Corporate malfeasance – why is the codification of director’s duties not assisting in combating wrong doing by directors?

Corporate malfeasance – why is the codification of director’s duties not assisting in combating wrong doing by directors?

by Peter Tshisevhe

One of the key reforms to company law in South Africa that the Companies Act, No. 71 of 2008 (the “Act”) introduced include, inter alia, the codification of directors’ duties. The rationale behind the codification of directors’ duties was mainly to make the law more easily accessible to directors so as to assist them in avoiding breaching their fiduciary duties and avoiding incurring liability. The Act has improved the definition of a director to include persons occupying the position of director or alternate director by whatever name designated. Consequently, managers who may not be board members can qualify to be directors depending on their responsibility within a company.

In recent times, construction companies were fined for price fixing; listed companies are trending on the news for the wrong reasons; and state-owned companies (“SOCs”) are reported to have been looted out of billions of rands. With the codification of directors’ duties and the law having become more easily accessible, why then, is corporate malfeasance so rife?

Is the answer to this question perhaps a lack of qualifications by directors? If so, how does one explain the alleged conduct of Steinhoff’s directors with its board boasting some of the most highly educated directors in the country? Is the issue poor ethics? If so, how does one explain that even the most credible of directors sit on some of the boards of the companies that are alleged or have been found to have committed wrong-doing? If the issue in SOCs is cadre deployment, how does one explain the presence of experienced directors on such boards and the standard required of them in terms of section 76(3) (c) of the Act which requires experienced directors to bring their experience to bear in dealing with director issues? Are experienced directors being outvoted on issues? And if they are, why do they remain on boards that carry on their functions contrary to the prescripts of the law? What is the role of senior management within these companies in this corporate malfeasance? Are they deliberately looking the other way or carrying out orders from their seniors? Is the issue shareholder interference? If so, how does one reconcile that with the requirement in law for directors to discharge their functions independently without abdicating that function to the shareholder?
In my view the quality of a fiduciary has to be improved as part as a solution to this problem. In public companies and SOCs, it ought to be a requirement that directors have to undergo vigorous training by experienced professionals on the discharge of their duties. Company law and ethics must form part of the curriculum of their training.

Corporate malfeasance will not occur that easily if directors were empowered to exercise their fiduciary duties. Proper understanding of their duties will enable fiduciaries to refuse to carry out orders that breach their fiduciary duties and immediately report any conduct that may adversely affect a company they represent. In certain instances, directors are instructed by shareholders and senior executives to breach their fiduciary duties and out of fear from being removed from boards or dismissed from employment, they comply. Complying with such instructions does not absolve the fiduciary from wrong-doing. A properly empowered and trained fiduciary will also play a key role in promoting good governance. In other words, improving the quality of a fiduciary through proper training could assist in curbing the scourge.

Over and above the training, four other crucial issues need to be strengthened. Firstly, there must be a mechanism to detect the wrong-doing and the ability to detect the wrong-doing is dependent on the knowledge of the person entrusted with the role of a fiduciary. In the absence of that knowledge, a civil wrong or criminality cannot be easily detected. Secondly, there must be successful prosecution of offenders. Successful prosecution depends on the knowledge of the investigator or of the prosecutor as cases can be lost due to lack of evidence. If perpetrators of the wrong-doing know that even if their crime gets detected, there won’t be successful prosecution due to the lack of skill in the investigation and prosecution team, or successful civil claims against them for whatever reason, they will continue with their malfeasance. Thirdly, once the perpetrators of wrongdoing have been caught, there must be heavy sentences or huge damages claims awarded against them. Lastly, evidence necessary to secure successful litigation must be preserved. If the evidence of wrong-doing is destroyed or tampered with, chances of successful litigation in any forum are extremely limited. In most instances where people were found to have failed to discharge their fiduciary duties, there has never been any notable consequences for many of them. Instead, boards get changed and the perpetrators carry on as if nothing has happened. If the perpetrators are successfully prosecuted or sued for breach of their fiduciary duties, corporate malfeasance will be significantly reduced.

For the impact of the Act to be felt, the quality of the fiduciary has to be improved, the system of detection has to work, evidence has to be properly preserved, litigation against the perpetrators has to be successful and in criminal cases, sentences have to be severe.

The views expressed in this article are the personal views of the writer and not of TGR Attorneys and do not constitute legal advice or opinion.

Peter Tshisevhe
Director – TGR Attorneys

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