April 2013 Duties of Directors 2 The question of corporate governance as it pertains to directors is a very wide-ranging topic

April 2013
Duties of Directors

2
The question of corporate governance as it pertains to directors is a very wide-ranging topic. This
booklet is intended to provide general guidance in this regard only, and does not purport to cover all
possible issues relating to the topic. For specific guidance, we suggest you contact Deloitte & Touche.
Deloitte & Touche cannot accept responsibility for loss occasioned to any person acting or
refraining from action as a result of any material in this publication.
References
Audit committees combined code guidance, Sir Robert Smith, 2003
Banks Act of 1990
Companies Act 71 of 2008
Insurance Act 53 of 1998
JSE Securities Exchange, South Africa Listings Requirements
JSE Securities Exchange, South Africa Insider Trading booklet, 2001
King Report on Corporate Governance for South Africa 2009
Law of South Africa, WA Joubert & JA Faris, Butterworths, 2002
Long-Term Insurance Act 52 of 1998
Review of the role and effectiveness of non-executive directors, Derek Higgs 2003
Financial Markets Act 19 of 2012
Companies and other business structures in South Africa, Davis et al, 2009

Duties of Directors 3
Contents
Preface
1. What is a Director? 9
1.2 Prescribed officers 10
1.3 The legal status of a d irector 12
1.4 The d ifferent types of d irectors 12
1.5 Personal characteristics of an effective d irector 15
2. Appointment of a d irector 16
2.1 Who qualifies as a d irector? 17
2.2 The legal mechanics of appointment 17
2.3 What a new d irector should be told 20
3. Director conduct 22
3.1 The standard of d irectors’ conduct 23
3.2 Conflicts of interest 27
3.3 Liability of d irectors 29
3.4 Apportionment of damages 30
3.5 Insider trad ing 30
4. The workings of the board of d irectors 35
4.1 Composition of the full board 35
4.2 The implicit duties of the board 36
4.3 Meetings of d irectors 40
4.4 Important roles of the board 41
4.6 Relationships within the company 52
4.7 Communication with stakeholders 57
5. The powers of the board of d irectors 59
5.1 How can a d irector bind the company? 59
5.2 Reservation of powers 60
5.3 Which powers are restricted? 60
5.4 Effectiveness of company actions and the role of the CIPC 61
6. Remunerating d irectors 65
6.1 The d irector’s right to remuneration 65
6.2 Remuneration policy 66
6.3 What type of remuneration is appropriate? 66
6.4 Employment contracts, severance and retirement benefits 69
6.5 Disclosure of d irectors’ remuneration 69
7. Assessment, removal and resignation 72
7.1 Assessment of performance 72
7.2 Why a d irector may be removed 73
7.3 Rotation of d irectors 73
7.4 Vacancies on the board 74
7.5 The legal mechanics of removal 74
7.6 Formalities when a d irector resigns 75
8. Financial institutions 76
8.1 Directors of banks 76
8.2 Directors of insurance companies 80
9. Contact information 81

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Recent international and local jurisprudence also
underline the demanding standard of conduct
that is expected of company directors, all of
which South African company directors would
do well to take very thorough notice of.
The Act reduces the company’s reliance on
the regulator, the Companies and Intellectual
Property Commission (CIPC). Although
companies still have to comply with various
administrative processes to inform the CIPC
of its decisions (for example the appointment
of directors, changing of auditors, change of
year end, amendment of the Memorandum
of Incorporation, etc.), the validity of these
decisions are generally not dependent on the
approval of the CIPC. In most instances, the
company’s decision is effective immediately and
it merely needs to inform the CIPC of decisions
or actions. However, in a few instances the effect
of the decision is delayed until the necessary
Notices have been ‘filed’ with the CIPC. ‘Filing’
in terms of the new Act simply means that the
Notice had been received by the CIPC (recorded
in the CIPC’s computer system, or the date on
which registered or other mail is received by the
CIPC). The CIPC is not required to approve or vet
any decisions or actions of the company.
The counter balance to the diminished role of
the regulator is greater emphasis on the role of
the directors of the company. The construction
is that by accepting their appointment to the
position, directors tacitly indicate that they will
perform their duties to a certain standard, and it
is a reasonable assumption of the shareholders
that every individual director will apply his or her particular skills, experience and intelligence
appropriately and to the best advantage of the
company. In this regard, the Act subscribes to
the “enlightened shareholder value approach”
– which requires that directors are obliged to
promote the success of the company in the
collective best interest of shareholders. This
includes, as appropriate, the company’s need
to take account of the legitimate interests of
other stakeholders including among others, the
community, employees, customers and suppliers.
Also, the social responsibility of the company
(and the directors) was noted in Minister of
Water Affairs and Forestry v Stilfontein Gold
Mining Company Limited and others 2006 (5) SA
333 (W), emphasising the broader responsibility
of the directors and the company. In this case
the court made direct reference to the King
Code, which is interpreted by some as evidence
that the King Code has de facto become part of
the duties of directors.
The Act codifies the standard of directors’
conduct in section 76. The standard sets the bar
very high for directors, with personal liability
where the company suffers loss or damage as
a result of the director’s conduct not meeting
the prescribed standard. The intention of the
legislature seems to be to confirm the common
law duties and to encourage directors to act
honestly and to bear responsibility for their
actions – directors should be accountable to
shareholders and other stakeholders for their
decisions and their actions on behalf of the
inanimate company. With the standard set so
high, the unintended consequence may be
that directors would not be prepared to take
Preface
A key feature of the Companies Act, 2008
(the Act) is that it clearly emphasises the
responsibility and accountability of directors.

Duties of Directors 5
difficult decisions or expose the company to risk.
Since calculated risk taking and risk exposure
form an integral part of any business, the Act
includes a number of provisions to ensure that
directors are allowed to act reasonably without
constant fear of personal exposure to liability
claims. In this regard, the Act has codified
the business judgement rule, and provides for
the indemnification of directors under certain
circumstances, as well as the possibility to insure
the company and its directors against liability
claims in certain circumstances.
The Act makes no specific distinction between
the responsibilities of executive, non-executive
or independent non-executive directors (in order
to understand the distinction between different
types of directors we turn to the King Report
of Governance for South Africa, 2009 (King III)
for guidance). The codified standard applies
to all directors. In CyberScene Ltd and others v
iKiosk Internet and Information (Pty) Ltd 2000 (3)
SA 806 (C) the court confirmed that a director
stands in a fiduciary relationship to the company
of which he or she is a director, even if he or she
is a non-executive director.
In terms of this standard a director (or other person
to whom section 76 applies), must exercise his or
her powers and perform his or her functions:
• in good faith and for a proper purpose;
• in the best interest of the company; and
• with the degree of care, skill and diligence
that may reasonably be expected of a person
carrying out the same functions and having the
general knowledge, skill and experience of that
particular director.
In essence, the Act combines the common law
fiduciary duty and the duty of care and skill. This
codified standard applies in addition to, and not
in substitution of the common law duties of a
director. In fact, the body of case law dealing
with the director’s fiduciary duty and the duty of
care and skill remains applicable. All directors are bound by their fiduciary duty
and the duty of care and skill. The codified
standard of conduct applies equally to all
the directors of the company. Of course, it is
trite that not all directors have the same skill
and experience, and not all directors have a
similar understanding of the functioning of the
company. This raises the question as to what is
expected of different types of directors when it
comes to their duties. In this regard, the court,
in Fisheries Development Corporation of SA Ltd
v AWJ Investments (Pty) Ltd 1980 (4) SA 156 (W)
made it clear that the test is applied differently to
different types of directors. The court concluded
that the extent of a director’s duty of care and
skill depends on the nature of the company’s
business, that our law does not require a director
to have special business acumen, and that
directors may assume that officials will perform
their duties honestly.
The test for the duty of care and skill as
contained in the Act provides for a customised
application of the test with respect to each
individual director – in each instance both the
objective part of the test (measured against a
person carrying out the same functions as that
director), as well as the subjective element of the
test (measured against a person having the same
knowledge, skill and experience as that director)
will be applied. Thus, even though all directors
have the same duties, the measurement against
the standard of conduct will account for the
personal circumstances of each director.
As stated above, the Act also codifies the
business judgment rule. In terms of this rule a
director will not be held liable if he or she took
reasonable diligent steps to become informed
about the subject matter, did not have a personal
financial interest (or declared such a conflicting
interest) and the director had a rational basis to
believe that the decision was in the best interest
of the company at the time.

6
In discharging any board or board committee
duty, a director is entitled to rely on one or
more employees of the company, legal counsel,
accountants or other professional persons, or a
committee of the board of which the director is
not a member. The director, however, does not
transfer the liability of the director imposed by this
act onto such employee, nor can a director blindly
rely on the advice of employees or advisors.
In a recent Australian judgment, Australian
Securities and Investments Commission v
Healey 2011 FCA 717, commonly referred to
as the Centro case, the court re-emphasised
the responsibility of every director (including
non-executive directors) to pay appropriate
attention to the business of the company, and to
give any advice due consideration and exercise
his or her own judgment in the light thereof.
This case is relevant to directors of South African
companies, because the new Act indicates
that a court, when interpreting or applying
the provisions of the Act, may consider foreign
company law.
In this case the non-executive Chairman, six
other non-executive directors and the Chief
Financial Officer of the Centro Property Group
(“Centro”) faced allegations by the Australian
Securities and Investments Commission that they
had contravened sections of the Corporations
Act 2001 arising from their approval of the
consolidated financial statements of Centro,
which incorrectly reflected substantial short-term
borrowings as “non-current liabilities”. Similar to
our Companies Act, the Australian Corporations
Act also requires the board to approve the
financial statements.The relevant detail facts are that the 2007 financial
statements of Centro Properties Group failed to
disclose, or properly disclose, significant matters.
The statements failed to disclose some AUS$1.5
billion of short-term liabilities by classifying them
as non-current liabilities, and failed to disclose
guarantees of short-term liabilities of an associated
company of about US$1.75 billion that had been
given after the balance sheet date, but before
approval of the statements.
The central question in those proceeding were
whether directors of substantial publicly listed
entities are required to apply their own minds to,
and carry out a careful review of, the proposed
financial statements and the proposed directors’
report, to determine that the information
they contain is consistent with the director’s
knowledge of the company’s affairs, and that
they do not omit material matters known to
them or material matters that should be known
to them. In short, the question was to what
extent reliance may be placed on the audit
committee and the finance team.

Duties of Directors 7
In analysing the director’s duty of care and skill,
the court commented that:
“all directors must carefully read and
understand financial statements before they
form the opinions which are to be expressed
… Such a reading and understanding would
require the director to consider whether the
financial statements were consistent with his or
her own knowledge of the company’s financial
position. This accumulated knowledge arises
from a number of responsibilities a director
has in carrying out the role and function of a
director. These include the following:
• a director should acquire at least a rudimentary
understanding of the business of the
corporation and become familiar with the
fundamentals of the business in which the
corporation is engaged;
• a director should keep informed about the
activities of the corporation;
• whilst not required to have a detailed
awareness of day-to-day activities, a director
should monitor the corporate affairs and
policies;
• a director should maintain familiarity with
the financial status of the corporation by a
regular review and understanding of financial
statements;
• a director, whilst not an auditor, should still
have a questioning mind.” Several statements were made in which it
became apparent that every director is expected
to apply his or her own mind to the issues at
hand. Even though directors may rely on the
guidance and advice of other board committees,
employees and advisors, they nevertheless need
to pay attention and apply an enquiring mind to
the responsibilities placed upon him or her.
“…. a director is not relieved of the duty to pay
attention to the company’s affairs which might
reasonably be expected to attract inquiry, even
outside the area of the director’s expertise.”
“… Whether, for instance, a director went
through the financial statements ‘line by line’,
he is not thereby taking all reasonable steps,
if the director in doing so is not focussed for
himself upon the task and considering for
himself the statutory requirements and applying
the knowledge he has of the affairs of the
company”.
A key statement made by the judge is as follows:
“Nothing I decide in this case should indicate
that directors are required to have infinite
knowledge or ability. Directors are entitled to
delegate to others the preparation of books and
accounts and the carrying on of the day-to-day
affairs of the company. What each director
is expected to do is to take a diligent and
intelligent interest in the information available to
him or her, to understand that information, and
apply an enquiring mind to the responsibilities
placed upon him or her.”
The court concluded that in the Centro case
each director failed to exercise the degree of
care and diligence required by law in the course
of their review of the financial statements, and
as such can be held liable for the losses suffered
by that company as a result of their failure to
comply with their duties.

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South African case law echoes the findings of
the Centro judgment. In Fisheries Development
Corporation of SA Ltd v AWJ Investments (Pty)
Ltd 1980 (4) SA 156 (W) the court stated that:
“Nowhere are the director’s duties and
qualifications listed as being equal to those of an
auditor or accountant. Nor is he required to have
special business acumen or expertise, or singular
ability or intelligence, or even experience in the
business of the company… He is nevertheless
expected to exercise the care which can
reasonably be expected of a person with his
knowledge and experience… a director is not
liable for mere errors of judgment. In respect of
all duties that may properly be left to some other
official, a director is, in the absence of grounds
for suspicion, justified in trusting that official to
perform such duties honestly. He is entitled to
accept and rely on the judgment, information
and advice of the management, unless there
are proper reasons for querying such. Similarly,
he is not expected to examine entries in the
company’s books… Obviously, a director
exercising reasonable care would not accept
information and advice blindly. He would accept
it, and he would be entitled to rely on it, but he
would give it due consideration and exercise his
own judgment in the light thereof”. How do these judgments affect the position
of directors (especially non-executive directors)
where the audit committee considered complex
financial reports? Are non-executive directors
nevertheless expected to review such reports
and vote on applicable resolutions? The answer
seems to be ‘yes’. The obligation to approve
the financial statements of the company rests
equally on each director. As such, every director
has to study the relevant reports, and ensure for
himself that the content of the report confirms
and coincides with his view of the business.
No director is entitled to blindly rely on the
conclusions of the audit committee, the finance
team or other experts.
These judgements emphasise the fact that the
decision to accept appointment to the board
of a company should not be taken lightly. A
director cannot uncritically rely on the officials
of the company, or on the other members of
the board for the decisions of the company,
but needs to be confident that he or she is
able to pay adequate personal attention to the
business of the company. Even though directors
are entitled to rely of the guidance and advice
from employees, advisors and other board
committees, each director is obliged to apply
their own mind (i.e. bring their own skill and
experience to bear) to the facts at hand. They
are not entitled to blindly rely on advice. What
each director is expected to do is to ensure that
they make a concerted effort to understand the
business of the company and the information
placed in front of them, and to apply an
enquiring mind to such information.

Duties of Directors 9
1. What is a Director?
“At common law, once a person accepts appointment as a
director, he becomes a fiduciary in relation to the
company and is obliged to display the utmost good faith
towards the company and in his dealings on its behalf.”
The term “director” has been defined in law. The
Companies Act, 2008 (the Act) defines a director as:
“A member of the board of a company…,
or an alternate director of a company and
includes any person occupying the position of
director or alternate director, by whatever name
designated”.
In terms of section 66 of the Act, the business
and affairs of a company must be managed by
or under the direction of its board, which has
the authority to exercise all of the powers and
perform any of the functions of the company.
The powers of the board may be limited
by specific provisions of the Act or by the
company’s Memorandum of Incorporation.
It is interesting to note that the definition of a
director includes not only those individuals that
are appointed to the board of the company (as
well as alternate directors), but also “any person
occupying the position of director or alternate
director, by whatever name designated”. The
effect of this wide definition is that the provisions
will apply not only to members of the board, but
also to “de facto” directors. “A de facto director is a person who assumes
to act as a director. He is held out as a director
by the company, and claims and purports
to be a director, although never actually or
validly appointed as such. To establish that a
person is a de facto director of a company, it is
necessary to plead and prove that he undertook
the functions in relation to the company which
could properly be discharged only by a director.”
Re Hydrodam (Corby) Ltd 1994 2 BCLC (Ch);
1994 BCC 161 at 183
The Act requires private companies and
personal liability companies to appoint at least
one director, whereas public companies, state
owned companies and non-profit companies are
required to appoint at least three directors. This
number would be in addition to the number of
directors required where an audit committee
and/or social and ethics committee is required
(see 2.2 below).
Howard v Herrigel 1991 2 SA 660 (A) 678

10
It should be noted that this is the minimum
requirement. Given the complexities of running a
corporate, it may be necessary to appoint more
directors. Furthermore, where companies apply
the governance principles set out in the King
Report on Governance for South Africa (King
III), it may be necessary to have more than the
minimum number of directors.
In general terms, the directors of a company
are those individuals empowered by the
Memorandum of Incorporation of that company
to determine its strategic direction. As a
consequence of the nature of a company, being
a lifeless corporate entity, human intervention
is required to direct its actions and therefore
determine its identity.
The directors are entrusted by the shareholders
of the company with the ultimate responsibility
for the functioning of the company. While
some of the day-to-day running of the
company is generally delegated to some level
of management, the responsibility for the acts
committed in the name of the company rests
with the directors.1.2 Prescribed officers
Prescribed officers include every person, by
whatever title the office is designated, that:

exercises general executive control over and
management of the whole, or a significant
portion, of the business and activities of the
company; or
• regularly participates to a material degree in
the exercise of general executive control over
and management of the whole, or a significant
portion, of the business and activities of the
company.
Most of the provisions in the Act pertaining to
directors apply equally to prescribed officers.
The Act determines that prescribed officers
are required to perform their functions and
exercise their duties to the standard of conduct
as it applies to directors. Prescribed officers
will be subject to the same liability provisions
as it applies to directors. As is the case with
directors, the remuneration paid to prescribed
officers must be disclosed in the annual financial
statements. The following provisions, inter
alia applicable to directors, will also apply to
prescribed officers:
• Section 69 – Ineligibility and disqualification of
persons to be directors or prescribed officers;
• Section 75 – Directors’ personal financial
interest;
• Section 76 – Standards of directors’ conduct;
• Section 77 – Liability of directors and
prescribed officers;
• Section 78 – Indemnification and directors’
insurance; and
• Section 30(4) and 30(5) – Disclosure of
remuneration.
A person will be a prescribed officer regardless of
any title or office they are designated.

Duties of Directors 11
Although it is not a legislative requirement, it is
recommended that the board records the names
of all those individuals which are regarded as
prescribed officers. The list of names will be
necessary, among other requirements, when the
company has to disclose the remuneration paid
to or receivable by its prescribed officers in the
annual financial statements.
Note that regardless of whether a company
has officially identified a particular individual
as a prescribed officer or not, that person may
nevertheless be classified as a prescribed officer to
the extent that the person’s role in the company
meets the definition.
In order to determine who the prescribed officers
of the company are, one will have to apply
a certain degree of judgment. Management
will have to consider all the relevant provisions
of the definition, such as “general executive
management” and “control” and “significant
portion of the business and activities” in the
context of their specific company in order to
identify the prescribed officers of the company.
The meaning of general executive control and
management needs to be determined in view of
the organisational and governance structure of
the company. Executive control and management
should be distinguished from ordinary control
and management carried out in the day to day functioning of the company. Where a person is
responsible for implementing specific decisions of
the board, he will in all likelihood not be regarded
as a prescribed officer, as the exercise of those
functions will not be equated with executive
management or control. Further, the company will
have to determine, in its particular circumstances
and in view of the company’s structure, which
parts of the company, if any, are regarded as a
significant portions of the company.
Not every division or business unit will necessarily
be regarded as a significant portion of the
business, and only persons that exercise general
executive control over or management of a
significant portion of the company are regarded as
prescribed officers.
A person does not have to be employed by a
particular company to be classified as a prescribed
officer of the company.

12
The intention of the legislature seems to be to
classify as prescribed officers those individuals
that are not appointed to the board of the
company (thus, they are not directors) but
nevertheless act with the same authority as
that of a director (executive management and
control). In an earlier draft of the Regulations,
a prescribed officer was defined as anyone that
has a significant impact on the management and
administration of the company. This definition
was much wider and included most of the
(senior) management of a company. However,
the definition in the final Regulations limits the
scope to only those individuals that exercise
“executive” management and control – this
would limit the prescribed officers to only those
individuals that have executive authority in
the company, and it would exclude ordinary
managers, even senior managers (depending of
course on the organisational and governance
structure of the company). Persons may be
classified as prescribed officers under the
following circumstances:
• A member of a company’s executive
committee
• The senior financial manager in a company
that does not have a financial director
• A chief executive officer
• Regional manager (eg “Africa manager: Sales”)
A company secretary that performs the role
contemplated in King III (i.e. advising the board
but not taking decisions on behalf of the board)
would generally not be classified as a prescribed
officer. Also, persons that perform an important
operational role, but not general executive
management and control functions, would not
be prescribed officers. 1.3 The legal status of a d irector
The Act assigns to directors the authority to
perform all the functions and exercise all the
powers of the company. It sets out the minimum
standard of conduct, and provides for personal
liability where a director does not perform to
the said standard. The Act does not specifically
comment on the legal status of a director.
Where no express contract has been entered
into between the company and its directors, the
provisions contained in the Act and the company’s
Memorandum of Incorporation are generally
viewed as guiding the terms of the relationship
that the director has with the company.
Directors have been alternately viewed as trustees,
agents, managers and caretakers of the companies
they serve. Whatever the view taken, a director
occupies a position of trust within the company.
1.4 The d ifferent types of d irectors
In law there is no real distinction between
the different categories of directors. Thus, for
purposes of the Act, all directors are required
to comply with the relevant provisions, and
meet the required standard of conduct when
performing their functions and duties.
It is an established practice, however, to classify
directors according to their different roles on the
board. King III has provided definitions for each
type of director.
The classification of directors becomes particularly
important when determining the appropriate
membership of specialist board committees,
and when making disclosures of the directors’
remuneration in the company’s annual report.

Duties of Directors 13
Executive director
Involvement in the day-to-day management of
the company or being in the full-time salaried
employment of the company (or its subsidiary) or
both, defines the director as executive.
An executive director, through his or her privileged
position, has an intimate knowledge of the
workings of the company. There can, therefore,
be an imbalance in the amount and quality of
information regarding the company’s affairs
possessed by executive and non-executive directors.
Executive directors carry an added responsibility.
They are entrusted with ensuring that the
information laid before the board by management
is an accurate reflection of their understanding of
the affairs of the company.
King III highlights the fact that executive
directors need to strike a balance between their
management of the company, and their fiduciary
duties and concomitant independent state of
mind required when serving on the board. The
executive director needs to ask himself “Is this
right for the company?”, and not “Is this right for
the management of the company?”Non-executive director
The non-executive director plays an important role
in providing objective judgement independent of
management on issues facing the company.
Not being involved in the management of the
company defines the director as non-executive.
Non-executive directors are independent of
management on all issues including strategy,
performance, sustainability, resources,
transformation, diversity, employment equity,
standards of conduct and evaluation of performance.
The non-executive directors should meet from
time to time without the executive directors to
consider the performance and actions of executive
management.
An individual in the full-time employment of the
holding company is also considered a non-executive
director of a subsidiary company unless the
individual, by conduct or executive authority, is
involved in the day-to-day management of the
subsidiary.
King III Report Annex 2.3

14
Independent director
An independent director is defined in detail in
King III. In essence, an independent director is a
non-executive director who:
• is not a representative of a shareholder who has
the ability to control or significantly influence
management or the board
• does not have a direct or indirect interest in the
company (including any parent or subsidiary in
a consolidated group with the company) which
exceeds 5% of the group’s total number of
shares in issue
• does not have a direct or indirect interest in the
company which is less than 5% of the group’s
total number of shares in issue, but is material to
his or her personal wealth
• has not been employed by the company or
the group of which it currently forms part in
any executive capacity, or appointed as the
designated auditor or partner in the group’s
external audit firm, or senior legal adviser for the
preceding three financial years
• is not a member of the immediate family of an
individual who is, or has during the preceding
three financial years, been employed by the
company or the group in an executive capacity
• is not a professional adviser to the company or
the group, other than as a director
• is free from any business or other relationship
(contractual or statutory) which could be seen
by an objective outsider to interfere materially
with the individual’s capacity to act in an
independent manner, such as being a director
of a material customer of or supplier to the
company, or
• does not receive remuneration contingent upon
the performance of the company.
King III suggests that it may be useful to appoint
a lead independent director who, as a result of his
or her senior status, has the authority to facilitate
any issues that may arise between executive
and non-executive directors of the board. Such
a function is noted as being especially relevant
where the chairperson is an executive director.

Duties of Directors 15
1.5 Personal characteristics of an effective
d irector
Some such characteristics may include:
• Strong interpersonal and communications skills
Increasingly, directors are being expected
to represent the company at shareholders’
meetings and in discussions with third parties
such as analysts and the media. An obvious
advantage is therefore the ability to clearly and
definitively present the company’s position.
• Energy
Directors typically have a number of competing
commitments and priorities. Where critical
decisions are being made on a daily basis,
directors are constantly challenged to maintain
their energy levels and enthusiasm.
• Of independent mind
A director is expected to apply his or her
independent judgment to all issues presented
to the board. Directors are increasingly required
to take a stand when, in his or her mind,
the company’s long term future is not being
prioritised, no matter what the consequences.
• A strategic thinker
The primary duty of the director is to guide the
company to long-term prosperity. This often
requires the individual to be able to assess the
long-term consequences of decisions taken.
• Analytical
Directors are often presented with problems
that have a number of potential solutions,
and the ability to sift through data to find an
answer is a valuable personality trait. In addition to personal characteristics, a number
of experiential factors may contribute to the
effectiveness of a director. Such factors are
not mandatory for all directors, but can often
be persuasive in evaluating an individual for
appointment.

International exposure
South African firms are increasingly competing
on the world stage. This competition brings
with it a number of unique challenges.
A director that brings to the board an
international focus and an exposure to global
benchmarks and processes is becoming more
and more valuable.
• Industry expertise
The board is enriched by any individual that
can contribute knowledge of the particular
industry when evaluating issues and decisions
made at the company.
• Financial knowledge
All businesses are becoming increasingly driven
by financial and accounting considerations.
Having the ability to evaluate the financial
implications of an action or decision is
definitely an advantage as a director.
The role of a director, whether executive or non-
executive, is a particularly challenging one. While all
appointments have their own unique demands, there are
a number of characteristics that can contribute to the
effectiveness of a director.

16
2. Appointment of a director
Shareholders are ultimately responsible for
the composition of the board and it is in
their own interests to ensure that the board
is properly constituted from the viewpoint
of skill and representivity.
King III Principle 2.19 par 80
Certainly one of the most important responsibilities
of shareholders is the appointment of directors.
While the Act and the company’s Memorandum
of Incorporation may prescribe the required
qualifications and disqualifications for appointment
as a director, it is vitally important that the existing
directors assess the qualitative characteristics
necessary in an individual to effectively perform
their functions and integrate with the culture and
style of the organisation.
From a legal perspective, it is important to
ensure that the required procedures of the
appointment as set out in the Act and the
company’s Memorandum of Incorporation are
carried out correctly. This amy avoid any unwanted
ramifications in the future.
In practice, companies may encounter difficulties
in identifying suitable individuals to approach as
potential directors. The directors of small companies
are often hampered by the fact that they do not
possess the extensive network of contacts that the
directors of larger companies have.
In such instances it is often best to enquire of
the company’s auditors or other professional
advisors, or to contact a professional
organisation such as the Institute of Directors to
identify suitable individuals. Further, companies
could make use of executive search agencies to
identify suitable individuals for consideration.

Duties of Directors 17
2.1 Who qualifies as a d irector?
With a few specific exceptions, anyone can be
appointed as a director of a company.
Legal qualities required to be a director
The Act is the primary determinant of who may
or may not be appointed to be a director. A
company’s Memorandum of Incorporation may
provide additional grounds for ineligibility or
disqualification, or minimum qualifications to be
met by directors.
Section 69 of the Act in essence provides that any
person is ineligible for appointment as director, if
that person is a juristic person, an unemancipated
minor (or is under a similar legal disability), or does
not satisfy the qualifications as per the company’s
Memorandum of Incorporation. Also, a person is
disqualified from being a director, if the person:
• has been prohibited to be a director by the court
• has been declared by the court to be delinquent
in terms of this Act or the Close Corporations Act
• is an unrehabilitated insolvent
• is prohibited in terms of any public regulation to
be a director of the company
• has been removed from an office of trust, on the
grounds of misconduct involving dishonesty, or
• has been convicted and imprisoned without
the option of a fine, or fined more than the
prescribed amount, for theft, fraud, forgery,
perjury or an offence under the Companies Act,
the Insolvency Act, the Close Corporations Act,
the Competition Act, the Financial Intelligence
Centre Act, the Securities Services Act, or
the Prevention and Combating of Corruption
Activities Act.
It is interesting to note that the Act provides the
courts with wide discretion to either extend any
disqualification for no longer than a period of five
years at a time, or to exempt any person from the
disqualifications as set out above.
The Act determines that the appointment of an
ineligible or disqualified person as director is null
and void. Register of Directors
The Act requires the Commission to maintain a
public register of persons who are disqualified
from serving as a director, or who are subject to
an order of probation as a director, in terms of an
order of a court.
2.2 The legal mechanics of appointment
Directors are either appointed or elected. The Act
provides that the company’s Memorandum of
Incorporation may provide for:

the direct appointment and removal of directors
by any person who is named in, or determined
in terms of, the Memorandum of Incorporation
(e.g. shareholder representative)
• ex officio directors (e.g. the CEO), and
• the appointment of alternate directors.
The Act makes it clear that, in the case of a profit
company other than a state-owned company, the
Memorandum of Incorporation must provide for
the election by shareholders of at least 50% of the
directors, and 50% of any alternate directors.
The first directors of the company
The Act determines that each incorporator of
a company will also be a first director of that
company. This directorship will be temporary and
will continue until a sufficient number of directors
have been first appointed or first elected in terms
of the requirements of the Act.
The first appointment of directors should be
done in terms of the provisions of the company’s
Memorandum of Incorporation (e.g. the
Memorandum of Incorporation may permit the
majority shareholder to appoint a certain number
of directors). The first election of directors should
be done in accordance with the provisions of
section 68 (see below).

18
The required number of directors may be
determined either in terms of the Act (private
companies and personal liability companies to
appoint at least one director, whereas public
companies, state owned companies and
non-profit companies are required to appoint
at least three directors) or the company’s
Memorandum of Incorporation. It should be
noted that the number of directors as prescribed
by the Act is in addition to the directors that
must be appointed to serve on the audit
committee or social and ethics committee.
If not enough directors are either first appointed
or first elected to meet the required number of
directors as required in terms of the Act or the
company’s Memorandum of Incorporation, the
board must call a shareholders’ meeting within
40 days of incorporation to elect a sufficient
number of directors.
Election of directors by the shareholders
While it is usually the directors themselves who
identify and nominate a new director to be
elected to their number, it is the responsibility of
the shareholders to evaluate and legally appoint
each new director.
In terms of section 68 of the Act each director
must be voted on by a separate resolution
at a general meeting of the company. Once
elected, the person will become a director only
once written consent to serve as a director
was delivered to the company. The company’s
Memorandum of Incorporation may prescribe a
different process for the election of directors by
the shareholders. However, it should be noted
that this must still amount to an ‘election’.If a vacancy arises on the board, other than as
a result of an ex officio director ceasing to hold
that office, it must be filled:

by a new appointment, if the director was
appointed by a person identified in the
Memorandum of Incorporation, or
• by a new election conducted at the next
annual general meeting of the company (in the
case of a public company and a state owned
company), or
• in any other case, within six months after the
vacancy arose at a shareholders meeting called
for the purpose of electing the director. In the
latter instance, the election may be conducted
by means of a written poll of the persons
entitled to exercise voting rights in an election
of the director.
King III proposes that a formal and transparent
board appointment process be implemented.
The JSE Listings Requirements require listed
companies to have a policy detailing the
procedures for appointments to the board of
directors. The board, assisted by a nominations
committee, should identify potential candidates
and ensure that all such candidates will be in
a position to contribute to the combined skill
and experience of the board. The nominations
committee (or the board) has to perform
a background check on candidates. When
considering candidates, cognisance should be
taken of the following:
• the knowledge and experience required to fill
the gap on the board
• the apparent integrity of the individual, and
• the skills and capacity of the individual to
discharge these duties to the board.

Duties of Directors 19
Notwithstanding the consideration and evaluation
of candidates, the onus is on the individual
candidate to determine whether or not they have
the time, skill, experience, and capacity to make
a meaningful contribution to the company. They
should consent to serve as a director only if they
are of the opinion that they meet the requisite
requirements and would be in a position to commit
the time necessary to discharge their duties.
This is especially true for non-executive
directors. Prior to accepting an appointment
as director, they should consider the time and
dedication required, and they should not accept
an appointment if they would not be able to
exercise the necessary care, skill and diligence.
King III does not prescribe a maximum number
of directorships for non-executive directors.
The appointment of a non-executive director
should be formalised in an agreement between
the director and the company.
Even though executive directors may accept
non-executive directorships, they should consider
their responsibilities and only accept such
appointment in consultation with the CEO and
chairman.
It is important when identifying new directors
to consider the balance of power and authority
at board of directors’ level, to ensure that
no one director has unfettered powers of
decision-making.
The JSE Listings Requirements require that
the company inform the JSE of any new
appointments of directors (including the change
of important functions on the board, or change
of executive responsibilities of a director) by
the end of the business day following the
decision, or receipt of notice of the change. This
information must also be disclosed on the JSE’s
news service SENS.Where a director retires by rotation and is
re-appointed, no notice needs to be given to the JSE.
The minimum number of directors
The Act requires private companies and
personal liability companies to appoint at least
one director, whereas public companies, state
owned companies and non-profit companies
are required to appoint at least three directors.
This prescribed number of directors is in addition
to the number of directors appointed to the
audit committee and/or the social and ethics
committee.
All public companies and state-owned companies
need to appoint an audit committee comprising
at least three directors that meet the prescribed
criteria. All listed public companies and state-
owned companies (as well as those other
companies that would have scored at least 500
public interest points in any two of the last five
financial years) must appoint a social and ethics
committee comprising at least three directors or
prescribed officers, of which one director must
be an independent non-executive director. It is,
however, permitted for committee members to
serve on more than one committee. Thus, the
members of the audit committee may also serve
on the social and ethics committee. As such,
the minimum prescribed number of directors
for a public company is six (i.e. three directors
as required by the Act, plus three committee
members). Note: the obligation to appoint an audit
committee and/or a social and ethics committee
does not apply where the company in question
uses the said committee of its holding company.
In such an instance, the minimum number will be
one director for private companies and personal
liability companies, whereas public companies,
state owned companies and non-profit companies
are required to have at least three directors.

20
Any failure by a company at any time to have
the minimum number of directors required
by the Act or the company’s Memorandum
of Incorporation, does not limit or negate the
authority of the board, or invalidate anything
done by the board or the company.
Where the company is listed, Schedule 10 to
the JSE Listings Requirements states that the
company should have at least four directors.
The Register of Directors
The Act requires every company to keep a record
of its directors. This record should be in written
form, or other form as long as the information
can be converted into written form within a
reasonable time. The register of directors of a
company must be open to inspection by any
person who holds a beneficial interest in any
securities issued by a profit company, or who is a
member of a non-profit company, as well as any
member of the public.
A record of its directors should comprise details
of any person who has served as a director of
the company, and include:
• full name
• identity number or date of birth
• nationality and passport number
• occupation
• date of their most recent election or
appointment as director of the company
• name and registration number of every
other company or foreign company of which
the person is a director, and in the case of
a foreign company, the nationality of that
company, and
• any other information as required by
Regulations.
These records should be kept for a period of seven
years after the person ceases to serve as a director. One of the details required by the Act to be
entered is that of the other companies for
which the individual also serves as a director. In
practice, these details are often insufficient as
the company secretary may struggle to obtain
the information from the director, and to keep it
current. The information does, however, serve as
an important record in distinguishing between
independent and non-executive directors.
2.3 What a new d irector should be told
King III recommends that when a new director
is appointed to the board, he or she should
receive the necessary induction to familiarise
themselves with the duties and responsibilities
of a director generally (where the individual
has not performed the role previously), and
with the issues specific to the company such as
operations, business environment and general
sustainability matters.
A formal programme should be designed to
increase the awareness and effectiveness of each
director appointed (both new and existing director).
While the responsibility for this process lies with
the chairperson, it is suggested that the company
secretary is the best person to actually perform the
induction and development programme.
Orientation of inexperienced directors
The functions and responsibilities of a director
are unlike any other management position.
Therefore, even when an individual has served
for a considerable period of time as a member of
senior management, the responsibilities assumed
on the appointment as a director are unique to
that position.

Duties of Directors 21
There are certain critical issues that should be
communicated to a new, inexperienced director:
• The time horizon of any decisions made
Most individuals, certainly when acting in a
managerial capacity, become accustomed to
dealing with a short time horizon. This arises
due to the numerous deadlines imposed, and
the importance ascribed to accounting results.
The director’s role is not to maximise short-
term returns, but should rather attempt to
safeguard the sustainable development of the
company in the long-run. Decisions should
therefore be taken that are in the long-term
interests of the company, and not to boost the
next earnings statement.
• The independent frame of mind required
Managers in the business world are often
accused of not being “team-players” when
they criticise a decision made by their peers or
superiors.
It should be stressed that the director’s role
is to take a step back and critically assess the
motivation and consequences of a decision,
and where necessary, to put forward a
reasoned view.
• Personal liability of directors
Directors are often surprised by the high level
of personal risk that they bear through their
position.
The legal framework in South Africa (which
extends far beyond the Companies Act) is
increasingly looking to make directors liable
in their personal capacity for actions of the
company.
It is only fair that an individual be given the
opportunity to weigh up any risks against the
rewards from serving as a director.
Each company and industry has its own unique
issues. It is therefore vital for all directors to
understand what these issues are and what their
impact on the company is. It may be beneficial for an experienced member
of the board to introduce the new director to
these issues, which may include:

Specific risks and the management thereof
The pertinent risks present in the industry, and
those specific to the company, as well as the
ways in which the board manages these risks.
• Key members of senior management
New directors should be introduced to the
various members of management on whom
the directors depend for information.
• Pertinent accounting issues
With accounting decisions driving a company’s
share price to a greater extent than ever
before, it is important that all directors are
aware of the material choices that have been
made, and the extent to which these choices
influence the company’s results.
• Quality of information and internal controls
Directors should satisfy themselves of the
veracity of the information received from
management, and the state of the internal
control environment at the company.
• The board’s relationship with internal and
external audit
The directors make certain assertions in the
annual report, including:
? the accounting results are free from
misstatement, and that the internal controls
at the company are operating effectively
? the company will be a going concern in the
foreseeable future, and
? the risk management framework and
processes within the company are adequate
to manage the risks inherent in the business.
In order to make such statements, the directors
rely to an extent on assurances provided to them
by the internal and external audit functions. It is
therefore important for a director to understand
the sources and reliability of this assurance.

22
3. Director conduct
“It is unhelpful and even misleading to classify company
directors as “executive” and “non-executive” for purposes of
ascertaining their duties to the company or when any or
specific or affirmative action is required of them. No such
distinction is to be found in any statute. At common law,
once a person accepts appointment as a director, he
becomes a fiduciary in relation to the company and is
obliged to display the utmost good faith towards the
company and in his dealings on its behalf. That is the
general rule and its application to any particular
incumbent of the office of director must necessarily depend
on the facts and circumstances if each.”
Howard v Herrigel 1991 (2) SA 660 (A)

Duties of Directors 23
3.1 The standard of d irectors’ conduct
By accepting their appointment to the position,
directors imply that they will perform their duties
to a certain standard, and it is a reasonable
assumption of the shareholders that every
individual director will apply his or her particular
skills, experience and intelligence to the
advantage of the company.
The Act codifies the standard of directors’
conduct in section 76. The standard sets the
bar very high for directors. The intention of the
legislature seems to be to encourage directors
to act honestly and to bear responsibility for
their actions – directors should be accountable
to shareholders and other stakeholders for
their decisions and their actions. However,
with the standard set so high, the unintended
consequence may be that directors would not
be prepared to take difficult decisions or expose
the company to risk. Since calculated risk taking
and risk exposure form an integral part of any
business, the Act includes a number of provisions
to ensure that directors are allowed to act
without constant fear of personal exposure to
liability claims. In this regard, the Act has codified
the business judgement rule, and provides for
the indemnification of directors under certain
circumstances, as well as the possibility to insure
the company and its directors against liability
claims in certain circumstances.
It should be noted that the duties imposed
under section 76 are in addition to, and not
in substitution for, any duties of the director
of company under the common law. This
means that the courts may still have regard
to the common law, and past case law when
interpreting the provisions of the Act.
The codified standard applies to all directors,
prescribed officers or any other person who is
a member of a board committee irrespective of
whether or not that the person is also a member
of the company’s board. Also, it should be noted
that no distinction is made between executive, non-executive or independent non-executive
directors. The standard, and consequent liability
where the standard is not met, applies equally to
all directors.
In terms of this standard a director (or other
person to whom section 76 applies), must
exercise his or her powers and perform his or her
functions:

in good faith and for a proper purpose
• in the best interest of the company, and
• with the degree of care, skill and diligence that
may reasonably be expected of a person carrying
out the same functions and having the general
knowledge, skill and experience of that director.
The Act prohibits a director from using the
position of director, or any information obtained
while acting in the capacity of a director to
gain an advantage for himself or herself, or for
any other person (other than the company or
a wholly-owned subsidiary of the company), or
to knowingly cause harm to the company or a
subsidiary of the company.
Directors have a fiduciary duty to act in the
best interest of the company as a whole.
Directors owe this duty to the company as a
legal entity, and not to any individual, or group
of shareholders – not even if the majority
shareholder appointed the director. Directors are
obliged to act in good faith in the best interest
of the company. They should act within the
bounds of their powers, and always use these
powers for the benefit of the company. Where
a director transgresses his or her powers, the
company might be bound by his or her action,
although he or she can be held personally liable
for any loss suffered as a result.

24
The fiduciary duty of directors includes (but not
limited to):
• the duty to individually and collectively exercise
their powers bona fide in the best interest of
the company
• the duty not to exceed their powers
• the duty not to act illegally dishonestly, or ultra
vires
• the duty to act with unfettered discretion
• the duty not to allow their personal interests to
interfere with their duties
• a director is accountable to the company for
secret profits made by virtue of the fiduciary
position or from the appropriation of a
corporate opportunity
• the duty not to compete with the company
• the duty not no misuse confidential
information
When determining whether a director complied
with his or her fiduciary duty, the court may consider
whether, in the circumstances, a reasonable person
could have believed that the particular act was in the
best interest of the company. This is typically known
as an objective test.
“… and the directors as occupying a fiduciary
position towards the company must exercise
those powers bona fide in the best interest of
the company as a whole, and not for an ulterior
motive …”
Treasure Trove Diamonds Ltd v Hyman 1928 AD 464 at 479
The codified standard for director conduct
combines “care, skill and diligence” in one
single test. The test to measure a director’s
duty to exercise a degree of care, skill and
diligence provides for an objective assessment
to determine what a reasonable director would
have done in the circumstances. However,
the objective assessment contains subjective
elements in that it takes into consideration the,
skill and experience of that particular director. In
applying the test, a distinction is made between
different types of directors. “the extent of a director’s duty of care and skill
depends to a considerable degree on the nature
of the company’s business and on any particular
obligations assumed by him or assigned to him….
In that regard there is a difference between the
so-called full-time or executive director, who
participates in the day to day management of the
company’s affairs or of a portion thereof, and the
non-executive director who has not taken on any
special obligation. The latter is not bound to give
continuous attention to the affairs of the company.
His duties are of an intermittent nature to be
performed at periodical board meetings, and at
any other meetings that may require his attention.”
Fisheries Development Corporation of SA Ltd v AWJ
Investments (Pty) Ltd 1980 (4) SA 156 (W)
In a recent Australian case (Centro case) the duty
of care and skill was considered with respect to
the duty of directors to approve the financial
statements of the company. In this case that
court found that all non-executive directors were
in breach of their duty of care and skill. The
failure to notice certain omissions may well be
explicable – but here the directors clearly looked
solely to management and external advisors.
However, if they had acted as the final filter,
taking care to read and understand the financial
accounts, the errors may have been discovered.

Duties of Directors 25
“All directors must carefully read and understand
financial statements before they form the
opinions which are to be expressed … Such
a reading and understanding would require
the director to consider whether the financial
statements were consistent with his or her own
knowledge of the company’s financial position.
This accumulated knowledge arises from a
number of responsibilities a director has in
carrying out the role and function of a director.
These include the following:
• a director should acquire at least a rudimentary
understanding of the business of the
corporation and become familiar with the
fundamentals of the business in which the
corporation is engaged;
• a director should keep informed about the
activities of the corporation;
• whilst not required to have a detailed
awareness of day-to-day activities, a director
should monitor the corporate affairs and
policies;
• a director should maintain familiarity with
the financial status of the corporation by a
regular review and understanding of financial
statements;
• a director, whilst not an auditor, should still
have a questioning mind.”
“…. a director is not relieved of the duty to pay
attention to the company’s affairs which might
reasonably be expected to attract inquiry, even
outside the area of the director’s expertise.”
Australian Securities and Investments Commission v Healey 2011 FCA 717 at 17 and 18
As stated above, the Act also codifies the
business judgment rule. In terms of this rule a
director will not be held liable if he or she took
reasonable diligent steps to become informed
about the subject matter, does not have a
personal financial interest (or declared such
a conflicting interest) and the director had a
rational basis to believe that the decision was in
the best interest of the company.

26
In discharging any board or committee duty,
a director is entitled to rely on one or more
employees of the company, legal counsel,
accountants or other professional persons, or a
committee of the board of which the director is
not a member. The director, however, does not
transfer the liability of the director imposed by
this act onto such employee.
“In respect of all duties that may properly be
left to some other official, a director is, in the
absence of grounds for suspicion, justified in
trusting that official to perform such duties
honestly. He is entitled to accept and rely on
the judgment, information and advice of the
management, unless there are proper reasons
for querying such. Similarly, he is not expected
to examine entries in the company’s books…
Obviously, a director exercising reasonable
care would not accept information and advice
blindly. He would accept it, and he would be
entitled to rely on it, but he would give it due
consideration and exercise his own judgment in
the light thereof”.
Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty)Ltd 1980 (4) SA 156 (W)
“Nothing I decide in this case should indicate
that directors are required to have infinite
knowledge or ability. Directors are entitled to
delegate to others the preparation of books and
accounts and the carrying on of the day-to-day
affairs of the company. What each director
is expected to do is to take a diligent and
intelligent interest in the information available to
him or her to understand that information, and
apply an enquiring mind to the responsibilities
placed upon him or her.”
Australian Securities and Investments Commission v Healey 2011 FCA 717 at 20
Directors of a company may be held jointly and
severally liable for any loss, damage or costs
sustained by the company as a result of a breach
of the director’s fiduciary duty or the duty to act
with care, skill and diligence. The Act sets out a
range of actions for which directors may be held
liable for any loss, damage or costs sustained by
the company. These actions include:
• acting in the name of the company without
the necessary authority
• being part of an act or omission while knowing
that the intention was to defraud shareholders,
employees or creditors
• signing financial statements that was false or
misleading in a material respect, or
• issuing a prospectus that contained an untrue
statement.
In certain instances companies are allowed to
indemnify directors in respect of any liability, or
companies may purchase insurance to protect
a director against liability (but only for those
instances for which the company may indemnify
the director), or to protect the company against
expenses or liability for which the company may
indemnify a director. A company may indemnify
a director in respect of any liability, except for:
• any liability arising from situations where the
director:
? acted in the name of the company, signed
anything on behalf of the company, or
purported to bind the company or authorise
the taking of any action by or on behalf
of the company, despite knowing that the
director lacked the authority to do so
? acquiesced in the carrying on of the
company’s business despite knowing that it
was being conducted in a reckless manner
? been a party to an act or omission by the
company despite knowing that the intention
was calculated to defraud a creditor,
employee or shareholder of the company, or
had another fraudulent purpose
• any liability arising from wilful misconduct or
wilful breach of trust, or
• incurred a fine as a result of a conviction on an
offence in terms of national legislation.

Duties of Directors 27
Unless the company’s Memorandum of
Incorporation provides otherwise, a company
may purchase insurance to protect a director
against any liability or expenses for which the
company is permitted to indemnify a director or
to protect the company against any expenses
or liability for which the company is permitted
to indemnify a director. The company may,
however, not directly or indirectly pay a fine
imposed on the director of the company or of
a related company as a consequence of that
director having been convicted of an offence
unless the conviction was based on strict liability.
3.2 Conflicts of interest
One of the fundamental duties of a director is
to avoid any possible conflict of interests with
the company. It is an accepted principle in
South African law that, as a result of the trust
placed in the director, he or she is bound to put
the interests of the company before their own
personal interests.
Section 75 of the Act makes clear provision
for dealing with a director’s use of company
information and conflict of interest. Where
a director has a conflicting personal financial
interest (where his or her own interests are at
odds with the interests of the company), he or
she is prohibited from making, participating in the
making, influencing, or attempting to influence any
decision in relation to that particular matter. This
provision seems to impose a strict duty on directors
not to allow their personal financial interest to
impact, in any way, on their dealings with the
company. In addition, where a director has a
conflicting personal interest in respect of a matter
on the board agenda, he or she has to declare
that personal interest and immediately leave the
meeting. A director is also prohibited from any
action that may influence or attempt to influence
the discussion or vote by the board, and is
prohibited from executing any document on behalf
of the company in relation to the matter, unless
specifically requested to do so by the board.It should be noted that section 75 of the Act
extends the application of the conflict of interest
provisions to prescribed officers and members of
board committees (even if those persons are not
directors).
The conflict of interest provisions apply equally
to persons related to the director. Thus, where
a director knows that a related person has a
personal financial interest in a matter to be
considered at a meeting of the board, or knows
that a related person has acquired a personal
financial interest in a matter, after the board has
approved that agreement or matter, the director
should disclose that fact to the board. In this
regard, it should be noted that for purposes of
section 75 the definition of a ”related person”,
when used in reference to a director, not only
has the ordinary meaning as set out in the Act,
but also includes a second company of which
the director or a related person is also a director,
or a close corporation of which the director or a
related person is a member.
The conflict of interest provisions do not apply
to a company or its director, if the company has
only one director, and that director holds all the
beneficial interest in all the issued securities of
the company. However, where that one director
does not hold all the beneficial interest in the
issued securities, he or she may not approve or
enter into an agreement, or determine any other
matter, in terms of which a person related to him
may have a personal financial interest. In these
instances, the director has to obtain shareholder
approval by ordinary resolution.
The provision makes it clear that conflict of
interest is taken seriously by the legislature, and
one may assume that the Commission and the
Takeover Regulation Panel will enforce these
provisions strictly.

28
The provisions will potentially have an impact
on the way in which members of boards are
selected and appointed, as membership of
a number of different boards might lead to
possible conflicts, which in turn means that
those directors will not be able to participate in
or contribute to discussions and decisions related
to such matters.
“It is an elementary principle of company law,
that (apart from explicit power in the articles
of association) a director cannot vote for the
adoption of a contract or on a matter in which
he is an interested party”.
Gundelfinger v African Textile Manufacturers Ltd 1939 AD 314
Where a director somehow acts in competition
with the company, a fundamental conflict of
interest is inevitable. There are a number of ways
in which such a situation could occur. One is
where a director takes an opportunity that could
have been taken by the company, in his or her
personal capacity. Another is where the director
holds directorships on rival companies.
Where an opportunity arises that could have
been acted upon by the company, the director
is precluded from acting upon it in his or her
individual capacity. The director has a fiduciary
duty to pass this opportunity on to the company.
The courts have held that even where the
company did not have the resources to pursue
the opportunity, the director who came across it
was not at liberty to pursue it personally.
It is debatable whether the holding of
directorships on the boards of rival companies
in itself constitutes a breach of the director’s
fiduciary duties. However, it would be almost
impossible for the director not to prejudice one of
the two or more companies that he or she serves. “It would be a most unusual situation which
allowed directors… of one company to act in
the same or similar capacity for a rival without
actual or potential conflict situations arising with
frequent regularity”.
Sibex Construction (SA) (Pty) Ltd v Injectaseal CC
1988 2 SA 54 (T )
Of course, the provisions of the Act relating to
conflicts of interest (as discussed above) will
prevent a director from such a position.

Duties of Directors 29
3.3 Liability of d irectors
The Act makes it clear that a person is not, solely
by reason of being an incorporator, shareholder
or director of a company, liable for any liabilities
or obligations of the company, unless where
the Act or the company’s Memorandum of
Incorporation provides otherwise. The directors
of a company may only incur liability in specific
instances. In terms of the Act, a director of
a company may be held liable for any loss,
damages or costs sustained by the company as
a consequence of any breach by the director of
a duty contemplated in the standard of directors
conduct, failure to disclose a personal financial
interest in a particular matter, or any breach
by the director of a provision of the Act or the
company’s Memorandum of Incorporation.
In addition, the Act determines that a director
of a company is liable for any loss, damages or
costs sustained by the company as a direct or
indirect consequence of the director having –
• acted in the name of the company, signed
anything on behalf of the company, or
purported to bind the company or authorise
the taking of any action by or on behalf of the
company, despite knowing that the he or she
had no authority to do so
• persisted and went along with any action or
decision despite knowing that it amounts to
reckless trading
• been a party to any action or failure to act
despite knowing that the act or omission was
calculated to defraud a creditor, employee or
shareholder of the company
• signed, consented to, or authorised the
publication of any financial statements that
were false or misleading, or a prospectus that
contained false or misleading information
• been present at a meeting, or participated in
the making of a decision, and failed to vote
against a decision to issue any unauthorised
shares or securities, to issue options for
unauthorised shares or securities, to provide
financial assistance to a director or any person
without complying with the requirements
of the Act and the Memorandum of Incorporation, to approve a distribution that
was contrary to the requirements of the Act,
or for the company to acquire any of its own
shares, or the shares of its holding company,
or make an allotment despite knowing that
the acquisition or allotment was contrary to
the requirements of the Act.
The Act makes it clear that a director is jointly
and severally liable with any other person who
is or may be held liable for the same act. Also,
any claim for loss, damages or costs for which
a person is or may be held liable in terms of the
Act prescribes after three years after the act or
omission that gave rise to that liability.
Delinquency and probation of directors
The Act determines that directors may be
declared delinquent or placed on probation as a
result of certain conduct. This can be achieved
by an application to court by the company, a
director, a shareholder, the company secretary,
a registered trade union or representatives of
employees of the company. The grounds for the
application for delinquency and probation are
set out in the Act, but in general terms, directors
could be:
• declared delinquent if they grossly abused their
position or if they caused intentional harm to
the company, and
• placed on probation if they improperly
supported a resolution in contravention of the
solvency and liquidity test or otherwise acted
in a manner which is inconsistent with the
duties of directors.
Delinquency usually lasts for 7 years from date of the
order or a longer period as determined by the court
order. A person who has been declared delinquent
may apply to court after 3 years, for suspension
of the delinquency order and substitution thereof
with a probation order. A probation order will lapse
automatically after 5 years.

30
Personal liability company
The Act allows for the inclusion in the
Memorandum of Incorporation of a private
company the provision that all directors (both
present and past) are jointly and severally liable,
together with the company, for the past and
present debts and liabilities of the company that
were incurred during their term of office. Such
a company is classified as a personal liability
company, and the name of the company will
end with the expression ‘Incorporated’ or the
abbreviation ‘Inc’.
While all private companies are able to include
such a provision, it is usually those within certain
professions such as companies of attorneys or
auditors where personal liability is a necessity
in terms of their professional standards. The
advantage of such a corporate structure over a
partnership would be perpetual succession of the
legal entity.
3.4 Apportionment of damages
The Apportionment of Damages Act makes it
easier for an aggrieved party to sue more than
one party at a time. In the case of company
failures, it has become common practice for the
aggrieved creditors and shareholders to sue those
parties with the “deepest pockets” namely the
auditors, and occasionally the directors (although
most directors of failed companies manage to
alienate their assets prior to being sued).
In such instances, it will become more likely that
the directors, together with any other relevant
party, will be sued jointly under this Act.3.5 Insider trad ing
Insider Trading and Closed Periods
The Financial Markets Act 19 of 2012 replaces
the Securities Services Act which has governed
the regulation of securities services in South
Africa since 2005. With the purpose of
maintaining the integrity of South African
financial markets, aligning the regulatory
framework with relevant local and international
developments and standards and mitigating
the potential impacts of any possible future
financial crisis, the Financial Markets Act refines
its predecessor’s provisions regulating insider
trading. The revisions further extend the liability
of directors and their proxies, mainly through the
amendment of allowable defences, in dealing
with unpublished price-sensitive information
within their companies.
Given the Financial Services Board and
Legislature’s continued focus on market abusive
transactions as well as the criminal and civil
sanctions envisaged by the Financial Markets
Act, this piece of legislation is very relevant
to directors who receive and trade in their
company’s securities.
Inside information
Inside information is defined by the Financial
Markets Act as specific or precise information
which has not been made public and which is
obtained or learned as an insider and, if it were
made public, would be likely to have a material
effect on the price or value of any security listed
on a regulated market.

Duties of Directors 31
Insider
An insider, as defined by the Financial Markets
Act, is an individual who “has inside information:
(a) through(i) being a director, employee or shareholder
of an issuer of securities listed on a
regulated market to which the inside
information relates; or
(ii) having access to such information by
virtue of employment, office or possession;
or her employment, office or possession; or
(b) where such person knows that the direct
or indirect source of the information was a
person contemplated in paragraph (a)”
The definition, borrowed from the Security
Services Act (Act 36 of 2004), stretches a
far-reaching net to include not only directors
as insiders, but also those that have direct or
indirect exposure to inside information.
The offences
Similar to its predecessor, the Financial Markets
Act makes it an offence for an insider to deal
directly, indirectly or through an agent for his or
her own account or for any other person, in the
securities listed on a regulated market to which
the inside information relates or which are likely
to be affected by it. The disclosure of inside
information to another person, encouragement
of another person in dealing in securities of the
company or discouragement of another person
from dealing in the securities of the company by
an insider who knows that he or she has inside
information, similarly remains an offence in
terms of the Financial Markets Act.
The Financial Markets Act, however, for the first
time extends liability to any person dealing for an
insider who knew that such person is an insider.
Insider’s proxies are hereby included within the realm
of liability and are treated as insiders themselves if
acting for another insider of the company. The defences
An insider, dealing for his or her own account,
may no longer utilise the defence that insider
trading was performed in pursuit of an affected
transaction as defined in section 440A of
the Companies Act 1973. The only defence
available to such an insider is where he or she
only became an insider after having given the
instruction to deal to an authorised user (i.e.
licensed security services provider) and the
instruction was not changed in any manner after
he or she became an insider. A similar defence
is given to the authorised user acting on the
insider’s behalf.
Where an insider deals for another person’s
account, the Financial Markets Act has amended
the defence available to the authorised user
acting on the instruction of the insider and
now places the onus on that authorised user
to prove that he or she did not know the client
was an insider at the time that the instruction
was given. The defence previously available
to public sector bodies in pursuit of monetary
policy was completely removed in the Financial
Markets Act. A new defence has been added,
known as the “safe harbour defence”, for bona
fide commercial transactions amongst insiders
that are not designed to benefit from the price
sensitive information. This defence requires that
all parties to the transaction have possession of
the same inside information and that trading
is limited to these parties. An authorised user
acting on the instruction of the insider(s) may
also utilise this defence.
Lastly, disclosure of insider information by an
insider to another person is defensible where
the insider can prove that such disclosure was
made pursuant to the proper performance of
his or her employment, office or profession in
circumstances unrelated to dealing and that
he or she at the same time disclosed that the
information was inside information.

32
The table below summarises the available defences:
The DefenceAvailable to
I only became an insider after having given the
instruction to deal to an authorised user (i.e. licensed
security services provider) and the instruction was not
changed in any manner after I became an insider. •
An insider dealing for own account.
• The authorised user dealing on
instruction of the insider
I am an authorised user acting on the instruction of the
insider. The onus is on me to prove that I did not know
the client was an insider at the time that the instruction
was given. •
The authorised user dealing on
instruction of the insider.
I entered into a bona fide commercial transaction
amongst fellow insiders. The transaction was not
designed to benefit from the price sensitive information.
All parties to the transaction had possession of the
same inside information and the trading was limited to
these parties. •
An insider dealing for another person’s
account.
• An authorised user dealing on
instruction of the insider.
I disclosed insider information to another person. I
can prove that such disclosure was made pursuant to
the proper performance of my employment, office or
profession in circumstances unrelated to dealing and
that I at the same time disclosed that the information
was inside information. •
An insider dealing for own account.
• An insider dealing for another person’s
account.
• An authorised user dealing on
instruction of the insider.
The Penalty
Any director responsible for contravening the
Financial Markets Act’s provisions regulating
insider trading will be liable to pay an
administrative sanction not exceeding the profit
on insider trading or loss avoided as a result
thereof, an amount of up to R1 million, interest
on any amount payable as well as the costs of
suit, including any investigation costs incurred
by the Enforcement Committeee. In addition,
the Financial Services Board has wide-ranging
powers to investigate allegations of insider
trading, including the search of premises and
examination of any documentation related to
their investigation on authority of a warrant. Publication
The insider trading provisions do not apply to
public information. The Financial Markets Act
has amended the definition of public information
to ensure that such information be more widely
available before insiders may deal. This was
done by removing information obtained by
persons exercising diligence or observation,
information only communicated on the payment
of a fee or information only published outside
South Africa, from the definition of public
information in the Financial Markets Act.

Duties of Directors 33
Closed periods
Regulators commonly utilise “closed period”
provisions to curb insider trading practices of
directors and management. The provisions prohibit
trading in company securities by designated
persons during closed periods which commonly
coincide with periods during which the persons
might be privy to price sensitive information.
The JSE Listing Requirements (“the JSE”) defines a
“closed period” as:
(a) the date from the financial year end up
to the date of earliest publication of the
preliminary report, abridged report or
provisional report;
(b) the date from the expiration of the first six
month period of a financial year up to the
date of publication of the interim results;
(c) the date from the expiration of the second
six month period of a financial year up to
the date of publication of the second interim
results, in cases where the financial period
covers more than 12 months;
(d) in the case of reporting on a quarterly basis,
the date from the end of the quarter up to
the date of the publication of the quarterly
results; and
(e) any period when an issuer is trading under a
cautionary announcement.
The director of a company and company secretary
(of the issuer company or a major subsidiary of
the issuer) as well as associates of the director,
which include immediate family, are prohibited
from trading in the securities of a listed company
during a closed period or any period when there
exists any matter which constitutes unpublished
price sensitive information in relation to the
issuer’s securities (whether or not the party has
knowledge of such matter). As it is quite possible that unpublished price sensitive
information might already exist prior to the end of
a financial period, the closed period could, applying
the definition above, result in extended periods
during which no trading is allowed. Even during
periods of allowed trading, the director or company
secretary (excluding his or her associates) require
written authorisation to trade in the securities from
the issuing company’s chairman or another director
designated for the purpose.
A director is expected to notify his or her
immediate family and other associates as well
as his or her investment manager of periods
during which no trading is allowed and such
communication should include the names of
the issuer(s) of which he or she is a director. The
investment manager of a director should be
instructed by the director that no trades should
be entered into on his or her behalf without prior
written consent. Similarly, immediate family and
associates of the director have to inform the
director of their trading activities in the securities
of the issuer to allow the director to comply with
the disclosure requirements set by the JSE.

34
Disclosure
Trading in the securities of a listed company
requires disclosure on Stock Exchange News
Service (SENS) when trading is entered into by or
on behalf of:
(i) a director and company secretary (held
beneficially, whether directly or indirectly) of
the issuer;
(ii) a director and company secretary (held
beneficially whether directly or indirectly) of a
major subsidiary company of the issuer; or
(iii) any associate of the company or a major
subsidiary of the company.
The SENS disclosure shall include all details of the
transaction, including off-market transactions.
In terms of the JSE Listing Requirements, a
company must, without delay, unless the
information is kept confidential for a limited
period of time as allowed by the JSE, release
an announcement providing details of any
development(s) in such company’s sphere of
activity that is/are not public knowledge and
which may, by virtue of its/their effect(s), lead
to material movements of the reference price of
such company’s listed securities.
Immediately after a listed company acquires
knowledge of any material price sensitive
information and the necessary degree of
confidentiality of such information cannot be
maintained or if the company suspects that
confidentiality has or may have been breached,
the company must publish a cautionary
announcement on SENS in terms of the JSE
Listing Requirements. The company is required
to update the cautionary statement at least
every 30 business days after issuing the initial
cautionary statement.

Duties of Directors 35
4. The workings of the board
of directors
Directors should be individuals of integrity and courage,
and have the relevant knowledge, skills and experience
to bring judgement to bear on the business of the
company. In situations where directors may lack
experience, detailed induction and formal mentoring and
support programmes should be implemented.
King III Principle 2.18 par 72
4.1 Composition of the full board
The three different types of directors each
bring a different area of focus to the board of
directors. Executive directors have an intimate
knowledge of the workings of the company.
Non-executive directors may have a better
understanding of the issues facing the group as
a whole. Independent directors bring a totally
unclouded, objective viewpoint to the board, as
well as experience gained at other enterprises.
The challenge lies in establishing the appropriate
balance. Each company faces different issues,
and will require a unique combination of skills
to meet those challenges. King III suggests that
every board should consider whether its size,
diversity and demographics make it effective. In
this regard, a number of factors may be taken
into account, including academic qualifications,
technical expertise, relevant industry knowledge,
experience, nationality, age, race and gender.
When determining the number of directors to
serve on the board, the collective knowledge, skills,
experience and resources required for conducting
the business of the board should be considered. Factors determining the number of directors to
be appointed are:

evolving circumstances, the needs of the
company and the nature of its business
• the need to achieve an appropriate mix of
executive and independent non-executive
directors
• the need to have sufficient directors to
structure board committees appropriately
• potential difficulties of raising a quorum with a
small board
• regulatory requirements, and
• the skills and knowledge needed to make
business judgement calls on behalf of the
company.
King III Report Principle 2.18 Par 70

36
King III has re-affirmed the view that the South
African business environment lends itself to having
a single (unitary) board of directors that takes
ultimate responsibility for the direction of the
company. Having a single board makes it essential
to achieve the appropriate balance of power
between the different categories of directors.
In South Africa, best practice dictates that the
majority of directors should be non-executive,
of which the majority should be independent.
At least two executive directors (the CEO and
the director responsible for the finance function)
should be appointed to the board.
King III proposes staggered rotation for
non-executive directors, while ensuring
continuity of skills and experience. Rotation also
allows for the introduction of new directors with
different skills and experience from which the
board may derive benefit. It is proposed that
at least one third of non-executive directors be
rotated every year. Rotating directors may be
re-appointed, if eligible.
The chairman and the board should re-assess
the independence of independent directors
on an annual basis. King III suggests that the
re-appointment of an independent director
after a term of nine years should be seriously
considered. A statement on the outcome of such
assessment should be included in the Integrated
Report. It is suggested that the director’s
independence may be impaired after nine years. 4.2 The implicit duties of the board
The Practice Note on the Board Charter issued
with King III advocates that the board has a
number of duties, with the following being the
most fundamental:

The board has to act as the focal point for, and
custodian of, corporate governance and as
such the board should manage its relationship
with management, the shareholders and other
stakeholders of the company along sound
corporate governance principles.
As the focal point for, and custodian of,
corporate governance the board should
exercise leadership, integrity, enterprise and
judgment when it directs, governs and controls
the company. The most important function of
the board is to ensure value creation, and in
doing so, it should account for the interest of
all stakeholders.
• The board has to appreciate that strategy, risk,
performance and sustainability are inseparable
and to give effect to this by:
? informing and approving the strategy
? satisfying itself that the strategy and business
plans are not encumbered by risks that
have not been thoroughly assessed by
management
? identifying key performance and risk areas
? ensuring that the strategy will result in
sustainable outcomes, and
? considering sustainability as a business
opportunity that guides strategy formulation.
• The board has to provide effective leadership
that stands on an ethical foundation.
Effective leadership is built on four pillars,
namely responsibility, accountability, fairness
and transparency. This entails doing business
ethically and sustainably by having regard
to the company’s economic, social and
environmental impact on the community.

Duties of Directors 37
• The board must ensure that the company is a
responsible corporate citizen.
Responsible corporate citizenship is closely
related to ethical leadership. As a responsible
corporate, the board has to ensure that the
company should have regard to not only
the financial aspects of the business of the
company but also the impact that business
operations have on the environment and the
society within which it operates.
• The board should ensure that the company’s
ethics is managed effectively.
The board should set the tone for ethical
behaviour within a company, and is responsible
for creating and sustaining an ethical corporate
culture, both formal and informal. The ethical
culture should be reflected in the company’s
vision, mission, strategies, operations,
decisions, conduct and its stakeholder
relationships. Ethical risks and opportunities
should be identified and managed. It is
advisable to articulate ethical standards in a
code of conduct, which provides guidance and
rules to avoid unethical behaviour. The board
should further ensure that ethics are integrated
into all the company’s strategies and policies,
and that its ethics performance is assessed,
monitored, reported and disclosed.
• The board must ensure that the company has
an effective and independent audit committee.
Although the Act prescribes the composition
and functions of the audit committee for
state owned and public companies, King III
proposes that all companies should appoint
an audit committee. The audit committee
should comprise at least three members
and all members should be independent
non-executive directors. The committee as
a whole should have sufficient qualifications
and experience to fulfil its duties, and should
be permitted to consult with specialists or consultants after following an agreed process.
The terms of reference of the audit committee
should be approved by the board.
The functions of the audit committee in relation
to the external auditor include:
• the nomination of the external auditor for
appointment and to verify the independence of
the auditor
• determining the audit fee and the scope of the
appointment
• ensuring that the appointment complies with
the requirements of the Act
• determining the nature and extent of
non-audit services, and
• pre-approving any contract for non-audit
services.
The board may delegate certain aspects of risk
management and sustainability to the audit
committee. King III introduces the concept of
integrated reporting (which combines financial
and sustainability reporting) and allows for the
board to delegate the review of integrated
reporting to the audit committee. In this regard,
the audit committee should recommend to the
board the need to engage external assurance
providers to provide assurance on the accuracy
and completeness of material elements of
integrated reporting.

38
King III adopts a wide approach to the audit
committee’s responsibility for financial risk and
reporting to include:
• financial risks and reporting
• review of internal financial controls, and
• fraud risks and IT risks as it relates to financial
reporting.
King III further introduces the combined
assurance model. In terms of this model,
assurance should be done on three levels, i.e.
management, internal assurance providers
and external assurance providers. The audit
committee should ensure that a combined
assurance model is applied to provide a
coordinated approach to all assurance activities.
• The board is responsible for the governance of
risk.
King III emphasises the fact that risk
management should be seen as an integral
part of the company’s strategic and business
processes. The board’s responsibility for
governance of risk should be set out in a risk
management policy and plan. The board should
consider the risk policy and plan, and should
monitor the whole risk management process.
While the board remains responsible for the risk
management policy and the determination of
the company’s risk appetite and risk tolerance,
management is responsible for the design,
implementation and effectiveness of risk
management. The board should receive combined assurance
regarding the effectiveness of the risk
management process. The board may assign
its responsibility for risk management to the
risk committee. Membership of this committee
should include executive and non-executive
directors. Where the company decides to assign
this function to the audit committee, careful
consideration should be given to the resources
available to the audit committee to adequately
deal with governance of risk in addition to its
audit responsibilities.
A director is “bound to take such precautions
and show such diligence in their office as a
prudent man of business would exercise in the
management of his own affairs”.
Trustees of the Orange River Land ; Asbestos Company v
King (1892) 6 HCG 260 285
• The board is responsible for information
technology (IT) governance.
As information and technology systems
have become such an integral part of doing
business, King III provides specific guidelines to
ensure effective IT governance. It is necessary
for directors to ensure proper IT governance,
the proper alignment of IT with the
performance and sustainability objectives of
the company, and the proper management of
operational IT risk, including security. The risk
committee may be assigned responsibility to
oversee the management of IT risk. In addition,
the audit committee should consider IT as it
relates to financial risk and reporting.

Duties of Directors 39
• The board should ensure that the company
complies with applicable laws and consider
adherence to non-binding rules and standards.
The board is responsible for overseeing the
management of the company’s compliance
risk. The board should ensure awareness
of and compliance with laws, rules, codes
and standards throughout the business. In
turn, management is responsible for the
implementation of an effective compliance
framework and processes, and for the effective
management of the company’s compliance
risk. The board may mandate management to
establish a compliance function to implement
measures and procedures to ensure that the
board’s policy on compliance is implemented.
• The board has to ensure that there is an
effective risk-based internal audit function.
King III advocates a risk based approach to
internal audit. In order for internal audit to
contribute to the attainment of strategic
goals, the internal audit function should be
positioned at a level within the company to
understand the strategic direction and goals of
the company. It should develop a programme
to test the internal controls vis-a-vis specific
risks. The internal audit function should
provide assurance with reference to the
adequacy of controls to identify risks that
may impair the realisation of specific goals as
well as opportunities that will promote the
achievement of the company’s strategic goals.
As an internal assurance provider internal
audit should form an integral part of the
combined assurance model. It should provide
a written assessment of internal controls and
risk management to the board, and specifically
on internal financial controls to the audit
committee. •
The board should appreciate that stakeholder’s
perceptions affect the company’s reputation.
King III proposes that companies institute
measures to ensure that they are able to
proactively manage the relationships with all
their stakeholders, including shareholders.
The board should encourage constructive
stakeholder engagement, and strive to achieve
the correct balance between the interests of all
its various stakeholder groupings and promote
mutual respect between the company and its
stakeholders.
• The board should ensure the integrity of the
company’s integrated report.
King III proposes integrated reporting to ensure
that all stakeholders are able to assess the
economic value of the company. This entails
the integration of the company’s financial
reporting with sustainability reporting and
disclosure. The board should ensure that the
positive and negative impacts of the company’s
operations, as well as plans to improve the
positives and eradicate the negatives, are
conveyed in the integrated report. The board
should review the integrated reporting and
disclosure to ensure that it does not contradict
financial reporting.
• The board must act in the best interests of
the company and in fulfilling this responsibility
individual directors:
? must adhere to legal standards of conduct
? should be permitted to take independent
advice in connection with their duties
following an agreed procedure
? must disclose real or perceived conflicts to
the board and deal with them accordingly,
and
? deal in securities only in accordance with the
policy adopted by the board.

40
• The board must commence business rescue
proceedings as soon as the company is
financially distressed.
The Act sets out the processes and procedures
to be followed when a company is financially
distressed. The board has the responsibility to
ensure that all stakeholders are consulted in
the preparation of the business rescue plan.
• The board must elect a chairman of the board
that is an independent non-executive director.
King III emphasises the fact that the chairman
should be independent and free of conflicts.
The chair has to set the ethical tone for the
board and the company, provide leadership
to the board and the company, and act as link
between the board and company.
• The board must appoint and evaluate the
performance of the chief executive officer.
Arguably the most important function of the
board is to identify and appoint a suitable chief
executive officer. The collective responsibility
of management vests in the chief executive
officer, and as such the chief executive officer
bears ultimate responsibility for the decisions
and actions of management. 4.3 Meetings of d irectors
The directors may meet as often as required.
Generally, boards meet quarterly, but more
meetings may be scheduled, depending on
circumstances.
A director authorised to call a board meeting is
obliged to do so if 2 or more directors (or 25% of
directors where the board comprises more than
12 members) ask him or her to call a meeting.
In terms of the Act, board meetings may be
conducted by electronic communication so
long as the electronic communication facility
employed ordinarily enables all persons
participating in that meeting to communicate
concurrently with each other without an
intermediary, and to participate effectively in
the meeting. Directors that participate in the
meeting via electronic communication are
regarded as being present at the meeting – both
for quorum and voting purposes.
The majority of directors must be present at a
board meeting before a vote may be called, in
other words, the quorum for the meeting to
commence is 50% plus one.
Decisions taken at the meetings are generally on
a majority vote. In this regard, it should be kept in
mind that a resolution will be passed by a majority
of the directors that participate in the meeting.
Where there is a tie, the Act allows the chairperson
to have the deciding vote (but only if the chair did
not participate in the initial vote). The Act allows
a decision that could be voted on at a meeting
of the board to be adopted by written consent
of a majority of the directors, given in person, or
by electronic communication, provided that each
director has received notice of the matter to be
decided (round-robin). This allows for a handy
alternative to a physical meeting.

Duties of Directors 41
The information relating to the business to be
conducted at the meeting is generally distributed
ahead of time within a board “pack” to enable
each director to digest the information prior to
the meeting. This is usually the responsibility of
the company secretary. Given the strict standard
of director conduct, and the requirement for
directors to take reasonably diligent steps to
become informed on any matter on the agenda,
it is important that the company secretary
ensures that directors are provided with relevant
and accurate information.
Section 73 of the Act requires that the minutes
of the directors’ meetings be kept, including
any declaration of a conflict of personal financial
interest, as well as every board resolution
adopted by the board. Again, given the strict
standard of director conduct, it is important
for all directors to carefully read the minutes,
and ensure that it provides a clear reflection
of the proceedings and decisions taken at that
particular meeting. Directors may have to rely
on the minutes, should their decisions or actions
ever be challenged.
The chairperson of the meeting (usually also the
chairperson of the board) should sign the minutes
as evidence that they are correct. Any minutes of
a meeting, or a resolution, signed by the chair of
the meeting, or by the chair of the next meeting
of the board, is evidence of the proceedings of
that meeting, or adoption of that resolution, as
the case may be. If the chairperson of the meeting
does not sign the minutes, the chairperson of the
following meeting should sign them.4.4 Important roles of the board
The board comprises a number of important
individuals, each with a different role to play.
The functions of these significant individuals are
discussed below.
The Chairperson
The Memorandum of Incorporation of a
company generally allow for the directors to
elect a chairperson to chair the meetings of the
board. Unless specified in the Memorandum of
Incorporation, the chairperson remains in that
position for as long as he or she is a director, or
until the board elects otherwise.
The chairperson of the board is the individual
charged with providing the board with
leadership, and to harness the talents and energy
contributed by each of the individual directors.
King III recommends that the chairperson should
be an independent non-executive director. The
chairperson should not also be the CEO. While
the chairperson is required to retain an objective
viewpoint of the affairs of the company, the CEO
is often required to become intimately involved
in developing and executing management plans
for the company.
King III emphasises the importance of an
independent chairperson. The chairperson
of the board should be independent and
free of conflicts of interest at appointment,
failing which, the board should appoint a
lead independent non-executive director (LID)
(another independent director, usually the
deputy chairperson). In situations where the
independence of the chairperson is questionable
or impaired, a LID should be appointed for as
long as the situation exists. The role of the LID
would be to act as the ‘independent conscience’
of the chairperson, i.e. to ensure that all
decisions of the chairperson are justifiable from
an independent point of view.

42
The most obvious role played by the chairperson
is to govern the workings of the board, including
directing the meetings of the board and acting
as a conciliatory element when elements of the
board differ. In case of a tied vote, the chairperson
may cast the deciding vote (but only if he did not
cast a vote in the initial round of voting).
The chairperson is obliged to use this power
appropriately and not to influence the outcome
of the meetings towards a specific agenda.
“The Chairperson of a general meeting is
empowered “to preserve order, and to take care
that the proceedings are conducted in a proper
manner, and that the sense of the meeting is
properly ascertained with regard to any question
which is properly before the meeting.”
National Dwellings Society v Sykes 1894 3
According to King III the core functions of
thechairperson include:
• setting the ethical tone for the board and the
company
• providing overall leadership to the board
• formulating (with the CEO and company
secretary) the yearly work plan for the board
against agreed objectives, and playing an
active part in setting the agenda for board
meetings
• presiding over board meetings and ensuring
that time in meetings is used productively
• managing conflicts of interest
• acting as the link between the board and
management and particularly between the
board and the CEO
• ensuring that complete, timely, relevant,
accurate, honest and accessible information is
placed before the board to enable directors to
reach an informed decision
• monitoring how the board works together and
how individual directors perform and interact
at meetings
• ensuring that good relations are maintained
with the company’s major shareholders and
its strategic stakeholders, and presiding over
shareholders’ meetings
• upholding rigorous standards of preparation
for meetings, and
• ensuring that decisions by the board are
executed.
Further responsibilities of the chairperson would
be to identify and participate in selecting board
members (via a nomination committee), and
overseeing a formal succession plan for the board,
CEO and certain senior management appointments
such as the chief financial officer (CFO).

Duties of Directors 43
The chairperson should ensure that all
directors are appropriately made aware of their
responsibilities through a tailored induction
programme, and ensuring that a formal
programme of continuing professional education
is adopted at board level. Also, he or she should
ensure that directors play a full and constructive
role in the affairs of the company and taking a lead
role in the process for removing non-performing or
unsuitable directors from the board.
The Chief Executive Officer
The chief executive officer (sometimes referred to
as the managing director) has the responsibility
for determining and maintaining the strategic
direction of the company. The collective
responsibility of management rests with the CEO,
and as such the CEO bears responsibility for all
management functions and decisions. The CEO
is usually seen as the figurehead for the company
in the public eye, and as such should be an
individual with the ability to present a positive
image of the company.
Certainly one of the most important functions
of the board is to appoint a CEO. The CEO
does not necessarily have to be an employee of
the company in addition to holding a post as
director. Where the CEO is an employee of the
company, however, best practice internationally
and in South Africa is that he or she should enter
into at most a three year employment contract
with the company.
Where the Memorandum of Incorporation so
provides, the directors may delegate all of their
powers to this one individual, thus conferring
onto him or her an enormous amount of
responsibility. However, it should be made
clear that the board remains accountable to
shareholders and stakeholders. The board
should have regard to the directors’ fiduciary
and statutory responsibilities when delegating
authority to management. Also, the board
should have clear performance indicators to hold
management accountable.The board should define its own levels of
materiality, reserving specific powers to it and
delegating other matters to management. Such
delegation by the board should have regard to
directors’ statutory and fiduciary responsibilities
to the company, while considering strategic and
operational effectiveness and efficiencies.
King III principle 2.17 par 50
Some of the more important functions that King
III suggests that the CEO perform include:

recommending or appointing the executive
team and ensuring proper succession planning
and performance appraisals
• developing the company’s strategy for
consideration and approval by the board
• developing and recommending to the board
annual business plans and budgets that
support the company’s long-term strategy
• monitoring and reporting to the board
the performance of the company and its
conformance with compliance imperatives
• establishing an organisational structure for
the company which is necessary to enable
execution of its strategic planning
• setting the tone in providing ethical leadership
and creating an ethical environment
• ensuring that the company complies with
all relevant laws and corporate governance
principles, and
• ensuring that the company applies all
recommended best practices and, if not, that
the failure to do so is justifiably explained.

44
4.5 Board committees
The Act provides the board with the power to
appoint board committees, and to delegate to
such committees any of the authority of the
board. The authority of the board to appoint
board committees is subject to the company’s
Memorandum of Incorporation.
If the company’s Memorandum of Incorporation,
or a board resolution establishing a committee,
does not provide otherwise, the committee
may include persons who are not directors of
the company. However, it should be noted that
where non-directors are appointed to a board
committee, such persons are not allowed to vote
on a matter to be decided by the committee).
Board committees constitute an important
element of the governance process and should
be established with clearly agreed reporting
procedures and a written scope of authority. The
Act recognises the right of a board to establish
board committees but by doing so, the board
is not exonerated of complying with its legal
responsibilities.
King III principle 2.23 par 125
King III recommends that the delegation of
powers to a committee be made official, in
order for the members to have formal terms
of reference to determine the scope of their
powers, and the responsibilities they bear.
The terms of reference should include detail
pertaining to:
• the composition of the committee
• the objectives, purpose and activities
• the powers that have been delegated
• any mandate to make recommendations to the
board
• the lifespan of the committee, and
• how the committee reports to the board. The Act requires public companies and
state owned companies to appoint an audit
committee comprising three independent
non-executive directors. King III proposes that all
other companies provide for the appointment of
an audit committee (the composition, purpose
and duties to be set out in the company’s
Memorandum of Incorporation). In addition,
King III proposes that the board should appoint
the audit, risk, remuneration and nomination
committees as standing committees. The board
may also consider establishing governance, IT
steering and sustainability committees.
Smaller companies need not establish formal
committees to perform these functions,
but should ensure that these functions are
appropriately addressed by the board.
The Act requires listed public companies and
state owned companies, as well as any other
company that scored more than 500 Public
Interest Score points in any two of the last
five years, to establish a social and ethics
committee. This committee should comprise
at least three members. The members may be
directors or prescribed officers, but at least one
must be a director that is not involved in the
day-to-day management of the company, i.e a
non-executive director.
Board committees are allowed to consult with
or receive advice from any person, including
employees, advisors, or other board committees.
King III suggests that all board committees, other
than the risk committee, should only comprise
members of the board and should have a
majority of non-executive directors. The majority
of the non-executive directors serving on these
committees should be independent. Committees
should be chaired by independent non-executive
directors, other than the executive committee
which is ordinarily chaired by the CEO.

Duties of Directors 45
Advisors, experts and other external parties
may attend committee meetings by invitation.
Non-directors serving as members on
committees of the board are not entitled to
vote, and will be subject to the same standards
of conduct and liability as if they were directors.
Executive directors and senior management
may be invited to attend committee meetings if
the chair of the committee considers their input
and contribution to be of value to the decision-
making process.
The composition and functions of each of these
sub committees are discussed below.
The Nomination Committee
The role of the nomination committee is to
review, on a regular basis, the composition
of the full board, and where it appears that
the board is lacking in skills or experience in a
certain area, to identify how best to rectify the
situation. This may involve identifying skills that
are required, and those individuals best suited to
bring these to the board.
King III suggests that the committee should only
comprise members of the board. The majority
of the members should be non-executive, of
which the majority should be independent. The
ideal situation is for the chairperson of the board
to also chair the nomination committee, failing
which an independent non-executive director
should be the chairperson.
The committee is empowered to consider the
size and balance of the full board, and to make
recommendations where, in the opinion of its
members, improvements could be made. It
remains the responsibility of the full board of
directors to consider the recommendations made
and to vote on any nominated appointments or,
as the case may be, suggested removals.One of the important considerations for the
committee is whether there are adequate
succession plans in place to mitigate the effects
of losing key members of the board, specifically
non-executives as these individuals may be more
difficult to replace than executive directors who
have followed a defined career path through the
management of the company.
The role of the nominations committee may be
extended to also consider the skill, experience
and succession planning with respect to the
executive management team.
The Remuneration Committee
The remuneration of a company’s directors is
one of the most sensitive and topical issues
facing the board of directors today. It is therefore
considered a crucial element of good corporate
governance to establish a committee whose
sole focus it is to consider and recommend
the level and form of the directors’ (and senior
management’s) remuneration.
King III suggests that the committee should only
comprise members of the board. The majority of
the members should be non-executive, of which
the majority should be independent.
The chairman of the committee should be an
independent, non-executive director. The chair
of the board should not chair the remuneration
committee, but may be a member.
One of the most important responsibilities of the
members of the committee is to remain up to
date on appropriate levels, structuring methods
and types of remuneration in the environment in
which the company operates.
The members of the committee are required to
maintain a fine balance between recommending
over-generous remuneration which is not in
the interests of the shareholders, and a level of
remuneration which fails to attract the desired
quality of individual to the board.

46
While it is usually within the committee’s
mandate to deliberate on the remuneration
of the non-executive directors, it is up to the
shareholders to make the final decision on the
appropriate level.
The Risk Committee
Risk management is an often misunderstood
discipline within a company. Too often the
responsibility for ensuring that the significant
risks are adequately managed is not
acknowledged, or is inappropriately delegated
to the audit committee. There are two reasons
why the risk management function should not
report to the audit committee, but should be
monitored by a separate risk committee.
The first is that, as a consequence of the
composition of the committee, the function
will often have financial focus when risk
management should correctly extend far beyond
the finances of a company.
Secondly, the audit committee should act as an
independent oversight body.
Having to directly oversee the risk management
function would generally involve a large amount
of detailed review of the processes and workings
of the company.
This would necessarily have a detrimental effect
on the objectivity of the audit committee’s
members when considering reports of the risk
management function. The formation of a
separate committee recognises the fact that the
identification and management of risks impacting
the business, and the disclosure of these to the
shareholders is vital to good governance.
King III recommends that the committee should
have at least three members, and may comprise
executive and non-executive directors, and even
non-directors. The chairperson of the committee should be a
non-executive director. The chairperson of the
board should not chair this committee, but may
be a member.
The role of the committee is to perform an
oversight function. In doing so, it should consider
the risk policy and plan, determine the company’s
risk appetite and risk tolerance, ensure that risk
assessments are performed regularly, monitor
the whole risk management process, and receive
assurance from internal and external assurance
providers regarding the effectiveness of the risk
management process. In turn, management is
responsible for the design, implementation and
effectiveness of risk management, as well as
continual risk monitoring.
It is of vital importance that members of the risk
committee have experience within the industry.
This would allow them to identify areas of risk
and be aware of the appropriate methods of
managing the company’s exposure via internal
(the control environment) or external (such as
thorough insurance cover) means.
To operate effectively, it is recommended
that the committee produces reports that
are reviewed and signed by the full board as
acknowledgment that their responsibilities in this
regard have been adequately discharged.

Duties of Directors 47
The Audit Committee
King III emphasizes the vital role of an audit
committee in ensuring the integrity of financial
controls and integrated reporting (both financial
and sustainability reporting), and identifying
and managing financial risk. This sentiment is
confirmed in the Act. The appointment of an
audit committee is regulated as part of the
enhanced accountability and transparency
requirements set out in Chapter 3 of the Act.
The Act requires all public companies and all
state owned companies to appoint an audit
committee. Any other type of company may
elect to appoint an audit committee (although
the provisions of the Act pertaining to the audit
committee will only apply to these companies
to the extent provided for in their respective
Memorandums of Incorporation.
Notwithstanding the requirements of the Act,
King III proposes that all companies should have
an audit committee.
The Act determines that where the appointment
of an audit committee is required, the
audit committee must be appointed by the
shareholders at every annual general meeting.
This requirement highlights the importance
of the board’s nomination committee. As all
audit committee members must be directors
(members of the board), it is important that
the nominations committee identifies suitably
skilled and qualified individuals to nominate for
appointment to the audit committee. The shareholders may appoint anyone they
deem fit and proper.
Section 94 of the Act determines that the
audit committee must consist of at least three
members. Each member of the committee must
be a director of the company and not:

be involved in the day to day management of
the company for the past financial year;
• be a prescribed officer or full-time employee of
the company for the past 3 financial years;
• be a material supplier or customer of
the company such that a reasonable and
informed third party would conclude in the
circumstances that the integrity, impartiality or
objectivity of that director is compromised by
that relationship; and
• be related to anybody who falls within the
above criteria.
The requirements of section 94 are prescriptive.
It appears that if the company appoints an
audit committee with persons other than those
prescribed, it would not be an audit committee
as required by the Act. As a result, any functions
undertaken by a non-compliant (that is an
“incorrectly constituted”) audit committee
will not have been performed by the audit
committee as required by the Act.

48
The audit committee can consist of as many
members as the company wishes to appoint, but
each of them must meet the criteria and each
of them must be a director of the company. The
audit committee would, of course, be entitled to
utilise advisors and obtain assistance from other
persons inside and outside of the company. The
audit committee may also invite knowledgeable
persons to attend its meetings. However, the
formally appointed members of the audit
committee entitled to vote and fulfil the functions
of the audit committee will have to meet the
criteria (non-executive independent directors) in
accordance with the prescribed requirements.
In this regard, cognisance should be taken
of the position of shareholders as potential
members of the audit committee. The Act makes
no reference to shareholders, and the value
judgement pertaining to independence relates
only to suppliers and customers. The mere fact
that a person holds shares in the company (or
meets any of the other factual tests such as
being related to a supplier) would not, on its
own, preclude such a person from serving on
the audit committee. It is proposed that, in line
with the best practice principles set out in King
III, the appointment of shareholders to the audit
committee be carefully considered. A judgment
on the effect of the shareholding or other
relationship is required in order to establish the
likely factual impact on the independence of a
particular person. The statutory duties of the audit committee
include:

making submissions to the board regarding
the company’s accounting policies, financial
controls, records and reporting
• nominating an auditor that the audit
committee regards as independent
• determining the audit fee
• ensuring that the appointment of the auditor
complies with the Companies Act and other
relevant legislation
• determining the nature and extent of
non-audit services
• pre-approving any proposed agreement with
the auditor for the provision of non-audit
services
• preparing a report to be included in the annual
financial statements describing how the
committee carried out its functions, stating
whether the auditor was independent, and
commenting on the financial statements,
accounting practices and internal financial
control measures of the company
• receiving and dealing with relevant complaints,
and
• any other function designated by the board.
Since the Act prescribes the appointment
process, composition and functions of the
audit committee, it can now be described as
a statutory committee. The audit committee
will bear sole responsibility for its decisions
pertaining to the appointment, fees and terms of
engagement of the auditor. On all other matters
it remains accountable to the board and, as
such, it will function as a board committee.
An interesting development is the fact that the
audit committee is now obliged to also report
to shareholders. The audit committee will report
to shareholders by including in the annual
financial statements the audit committee’s
report describing how the committee carried out
its functions, stating whether the auditor was
independent, and commenting on the financial
statements, accounting practices and internal
financial control measures of the company.

Duties of Directors 49
In addition to the legislative duties set out in the
Act, King III proposes a number of additional
functions, including:
• overseeing ? financial risks and reporting
? internal financial controls
? fraud and IT risks as they relate to financial
reporting
• ensuring that a combined assurance model is
applied to provide a coordinated approach to
all assurance activities (in terms of this model,
assurance should be done on three levels, i.e.
management, internal assurance providers and
external assurance providers)
• overseeing integrated reporting (both financial
and sustainability reporting)
• satisfying itself with regard to the expertise,
resources and experience of the finance
function
• overseeing the internal audit function
• playing a key role in the risk management
process, and
• overseeing the external audit process.
In terms of King III, the audit committee is
responsible to ensure integrated reporting
(integrating financial and sustainability
reporting). As a minimum, the audit committee
should provide the following information in the
integrated report:
• a summary of the role of the audit committee
• a statement on whether or not the audit
committee has adopted a formal terms of
reference that has been approved by the board
and if so, whether the committee satisfied its
responsibilities for the year in compliance with
its terms of reference
• the names and qualifications of all members of
the audit committee during the period under
review, and the period for which they served
on the committee
• the number of audit committee meetings held
during the period under review and members’
attendance at these meetings
• a statement on whether or not the audit
committee considered and recommended the internal audit charter for approval by the board
• a description of the working relationship with
the chief audit executive
• information about any other responsibilities
assigned to the audit committee by the board
• a statement on whether the audit committee
complied with its legal, regulatory or other
responsibilities, and
• a statement on whether or not the audit
committee recommended the integrated report
to the board for approval.
Ethical leadership and social responsibility is
highlighted in King III. These same sentiments
are echoed in the Act. Although it may be
argued that the provisions of the Act are onerous
and prescriptive, it should be acknowledged
that the intention is for the audit committee to
play a key role in ensuring accountability and
transparency. As an independent, objective body,
it should function as the company’s independent
watchdog to ensure the integrity of financial
controls, combined assurance, effective financial
risk management, and meaningful integrated
reporting to shareholders and stakeholders alike.

50
Social and Ethics Committee
During the public hearings on the Companies Bill
conducted by the Portfolio Committee on Trade
and Industry in 2007, a proposal was made to
include a requirement in the new Act to oblige
certain companies to appoint a member of a
trade union as a board member (director). The
Portfolio Committee rejected this proposal, but
presented a compromise. It was argued that
there is a definite need in the South African
context to encourage large companies (especially
those companies that have a significant
impact on the public interest) to not only act
responsibly, but also to be seen doing so and
to account from the public interest perspective
for their decision making processes and the
results thereof. In essence, it was argued that
these companies should be obliged to develop
a social conscience, and behave like responsible
corporate citizens.
As such, the Companies Act now provides the
Minister of Trade and Industry with the authority
to require certain companies to have a social
and ethics committee, having regard to the
impact such companies have on the public
interest. However, regardless of the requirement
to appoint a social and ethics committee, the
directors and prescribed officers of all companies
are bound to act in accordance with an
acceptable standard of conduct.
In terms of this standard, directors and
prescribed officers are obliged to act in the best
interest of the company. In this regard, the Act
subscribes to the “enlightened shareholder value
approach” – which requires that directors are
obliged to promote the success of the company
in the collective best interest of shareholders,
which includes, as appropriate, the company’s
need to take account of the legitimate interests
of other stakeholders including among
others, the community, employees, customers
and suppliers. In terms of section 72 of the
Companies Act (read with Companies Regulation
43), the following companies should have appointed a social and ethics committee within
one year after the Act became effective (i.e. by
30 April 2012):

every state owned company
• every listed public company and
• any other company that has, in any two of the
previous five years, had a public interest score
of at least 500 points.
The social and ethics committee must comprise
not less than three members. These members may
be directors or prescribed officers of the company,
however, at least one must be a director who
is not involved in the day-to-day management
of the company’s business, i.e. a non-executive
director, and must not have been so involved
during the previous three financial years.
In terms of Companies Regulation 43 a social
and ethics committee has to monitor the
company’s activities with regard to matters
relating to:
• social and economic development, including
the company’s standing in terms of the goals
and purposes of:
? the 10 principles set out in the United
Nations Global Company Principles;
? the Organisation for Economic Co-operation
and Development (OECD) recommendations
regarding corruption (refer to the OECD
website for further details (www.oecd.org));
? the Employment Equity Act, No 55 of 1998;
? the Broad-Based Black Economic
Empowerment Act, No 53 of 2003;
• good corporate citizenship, including the
company’s:
? promotion of equality, prevention of unfair
discrimination, and measures to address
corruption;
? contribution to development of the
communities in which its activities are
predominantly conducted or within which
its products or services are predominantly
marketed; and
? record of sponsorship, donations and
charitable giving;

Duties of Directors 51
• the environment, health and public safety,
including the impact of the company’s
activities and of its products or services;
• consumer relationships, including the
company’s policies and record relating to
advertising, public relations and compliance
with consumer protection laws; and
• labour and employment matters.
If one considers the requirements of King III
with respect to ethical leadership and ethical
behaviour, it appears advisable to assign to
the social and ethics committee some of the
responsibilities in this regard.
The additional functions may include:
• reviewing the adequacy and effectiveness of
the company’s engagement and interaction
with its stakeholders,
• considering substantive national and
international regulatory developments,
overseeing their operationalisation as well
as practice in the fields of social and ethics
management,
• reviewing and approving the policy and
strategy pertaining to the company’s
programme of corporate social investment,
• determining clearly articulated ethical
standards (code of ethics), and ensuring
that the company takes measures to achieve
adherence to these in all aspects of the
business, thus facilitating a sustainable ethical
corporate culture within the company,
• monitoring that management develop and
implement programmes, guidelines and
practices congruent with the company’s social
and ethics policies,
• reviewing the material risks and liabilities
relating to the provisions of the code of ethics,
and ensuring that such risks are managed
as part of the company’s risk management
programme,
• reviewing the company’s performance in
implementing the provisions of the code of
ethics and the assertions made in this regard, •
obtaining independent external assurance
of the company’s ethics performance on an
annual basis, and include in the Integrated
Report an assurance statement related to the
ethics performance of the company, and
• ensuring that management has allocated
adequate resources to comply with social and
ethics policies, codes of best practice and
regulatory requirements.
The social and ethics committee must report to
shareholders at the Annual General Meeting. At
least one member of the committee must attend
the Annual General Meeting of the company to
report back to shareholders on the activities of
the company. Although there is no legislative
requirement for the committee to issue a
written report, it is recommended that a written
report be included in the company’s Integrated
Report, Director’s Report or its Governance
report, whichever is the most appropriate in the
circumstances.

52
4.6 Relationships within the company
The board’s relationship with the
shareholders
The board of directors is ultimately accountable
to the owners of the company. The shareholders
therefore need to evaluate the performance of
the board to the extent that they are able to.
By exercising their rights to appoint and remove
the directors of the company, the shareholders
effectively control the board.
In most instances, however, the shareholders
would not have access to the detailed decisions
taken by the board, and consequently are not in
a position to evaluate the success or failure of
each decision made by the directors.
The board should encourage shareholders to
attend AGMs and other company meetings,
at which all the directors should be present.
The chairmen of each of the board committees
should be present at the AGM.
King III Report principle 8.2 par 18
Directors are not required by law to attend
general meetings of the shareholders. It is,
however, general practice for the directors to
attend the meetings to maintain a channel of
communication between the shareholders and
the board. Where a company is required to have
a social and ethics committee, one member must
attend the AGM to report to shareholders on the
activities of the committee.
Usually the chairperson of the board also acts as
the chairperson at a general meeting. However,
depending on the company’s Memorandum
of Incorporation, the members may be able to
appoint their own chairperson. The board’s relationship with the company
secretary
The individual directors, and the board
collectively, should look to the company
secretary for guidance on their responsibilities
and duties and how such responsibilities and
duties should be properly discharged in the best
interests of the company.
King III Report principle 2.21 par 101
The Act requires every public company and
state owned company to appoint a company
secretary. The company secretary may be
appointed either by the board or by an ordinary
resolution of the holders of the company’s
securities. This individual is required to have (in
the opinion of the directors) sufficient relevant
experience and knowledge to perform this
function adequately. In addition, the secretary
should be permanently resident in South Africa.
The company secretary is accountable to the
board.
The company secretary should provide a central
source of guidance and advice to the board,
and within the company, on matters of good
governance and of changes in legislation.
King III Report principle 2.21 par 102
The Act allows that the role of the company
secretary be performed by a juristic person or
partnership.

Duties of Directors 53
The directors have the power to remove the
company secretary. The removed individual has
the right to place a statement setting out his
or her objections to the removal in the annual
financial statements of the company.
Where there is a casual vacancy of the company
secretarial position, the directors have 60 business
days to find a replacement. The same restrictions
on persons being appointed as directors apply to
the appointment of the company secretary, apart
from the fact that the company secretary does not
have to be a natural person.
The Act, in section 88 sets out the duties of the
company secretary. The company secretary is
responsible for:
• providing the directors of the company
collectively and individually with guidance as to
their duties, responsibilities and powers
• making the directors aware of any law relevant
to or affecting the company
• reporting to the company’s board any
failure on the part of the company or a
director to comply with the Memorandum of
Incorporation or rules of the company or the
provisions of the Act;
• ensuring that minutes of all shareholders
meetings, board meetings and the meetings
of any committees of the directors, or of the
company’s audit committee, are properly
recorded
• certifying in the company’s annual financial
statements whether the company has filed
required returns and notices in terms of the
Act, and whether all such returns and notices
appear to be true, correct and up to date
• ensuring that a copy of the company’s annual
financial statements is sent to every person
who is entitled to it, and
• ensuring that the company’s annual return is
filed in terms of section 33 of the Act.
As can be seen from the above duties, the
company secretary plays a pivotal role in assisting
and supporting the directors of the company. In the past, the role of company secretary
was often delegated to individuals who were
meticulous in record keeping, but not much
more was usually required from the individual.
The secretary, however, plays an important part
in educating and inducting new directors to the
board. In recent years the company secretary has
become an important and powerful individual
within the company. This role is enforced by the
Act and King III.
King III suggests that a further important
function of the secretary is to ensure that the
directors receive all relevant information in
their board papers. Such information should be
complete to allow for an informed decision to
be made, concise to ensure that the directors do
not suffer from information overload and timely
to be of any use to the directors.
The company secretary should have a direct
channel of communication to the chairman and
should be available to provide comprehensive
practical support and guidance to directors,
with particular emphasis on supporting the
non-executive directors, the chairman of the
board and the chairman of committees and the
audit committee.
King III Report principle 2.21 par 103

54
The board’s relationship with management
The directors have the power to appoint and
remove the management of the company, unless
the manager is also a director of the company, in
which case the shareholders are responsible for
his or her appointment or removal.
In practice however, it is often the board
that takes decisions on executive director
appointments, with shareholder approval being a
“rubber-stamping” exercise.
It is management’s responsibility to provide the
directors with all relevant information that they
require to make an informed decision as to the
financial and operational affairs of the company.
In exceptional circumstances, managers who are
not directors may attend directors’ meetings.
This may be the case where, for some reason,
the directors require that a key member of
management is required to explain or clarify an
issue for the benefit of the board.
It should be noted that the Act determines
that prescribed officers are required to perform
their functions and exercise their duties to the
standard of conduct as it applies to directors.
Prescribed officers will be subject to the same
liability provisions as it applies to directors. Prescribed officers include every person, by
whatever title the office is designated, that:

exercises general executive control over and
management of the whole, or a significant
portion, of the business and activities of the
company; or
• regularly participates to a material degree in
the exercise of general executive control over
and management of the whole, or a significant
portion, of the business and activities of the
company.
A person will be a prescribed officer regardless of
any title or office they are designated.
Where executive directors play a dual role, the
individual should ensure that he or she is able to
detach him or herself from their role as a manager
of the company when representing the interests
of the shareholders on the board of directors.

Duties of Directors 55
The board’s relationship with the external
auditors
The shareholders are responsible for the
appointment of the auditor at the annual general
meeting. The audit committee has to nominate
an independent auditor for appointment.
However, nothing precludes the appointment
by the company at its annual general meeting
of an auditor other than one nominated by the
audit committee. However, if such an auditor is
appointed, the appointment is valid only if the
audit committee is satisfied that the proposed
auditor is independent of the company.
The board may remove the auditor. A vacancy
created in the appointment of the auditor,
either through the removal of the auditor by
the board or by the resignation of the auditor,
must be filled by the board within 40 business
days. In such an instance, the company’s audit
committee must be satisfied that the auditor is
independent of the company.
The audit committee is responsible, to the
exclusion of the rest of the board, for the terms
of engagement, the fees and the appointment of
the external auditor.
The audit committee should be informed when
there is a disagreement on auditing or accounting
matters between the management and the external
auditors. Where an accounting opinion has been
requested from a person other than the external
auditor of the company, the reasoning for the
accounting treatment adopted should be obtained
and should be approved by the audit committee
before the committee’s recommendation is made
to the board. The audit committee should also be
satisfied with the credentials of the person providing
such an opinion.
King III Report principle 3.4 par 32
The board’s relationship with internal audit
The internal audit function offers the board an
objective review of the internal control systems
within the company. The function should be
staffed with appropriate individuals who are well
respected within the organisation.
The internal audit function is accountable to the
board, and operates under the direct oversight
of the audit committee.
Internal audit should provide a written
assessment of the effectiveness of the system
of internal controls and risk management to
the board. The assessment regarding internal
financial controls should be reported specifically
to the audit committee.
King III Report principle 7.3 par 16

56
The charter of the internal audit function should
comply with the guidance published by the
Institute of Internal Auditors. King III indicates
that the key responsibility of internal audit
is to the board, its committees, or both, in
discharging its governance responsibilities and as
a minimum to perform the following functions:
• evaluate the company’s governance processes
including ethics, especially the ‘tone at the top’
• perform an objective assessment of the
effectiveness of risk management and the
internal control framework
• systematically analyse and evaluate business
processes and associated controls, including IT,
and
• provide a source of information, as
appropriate, regarding instances of fraud,
corruption, unethical behaviour and
irregularities.
Internal audit should pursue a risk based
approach to planning as opposed to a
compliance approach that is limited to evaluation
of adherence to procedures. A risk-based internal
audit approach has the benefit of assessing
whether the process intended to serve as a
control is an appropriate risk measure. An
internal audit function should be independent
from management who instituted the controls
and should be an objective provider of assurance
with respect to the risks that may threaten the
achievement of the company’s strategic goals, as
well as the opportunities that may contribute to
the achievement of such goals.
King III proposes that the internal audit function
should be positioned strategically within the
company to ensure that its objectives are
achieved. The Chief Audit Executive should have
a standing invitation to attend as an invitee any
of the executive committee or other committee
meetings. The Chief Audit Executive should be
apprised formally of the company’s strategy
and performance through meetings with the
chairman, the CEO, or both. The directors are required to take responsibility
for the state of the internal controls at the
company. In order to discharge this responsibility,
the directors have to take a certain amount of
reliance from the work performed by the internal
audit department.
It is vital that each member of the board
understands the significant risks impacting the
company, and is therefore able to make an
informed decision on the appropriateness of the
focus of the internal audit function, as well as
the work performed to draw an opinion on the
functioning of the controls in place to mitigate
the business, operational and financial risks.
Where the directors feel that there are significant
risks that are not being sufficiently managed,
they should be able to look to the internal
audit function to work with management in
creating and maintaining a comprehensive risk
management plan to manage these risks.

Duties of Directors 57
4.7 Communication with stakeholders
The Directors’ Report
All communication to stakeholders should
use clear and simple language and should
set out all relevant facts, both positive and
negative. It should be structured to enable its
target market to understand the implications
of the communication. Companies should use
communication channels that are accessible to
its stakeholder.
King III Report principle 8.5 par 33
The Act requires that the annual financial
statements of a company must include a
directors’ report. As this report is considered part
of the financial statements of the company, it is
subject to review by the auditor.
The Act requires the directors to discuss in the
directors’ report any matter with respect to the
state of affairs, the business and profit or loss
of the company, or of the group of companies,
if the company is part of a group, including
any matter material for the shareholders to
appreciate the company’s state of affairs.
Ownership of Integrated Reporting and the
Integrated Report
The actual effective ownership by the board
of the Integrated Reporting process, and the
Integrated Report itself, is of significant practical
importance as it is one of the key determinants
for a good Integrated Report.
There is indeed an important difference between
the board actually setting and owning the
agenda in this regard, or effectively acquiescing
to an agenda actually set, and populated by,
executive management or those that report
to them and which is submitted to the board
for approval, very often at a late stage of the
process. Due to the relatively immature stage
of development of Integrated Reporting and
Integrated Reports, and a consequentially still developing framework, a greater degree of
pro-activeness than is the case with the more
traditional areas of responsibility where more
mature and generally accepted frameworks are
in place, is indicated. This requires boards to
equip themselves properly in this area, and/or
to seek the appropriate assistance to properly
discharge their responsibilities.
According to King III, the board should ensure
the integrity of the Integrated Report, and
the audit committee should oversee the
Integrated Report. Detailed requirements for
audit committees in King III, that directly and
indirectly impact on the effective ownership of
the Integrated Report include:

The responsibility to consider whether an
unbiased picture of the company’s position,
performance or sustainability is being
presented;
• The responsibility for evaluating the significant
judgements and reporting decisions affecting
the Integrated Report;
• The responsibility to understand how
materiality for the Integrated Report has been
determined; and
• The responsibility to ensure that forward-
looking information provides a proper
appreciation of the key drivers that will enable
the achievement of such goals.

58
To properly discharge these responsibilities,
as well as those set out in the Companies Act
and contained in Company Law, the board
should pro-actively set and own the Integrated
Reporting agenda. In this regard, the view from
executive management is obviously important
to take into account in setting the agenda
and framework, but once these are finalised
by the board, the primary role of executive
management and those that report to them is
to operationalise and report back to the board
within the framework thus established. If, as
is generally accepted, the Integrated Report
indeed reflects the collective mind of the board
and the integrated thinking that is essential for
business in the modern world, a more reactive
approach by the board would not effectively
enable capturing the essential qualities and
pre-requisites for Integrated Reports.
The purpose of an Integrated Report is tell the
unique story of the company and the manner
in which it sustains and adds value in the short,
medium and long term. The board is clearly
intended to be ultimately overall accountable
for the company and its journey, and has
been placed in a unique position to practically
discharge this responsibility by a variety of
formal and informal arrangements. In order
to effectively discharge this accountability
responsibility, the board should therefore also
embrace the proactive and effective ownership
of the Integrated Reporting process and the
Integrated Report.
The purpose of an Integrated
Report is tell the unique story of
the company and the manner in
which it sustains and adds value
in the short, medium and long
term.

Duties of Directors 59
5. The powers of the board of
directors
5.1 How can a d irector bind the company?
A company is a juristic person, and unless the
company’s Memorandum of Incorporation
provides otherwise it has all of the legal powers
and capacity of an individual, except if a juristic
person is incapable of exercising any such power,
or having any such capacity.
A company may limit, restrict or qualify the
purposes, powers or activities of that company in
its Memorandum of Incorporation. In addition,
the Memorandum of Incorporation may limit
the authority of the directors to perform an act
on behalf of the company. It should be noted
that the Act determines that where a company
or its directors acts in contravention of such a
limitation, qualification or restriction the action
is not regarded as void for this reason only.
Therefore, the Act provides that any person
dealing with a company in good faith may
presume that the company has complied with
all of the formal and procedural requirements
in terms of the Act, its Memorandum of
Incorporation and any rules of the company,
unless the person knew or reasonably ought to
have known of any failure by the company to
comply with such requirement.
Where an action by the company or the
directors is inconsistent with any limit, restriction
or qualification as set out in the company’s
Memorandum of Incorporation, the shareholders,
by special resolution, may ratify such action.The business and affairs of a company are
managed by or under the direction of its board.
The board of directors has the authority to
exercise all of the powers and perform any of the
functions of the company, except to the extent
that the Act or the company’s Memorandum of
Incorporation provides otherwise. It is important
for directors to ensure that they are familiar
with the provisions of the Memorandum of
Incorporation, especially those provisions that
limit or restrict the authority of the board and
the directors.
It is the board of directors generally that has the
power to contract on behalf of the company.
Individual directors or members of management
do not have such authority, unless the authority
is expressly delegated to them by the board.
Often such delegation occurs through the terms
of reference of a position within the company,
for example the position of managing director.
The board often reserves certain powers for
itself, either because they are strategically
important, or in monetary terms they are
significant. This concept is discussed below.

60
5.2 Reservation of powers
As the board of directors bears the ultimate
responsibility for the actions and performance of
the company, it is usually considered appropriate
that certain decisions may only be taken by the
board itself.
In many instances, monetary limits are set
for each level of responsibility within the
company. For example, when authorising capital
expenditure, limits for authorisation may be set
for the divisional manager, the group financial
director and the managing director. Any projects
exceeding the managing director’s limit would
then need to be authorised by the board itself.
Further examples of when different levels of
responsibility may be designated for the various
tiers of management (or may be reserved only
for the board to decide upon, depending on the
materiality or strategic nature of the decision) are:
• Decisions regarding the use of auditors,
consultants and other outside agencies
• Strategic marketing decisions affecting
the company’s brands and stakeholder
communications
• Major tenders to be awarded
• Employee benefits awarded to senior and
middle management
• Significant litigation issues
It is therefore appropriate for the board to
prescribe the types of decisions that may be
delegated, and those that need to be brought
before the board. In some cases, it is appropriate
for the board to require that certain decisions
should be “pre-approved” or alternatively
subsequently ratified.
The board should set some level of quantitative
materiality for itself to ensure that issues
discussed are significant in terms of the company
as a whole. These limits may be more complex
than a single threshold, and may take into
account additional factors such as whether the
decision is for an unbudgeted expense. 5.3 Which powers are restricted?
The Act reserves certain decisions for the
shareholders and consequently the directors
require the approval of the shareholders prior
to any such decisions being finalised. In some
instances the shareholders provide the directors
with a general approval for such decisions, which
is usually valid until the next AGM, but some
decisions need to be voted on individually.
The Act requires approval of the shareholders by
special resolution in the following instances:

amendment of the company’s Memorandum
of Incorporation
• approval for the voluntary winding-up of the
company
• approval of any proposed fundamental
transaction (including the disposal of all
or greater part of assets or undertaking,
amalgamation, merger or scheme of
arrangement)
• ratification of any action by the company or
the directors that is inconsistent with a limit,
restriction or qualification in the Memorandum
of Incorporation
• approval of an issue of shares or securities to
a director, future director, prescribed officer,
or any person related or inter-related to the
company, or to a director or prescribed officer
of the company
• approval of financial assistance for subscription
of securities (special resolution of the
shareholders should be adopted within the
preceding two years)
• approval of loans or other financial assistance
to directors as well as related and inter-
related companies (special resolution of the
shareholders should be adopted within the
preceding two years), and
• approval of the policy or parameters for
director remuneration(special resolution of the
shareholders should be adopted within the
preceding two years).

Duties of Directors 61
5.4 Effectiveness of company actions and
the role of the CIPC
The Act specifically reduces the company’s reliance
on the regulator, the CIPC. Although companies
still have to comply with an administrative process
to inform the CIPC of its decisions (for example
the appointment of directors, changing of
auditors, change of year end, amendment of the
Memorandum of Incorporation), none of these
decisions are dependent on the approval of the
CIPC. In most instances, the company’s decision is
effective immediately and it merely needs to inform
the CIPC of decisions or actions. However, in a few
instances the effect of the decision is delayed until
the necessary notices have been ‘filed’ with the CIPC.
Companies are often required to “file” a
notice with the CIPC. Section 1 provides that
“file”, when used as a verb, means to deliver
a document to the Commission in the manner
and form, if any, prescribed for that document.
If one looks at the Regulations, (Regulation 7
and Annexure 3), it clearly indicates that when
a document is “delivered” to the CIPC, the date
and time of delivery is determined as follows:
Method of delivery Time of deemed delivery
By entering the required information in an
electronic representation of that form on the
internet website, if any, maintained by the
Commission, if the document is a prescribed
form; or On the date and at the time recorded by the
Commission’s computer system, as verified by
fax reply to the sender of the information.
By transmitting the document as a separate
file attached to an electronic mail message
addressed to the Commission; or On the date and at the time recorded by the
Commission’s computer system, unless, within
1 business day after that date, the Commission
advises the sender that the file is unreadable.
By sending a computer disk containing the
document in electronic form, by registered post
addressed to the Commission; or On the date and at the time of delivery of the
registered post to the Commission, as recorded
by the post office, unless, within 1 business day
after that date, the Commission advises the
sender that the disk is unreadable.
By handing the document, or a computer disk
containing the document in electronic form,
to the Commission, or a responsible employee
who is apparently in charge of the Commission’s
office. On the date and at the time noted in a receipt
issued by the Commission unless, the document
is on a computer disk, and, within 1 business
day after that date, the Commission advises the
sender that the disk is unreadable.

62
It should be clear from the table above that “file”
and “deliver” is defined so as to simply mean
that a document must be submitted to the CIPC.
There is no subsequent requirement for the
CIPC to check or approve the particular action.
Of course, the company needs to ensure that
the particular filing complies with the provisions
of the Act (relevant form completed correctly,
required supporting documents attached, and
the prescribed fee paid). Where the company
fails to comply with the provisions of the Act,
the company and its directors may be liable.
In order to illustrate the above conclusion, the
provisions of the Act with respect to a few
company actions will be investigated. To date,
the CIPC still adheres to the approach followed
by its predecessor CIPRO, in that they regard
it as a core function to check and approve all
documents filed with them, and then inform
the company as to whether or not the particular
company action is approved or rejected. This
approach is outdated, and not provided for in
the new Act. On the contrary, section 6(8) and
(9) clearly provides for a ‘substance over form’
approach, and indicates that even if there is
a deviation from the design or content of a
prescribed form, or in the manner of delivery, it
does not invalidate the action taken.
Appointment of directors
In terms of section 66(7):
“A person becomes entitled to serve as a director
of a company when that person
(a) has been appointed or elected in accordance
with this Part, or holds an office, title,
designation or similar status entitling that
person to be an ex officio director of the
company; and
(b) has delivered to the company a written
consent to serve as its director.”
In turn, section 70(6) requires every company
to file a notice (CoR39) within 10 business
days after a person becomes or ceases to be a
director of the company. Thus, in terms of the Act the appointment
of a director is effective as soon as he/she is
appointed or elected, and has confirmed in
writing that they are prepared to accept the
appointment to the board. The CIPC has no role
to play in the appointment of directors. The
filing of the relevant notice does not affect the
validity or the time of the appointment.
The question arises as to what would be the
consequence if the CIPC fails to update its register
of directors, delays the updating of the register, or
includes incorrect information in the register?
Despite the requirement to file a notice of the
appointment or removal of a director to the
CIPC, the company is obliged to keep a record
of its directors (section 24(3)(b) and 24(5)). This
record may be accessed by any person who
holds or has a beneficial interest in any securities
issued by a profit company, or who is a member
of a non-profit company. Any other person has a
right to inspect or copy the register of directors
of a company, upon payment of a prescribed
amount. As such one may conclude that the
register held by the company should be regarded
as the ‘official’ register of its directors, and it
is this register that should be consulted where
there is a discrepancy between the company’s
register and CIPC’s register, or where there is
confusion or uncertainty as to the identity of the
company’s directors.

Duties of Directors 63
Change of the financial year end
In order to determine the exact date and time on
which the financial yearend is changed, one needs
to look at the provisions of the Act. Section 27(4)
of the Companies Act determines that:
“The board of a company may change its
financial year end at any time, by filing a notice
of that change, but—
(a) it may not do so more than once during any
financial year;
(b) the newly established financial year end must
be later than the date on which the notice is
filed; and
(c) the date as changed may not result in a
financial year ending more than 15 months
after the end of the preceding financial year.”
As pointed out above, ‘filing’ in terms of the
new Act simply means that the notice had
been received by the CIPC (recorded in the
CIPC’s computer system, or the date on which
registered or other mail is received by the
CIPC). The CIPC is not required to approve or
vet any decisions or actions of the company.
The changing of the company’s financial year
end will be complete once the relevant notice
(CoR25)is received by the CIPC. Change of auditor
The Act requires certain companies to appoint
an auditor (public companies, state owned
companies, and any other category of
company that meets the requirements set out
in the Regulations). The Act provides for the
appointment of the auditor by shareholders
at the annual general meeting, and where a
vacancy exists, for the directors to fill the vacancy
within 40 business days. Section 85(3) requires
the company to file a notice (CoR44) within 10
business days after making the appointment. In
addition, the company has to maintain a record
of its auditors (section 85(1)). Again, the Act
does not link the filing of the relevant notice to
the effectiveness of the appointment. However,
where an auditor resigns, the Act expressly states
that the resignation of the auditor is effective
when the notice is filed (section 91(1)). This
implies that a resignation letter submitted to
the company by the auditor is not sufficient to
terminate the appointment of the auditor. In
order to complete the action, the company has
to file the CoR44. The resignation will only be
effective on the date and time when the notice
was received (and recorded) by the CIPC.

64
Amendment of the Memorandum of
Incorporation
Where a company amends its Memorandum
of Incorporation, it has to file a Notice of
Amendment (CoR15.2) within 10 days after
such amendment (section 16(7) read with
Regulation 15(3)). Where a company amends
its Memorandum of Incorporation by means of
a special resolution of shareholders (as provided
for in section 16(1)(c)), the amendment will not
be effective immediately. This constitutes the one
instance where the Act delays the effectiveness
of a special resolution of shareholders. Under
other circumstances, a special resolution will take
effect as soon as the required number of votes
is obtained. However, where a special resolution
is obtained to amend the Memorandum of
Incorporation, the amendment to a company’s
Memorandum of Incorporation takes effect on the
later of the date on, and time at, which the Notice
of Amendment is filed, or the date, if any, set out in
the Notice of Amendment (section 16(9)).
The new approach to enforcement of the Act, as
illustrated by the examples above is in line with
the Government’s objectives for reform of our
corporate law. The high-level objectives of the
new Companies Act (as per a DTI presentation to
Cabinet, dated 31 January 2007) were to:
• Reduce regulatory burden for small and
medium-sized firms (mostly owner-managed,
privately owned)
• Enhance protection of investors through
enhanced governance and accountability
(especially public interest companies), minority
protection and shareholder recourse
• Create a more flexible environment, without
comprising regulatory standards and
objectives, to enhance investment. The effect of the corporate law reform is clearly
that the regulator now regulates with a much
lighter touch, and that companies and directors
need to bear responsibility for their actions.
As a consequence, this new regulatory regime
allows companies to take and implement its
own decisions much easier and quicker, without
having to wait for approval or a go-ahead by
the CIPC. In most instances, mere ‘filing’ and
‘delivery’ will suffice to ensure compliance with
the Act. Where documents are rejected by
the CIPC, it does not invalidate the particular
company action – it merely implies that the
company needs to improve its administrative
processes. Of course the new approach also
points to the need for directors to carefully
consider their decisions and actions, and to take
into account the wider context and impact of
such decisions. The Act clearly made it easier for
companies to conduct business and has upped
the ante for directors.

Duties of Directors 65
Remuneration of directors is one of the most
debated topics in the corporate governance
arena, due to the tension between shareholders
demanding to understand their directors’
remuneration levels and methods and the directors’
desire for the privacy of their financial affairs.
6.1 The d irector’s right to remuneration
Both executive and non-executive directors
provide services to the company for which they
deserve to be remunerated. Executive directors
generally enter into an employment contract
in which their remuneration (which may take a
variety of forms as discussed below) is agreed
upon. In many cases, non-executive directors
have no formal contract with the company but
are paid a standard level of fees for attending
board and committee meetings.
“The shareholders at a meeting duly convened
for the purpose, can, if they think proper,
remunerate directors for their trouble or make
presents to them for the services out of assets
properly divisible amongst the shareholders
themselves.”
Re George Newman & Co 1895 1 Ch 674 (CA) 686
The Memorandum of Incorporation of
a company generally provides for the
remuneration of the directors, both for the
services they provide and any expenses that
they incur on behalf of the company. Where the
Memorandum of Incorporation do not provide
for this remuneration, the Act determines that
the directors are entitled to payments only if
such remuneration is authorised by a special
resolution approved by the shareholders within
the preceding two years.
6. Remunerating directors

66
6.2 Remuneration policy
King III suggests that the remuneration
committee be tasked with setting and
administering remuneration policies in the
company’s long-term interests. The committee
should consider and recommend remuneration
policies for all levels in the company, but should
be especially concerned with the remuneration
of senior executives, including executive
directors, and should also advise on the
remuneration of non-executive directors.
In proposing the remuneration policy, the
remuneration committee should ensure that the
mix of fixed and variable pay, in cash, shares
and other elements, meets the company’s needs
and strategic objectives. Incentives should be
based on targets that are stretching, verifiable
and relevant. The remuneration committee
should satisfy itself as to the accuracy of
recorded performance measures that govern
vesting of incentives. Risk-based monitoring of
bonus pools and long-term incentives should be
exercised to ensure that remuneration policies
do not encourage behaviour contrary to the
company’s risk management strategy.
King III Report principle 2.25 par 151
King III proposes that the remuneration policy
of the company be approved by shareholders,
and that the board should be responsible for
determining the remuneration of executive
directors in accordance with the approved
remuneration policy.
It is recommended that the remuneration
committee set well defined criteria against which
individual directors should be assessed. Directors
often have a number of directorships within
the same group, some executive and some
non-executive. It is therefore not unusual for
an individual to receive emoluments in various
forms and from various sources. 6.3 What type of remuneration is
appropriate?
Remunerating directors can take a number of
forms, and there is ongoing debate as to the
most appropriate way of both compensating
the director for his or her time, and aligning
their interests with the long term interests of the
company they serve.
The various types of remuneration are discussed
below. It is unusual for a remuneration policy
to employ only one type and often a variety of
different remuneration methods are negotiated.
In setting remuneration policies, the
remuneration committee should ensure that
remuneration levels reflect the contribution of
senior executives and executive directors and
should be rigorous in selecting an appropriate
comparative group when comparing
remuneration levels. There should be a balance
between the fixed components and the bonus
component of total remuneration of executives
so as to allow for a fully flexible bonus scheme.
King III Report principle 2.25 par 157

Duties of Directors 67
Cash
While being the most traditional and easy-
to-measure form of remuneration, cash can
sometimes be the most controversial. When
remunerating a director with cash the only
corporate governance issue is generally the size
of the cash payment to the director.
King III recognises the fact that the quantum
of a director’s remuneration package should
be appropriate in terms of the value that the
director adds to the company, bearing in mind
the levels of remuneration that the market pays
individuals of similar calibre in similar industries.
Where the company employs bonuses as part of
the remuneration package, the bonuses should
be related to specific performance indicators.
Such performance indicators should be
consistent with the long-term objectives of the
company and long term value for shareholders.
Although long- and short-term goals may be
utilised in this regard, the company should guard
against manipulation of results.
The company’s own equities
Where a company is listed, and its shares
are easily tradable, it is often appropriate to
remunerate the directors by issuing them with
the company’s shares. The purpose of issuing a
director with the company’s own shares is that
the shareholders’ and directors’ interests become
more closely aligned.
King III proposes that the participation in
share incentive schemes should be restricted
to employees and executive directors. Such
schemes should have appropriate limits for
individual participation, and such limits should
be disclosed. The chairperson and other
non-executive directors should not receive share
options or other incentives aligned to the share
price or the company’s performance, as this may
impair their objectivity and align their interest too
closely with those of the executive directors.Often a “share incentive trust” or other such
vehicle is used to house the shares to be issued
to directors and employees. The purpose of
such a scheme is to hold these shares in trust
on behalf of the beneficiary. The share incentive
trust is not a trading entity.
One of the problems with this remuneration
strategy is that the directors become overly
interested in maintaining the short-term share
price, sometimes at the expense of the long-term
interests of the company itself.
In many cases the options issued have relatively
short terms to their maturity dates, thereby
exacerbating the directors’ incentive to look for
short term gains at the expense of the long-term
financial health of the company. It is therefore in
the interests of the shareholders to ensure that
the options have appropriate vesting periods.
A possible solution to this issue is to lock the
directors into holding the shares for a reasonable
period of time before they can dispose of them.
King III suggests that options or other conditional
share awards should be granted for the year in
question and in expectation of service over a
performance measurement period of not less
than three years. This means that vesting of
rights should be dependent on performance.
Accordingly, shares and options should not vest
or be exercisable within three years from the
date of grant. In addition, options should not be
exercisable more than 10 years from the date of
grant. For new schemes it is best practice to restrict
the exercise period to less than seven years.

68
To align shareholders’ and executives’ interests,
vesting of share incentive awards should be
conditional on achieving performance conditions.
Such performance measures and the reasons
for selecting them should be fully disclosed.
They should be linked to factors enhancing
shareholder value, and require strong levels
of overall corporate performance, measured
against an appropriately defined peer group or
other relevant benchmark where yearly awards
are made. If performance conditions for share-
based incentive schemes are not met, they
should not be re-tested in subsequent periods.
Where performance measures are based on a
comparative group of companies, there should be
disclosure of the names of the companies chosen.
King III Report principle 2.25 par 174
This may, however, prejudice the individual
director from a cash flow perspective, and
therefore it is usually preferable to employ
a composite remuneration policy in which
performance-related elements of remuneration
constitute a substantial portion of the total
remuneration package of executives. Such
an approach will ensure the alignment of the
directors’ interests with those of the shareholders.
The price at which shares are issued under a
scheme should not be less than the mid-market
price or volume-weighted average price (or
similar formula) immediately preceding the grant
of the shares under the scheme.
A perceived benefit of issuing both equities and
options is that the shares issued are seen as
“free” to the company, with no impact on the
earnings of the company. Such a perception,
however, is not entirely accurate as any shares
issued at less than market value dilute the
existing shareholders’ interests in the assets and
earnings of the company.In addition, accounting standards require
companies to reflect share-based compensation
as an expense in the income statement.
The issue of shares or securities convertible into
shares, or a grant of options for the subscription
of securities, or a grant of any other rights
exercisable for securities is regulated by section
41 of the Companies Act. In these instances, the
Act requires authorisation by a special resolution
of the company. However, no shareholder
approval is required if the issue of shares,
securities or rights is

under an agreement underwriting the shares,
securities or rights
• in the exercise of a pre-emptive right to be
offered and to subscribe shares
• in proportion to existing holdings, and on
the same terms and conditions as have been
offered to all the shareholders of the company
or to all the shareholders of the class or classes
of shares being issued
• pursuant to an employee share scheme, or
• pursuant to an offer to the public.

Duties of Directors 69
Loans to directors
The Act regulates financial assistance to directors
(and others) in terms of section 45. In terms of
this section, unless the company’s Memorandum
of Incorporation provides otherwise, the
board may authorise direct or indirect financial
assistance to the following parties:
• a director or prescribed officer of:
? the company
? a related or inter-related company, or
• a related or inter-related company or
corporation
• a member of a related or inter-related
company or corporation, or
• a person related to any of the above parties.
The requirements for the provision of financial
assistance in terms of this section are:
• the provision of financial assistance must be
pursuant to an employee share scheme, or
• the shareholders must have approved such
financial assistance by special resolution (within
the past 2 years), and
• the company’s board of directors must
be satisfied that after the transaction, the
company will remain solvent and liquid.
An important development is that fact that the
Act requires the board to inform all shareholders
and trade unions representing employees
whenever it decides to provide financial
assistance in terms of this section. 6.4 Employment contracts, severance and
retirement benefits
King III recommends that employment contracts
(also for executive directors) should not commit
companies to pay on termination arising from
the executive’s failure. Also, with respect
to bonuses, there should be no automatic
entitlement to bonuses or share-based payments
in the event of early termination. Companies
should not provide for balloon payments on
termination.
Contracts should not compensate executives for
severance because of change of control.
Where a company pays compensation to a
director for loss of office, the Act requires the
particulars of such compensation to be disclosed
in the annual financial statements.
6.5 Disclosure of d irectors’ remuneration
Section 30 of the Act regulates the disclosure in
the company’s annual financial statements of the
directors’ emoluments.
Companies should provide full disclosure of each
individual executive and non-executive director’s
remuneration, giving details as required in
the Act of base pay, bonuses, share-based
payments, granting of options or rights, restraint
payments and all other benefits (including
present values of existing future awards).
Similar information should be provided for the
three most highly-paid employees who are not
directors in the company.
King III Report principle 2.26 par 180

70
The Act requires the annual financial statements
of a company to include particulars of the
remuneration and benefits received by each
director. This should include:
• the amount of any pensions paid by the
company to directors
• any amount paid by the company to a pension
scheme
• the amount of any compensation paid in
respect of loss of office
• the number and class of any securities issued
to a director and the consideration received by
the company for those securities, and
• details of service contracts of current directors.
For the purpose of disclosure, the Act defines
remuneration’ so as to include:
• fees paid to directors for services rendered by
them to or on behalf of the company
• salary, bonuses and performance-related
payments
• expense allowances
• contributions paid under any pension scheme
• the value of any option or right given directly
or indirectly to a director
• financial assistance to a director for the
subscription of shares, and
• with respect to any loan or other financial
assistance by the company to a director, or any
loan made by a third party to a director (if the
company is a guarantor of that loan), the value
of any interest deferred, waived or forgiven.
It is encouraging that more and more listed
companies are compiling comprehensive
remuneration reports which go far beyond the
legislative and regulatory disclosure requirements.
These reports are increasingly reflecting not only
the actual remuneration, but the justification for
the levels of remuneration for each individual
director in relation to the performance of the
company for the period. This is in line with
principles as set out in King III. Where consolidated financial statements are
provided, the information disclosed in terms of the
Act relates only to the holding company’s directors.
In terms of best practice however, it would be
recommended that the company should also
reflect the remuneration of directors of subsidiary
companies. This would remove any instances
where directors structure their employment
contracts through subsidiaries to avoid making
public disclosure of their remuneration.
Section 30(5) of the Act requires that the
disclosure must show the amount of any
remuneration or benefits paid to or receivable by
persons in respect of:
a.
services rendered as directors or prescribed
officers of the company, or
b. services rendered while being directors or
prescribed officers of the company
i. as directors or prescribed officers of any
other company within the same group of
companies, or
ii. otherwise in connection with the carrying
on of the affairs of the company or any
other company within the same group of
companies.
The effect of these requirements is that all
remuneration paid to or receivable by a director
or prescribed officer must be disclosed – thus,
not only the remuneration paid to or received
by the director or prescribed officer for services
to the company, but also all other remuneration
received by the director or prescribed officer
for services rendered as a director or prescribed
officer to any other company with the group.
One person’s remuneration may have to be
disclosed by more than one company in the
same group of companies.

Duties of Directors 71
Disclosure is required of all remuneration paid
to or receivable by the directors and prescribed
officers of the company for services as a director
or prescribed officer of any other company
within the same group of companies. In this
regard the definition of a group should be
considered. This means disclosure will have to
account for all other companies in the group,
and not only the subsidiaries of the company
in question, therefore the company will have to
take into account all companies in the group
– thus upward, downward and sideways. It
should be noted that the requirement applies
only with respect to all “companies” within
the group. In terms of the Companies Act a
“company” is a juristic person incorporated in
terms of the previous or current Companies Act,
i.e. only South African companies. Therefore,
any amounts paid to directors and prescribed
officers for services rendered to a trust or a
foreign subsidiary within the group would not
be included in the disclosure, since a trust or a
foreign subsidiary (company) is not a “company”
for purposes of the Companies Act.
The Act requires all remuneration paid to or
receivable by directors and prescribed officers
to be disclosed – it does not only account for
remuneration paid by the company, or another
company in the group. Rather, it focuses on the
amounts a director or prescribed officer earns for
services as a director or prescribed officer (to the
company or any other company within the group),
or for carrying on the affairs of the company (or
any other company within the group).

72
7. Assessment, removal and
resignation
Effective and meaningful evaluation is only
possible once the board has determined its own
role, functions, duties and performance criteria
as well as those for directors on the board and
on board committees.
King III Report principle 2.22 par 110
7.1 Assessment of performance
The assessment of the board of directors
(collectively and individually) is becoming a critical
success factor in any effective system of corporate
governance. In capital markets such as the United
States, where the level of shareholder activism is
far greater than in South Africa, it has become
common practice for directors, and in particular
the CEO to be evaluated against the company’s
results. Where the results have not been
consistent with the shareholders’ expectations, it
is almost inevitable that the individuals concerned
are removed from his or her post.
King III recommends that the company carefully
considers whether performance appraisals
should be done in-house or by an independent
service provider. Although an in-house process
may yield proper results, an independent process
may provide a more honest assessment. The
assessment is usually led by the chairperson
(through the nominations committee) with the
assistance of the company secretary, or by an
independent service provider.King III proposes that an assessment of the
board, the various board committees, and each
individual director be done on an annual basis.
This would assist the nominations committee to
evaluate the levels of skill and experience on the
board and committees with a view to identify
training and skills development needs, as well as
to evaluate the composition of the board and
the respective committees. These evaluations
should be reviewed by the nomination
committee to be used in assessing whether the
board requires additional skills, or that certain
members of the board are not performing
according to expectations. Due to the costs and
time of initiating a new director, where possible
it would be preferable for the existing directors
to acquire any skills that the board lacks, rather
than to have to seek to expand the board. The
outcome of the evaluation should be used as the
basis for an action plan to ensure that the board
as a whole has the required skill and experience.
The annual evaluation of director performance
should be used to determine whether or not
a particular director should be nominated for
re-appointment. Re-appointment should not
be an automatic process, but rather be based
on the director’s contribution to the board and
relevant committees.
The chairperson should ensure that all directors
are aware of the annual evaluation, and that
they understand the criteria used for evaluation.
A director’s role and contribution should be
measured against his or her specific duties.
The chairperson should also be evaluated, and
he or she should not be present when his or her
performance is discussed by the board. Where
an independent service provider is not used,
the Lead Independent Director should lead the
evaluation of the chairperson.

Duties of Directors 73
7.2 Why a d irector may be removed
Directors may be removed for a number of
reasons. In some cases, the results of the
evaluations discussed above may reveal the fact
that an individual does not have the appropriate
personality traits or other skills to continue to
serve the board.
In other cases the director may become legally
disqualified from his or her post as director, in
terms of the Companies Act or other legislation.
In some cases a director is removed not due to
his or her performance (or lack thereof). When
the nomination committee assesses the skills
and balance of the board, the conclusion may
be that the board is overloaded with certain skill
sets, and unfortunately individual directors with
redundant skills or experience may have to make
way for others who possess the attributes that
the board requires.
The Memorandum of Incorporation of a
company may provide that where a director
becomes interested in a contract with the
company, and he or she fails to declare that
interest to the board, that the director’s office
must be vacated.
7.3 Rotation of d irectors
The Memorandum of Incorporation of a
company generally provides that a certain
number or percentage of directors resign every
year and offer themselves for re-appointment.
The intention of such a provision is so that the
shareholders will actively consider whether
the director is performing according to their
expectations, and where he or she is not
performing, they will not be re-appointed. Generally, the Memorandum of Incorporation
will require that all directors retire at the first
annual general meeting of the company, and
that one third of the directors retire annually
thereafter. It is usually the directors that have
served the longest that retire, but where the
directors have served an equal period of time,
their retirement is selected by lot. The JSE Listings
Requirements requires such provisions to appear
in the Memorandum of Incorporation. King III
provides for similar rotation requirements for
non-executive directors.
The Listings Requirements provide for the
exception where a managing director or other
executive director has a contract with the
company, he or she does not have to retire so
long as they are employed by the company.
They would not be taken into account when
determining the number of directors that need
to retire annually.
Any appointment (even re-appointment) is only
valid once the director has provided written
consent to serve as a director.

74
7.4 Vacancies on the board
In terms of the Act, a person ceases to be a
director, and a vacancy arises on the board of
a company when the person’s term of office as
director expires (in the case of a company whose
Memorandum of Incorporation provides for fixed
terms). A vacancy may also arise where a director:
• resigns or dies
• in the case of an ex off?cio director, ceases
to hold the office, title, designation or similar
status that entitled the person to be an ex
off?cio director
• becomes incapacitated to the extent that the
person is unable to perform the functions of a
director
• is declared delinquent by a court, or placed on
probation
• becomes ineligible or disqualified in terms of
the provisions of the Act, or
• is removed by resolution of the shareholders or
the board, or by an order of court.
In the case of a vacancy, the directors may have
the power to appoint a director to the board.
Such appointment will be temporary, until
the director is elected and appointed by the
shareholders in terms of the provisions of the
Act. Schedule 10 of the JSE Listings Requirements
requires that any appointment of a director
needs to be confirmed at the next AGM of the
company. In general, the shareholders are not
under any obligation to fill the vacancy left by a
retiring director, unless the number of directors
has fallen below the minimum required by the
Companies Act, the company’s Memorandum of
Incorporation or the JSE Listings Requirements
where the company is listed.
The Listings Requirements require that the
company’s Memorandum of Incorporation
provide for, where the minimum number
of directors in terms of the Memorandum
of Incorporation has been reached, a
retiring director to be deemed to have been
re-appointed where the shareholders do not fill
the vacancy at the meeting even if they decided
not to re-appoint that particular director. 7.5 The legal mechanics of removal
Section 71 of the Act determines that a director
may be removed by an ordinary resolution
adopted at a shareholders meeting. In any such
case, the director should be given a reasonable
opportunity to state his or her case. Also, where
a company has a board comprising two or more
directors, the board may remove a director
where it is resolved that he or she:

has become ineligible or disqualified in terms
of the Act
• has become incapacitated to the extent that
the director is unable to perform the functions
of a director, or
• has neglected, or been derelict in the
performance of his or her functions.
The Act provides the director concerned with the
facility to air his or her grievances regarding the
impending removal. The director is allowed the
opportunity to make representations to those
attending the meeting. Any person who feels
that the representations may prejudice them may
apply to the Court to stop the representations
being communicated to the members.
Where the director does have a valid contract
with the company, compensation may have
to be paid to the director, as removal would
in most instances constitute a breach of the
contract (unless of course the removal is due
to the fact that the director breached the
contract in the first place). Any such payments
should be reflected in the schedule of directors’
remuneration in the annual financial statements
of the company.

Duties of Directors 75
7.6 Formalities when a d irector resigns
A director generally resigns his or her office
by providing the company with a notice of
this intention (usually in writing in terms of
the Memorandum of Incorporation of the
company). From a practical point of view it
would be preferable to have written record of
the resignation.
“(A) director, once having given in the proper
quarter notice of his resignation of his office, is
not entitled to withdraw that notice, but, if it
is withdrawn, it must be by the consent of the
company properly exercised by their managers,
who are the directors of the company. But, of
course, that is always dependent upon any
contract between the parties, and that has to be
ascertained from the articles of association.”
Glossop v Glossop 1907 2 Ch 374 & 375
In addition, the relevant form needs to be
sent to the CIPC. In terms of the JSE Listings
Requirements, listed companies must report to
the JSE when a director resigns or is removed
from the board.
The ease with which the director is able to
resign will be a function of the existence of any
contract between the director and the company,
and whether in addition the director acts as an
employee of the company.

76
8. Financial institutions
Financial institutions are often viewed as
companies with a higher public profile than
their counterparts in other industries. These
companies therefore often find themselves
the focus of more regulation than companies
operating in other sectors.
This fact results in the directors of these
financial institutions being entrusted with added
disclosure and performance responsibilities.
All financial institutions that are companies are
regulated by the Companies Act and the case
law that interprets it.
Consequently the discussions elsewhere in this
guide are equally of application to directors
of these institutions. Most financial industries,
however, have specific legislation that increases
the regulatory environment in that sector. The
impact of this legislation on certain financial
sectors is discussed in this chapter.
8.1 Directors of banks
The Companies Act determines that if there is
an inconsistency between any provision of the
Companies Act and a provision of any other
national legislation, the provisions of both Acts apply
concurrently. If, in case of a bank, it is impossible
to apply or comply with one of the inconsistent
provisions without contravening the Banks Act, the
provisions of the Banks Act will prevail.
Directors applying for registration of a bank
The Registrar of Banks is not obliged to approve
the registration of a new bank unless certain
criteria are met. The Banks Act requires that the
Registrar must be satisfied that the proposed
composition of the board of directors is
“appropriate having regard to the nature and
scale of the business it is intended to conduct.”
In addition, in terms of section 25(4) of the
Banks Act, the Registrar has the power to apply
to the court to cancel or suspend the registration
of a bank where the directors or executive
officers have committed any offence in terms of
the Banks Act.Fiduciary duties of a bank’s directors
In addition to the codified standard of director
conduct in the Companies Act, the Banks Act
has codified the specific fiduciary responsibilities
of directors of a bank in section 60. This section
states that each director, chief executive officer
and executive officer of a bank owes a duty
towards the bank to:

act bona fide for the benefit of the bank
• avoid any conflict between the bank’s interests
and the interests of such a director, chief
executive officer or executive officer, as the
case may be
• possess and maintain the knowledge and skill
that may reasonably be expected of a person
holding a similar appointment and carrying
out similar functions as are carried out by the
director, chief executive officer or executive
officer of that bank, and
• exercise such care in the carrying out of his or
her functions in relation to that bank as may
reasonably be expected of a diligent person
who holds the same appointment under similar
circumstances, and who possesses both the
knowledge and skill mentioned above and
any such additional knowledge and skill as the
director, chief executive officer or executive
officer in question may have.
“Each director, chief executive officer and
executive officer of a bank owes a fiduciary
duty and a duty of care and skill to the bank of
which such a person is a director, chief executive
officer or executive officer.”
Banks Act 94 of 1990 Section 60 (1)

Duties of Directors 77
The Regulations to the Banks Act further expand
on the responsibilities of the directors of a bank.

Regulation 39 requires that each director of a
bank acquire at least a basic knowledge of the
bank’s business, and those laws and regulations
that govern it. The Regulation further states
that while not every director on a bank’s board
necessarily has to have an intimate knowledge
of the workings of a bank, each director’s
knowledge thereof must be evaluated, based on
the size and complexity of the bank.
In the case of a director of a controlling
company of a bank, his or her required level of
knowledge becomes a function of the diverse
nature of the banks controlled by that company.
Appointment of directors
When appointing any new director, the Banks Act
requires that the particulars of the potential new
director be forwarded to the Registrar of Banks at
least 30 days before the appointment is made.
The Banks Act in section 60 (3) mandates the
appointment of non-executive directors by
requiring that at most 49% (rounded down to
the next lowest whole number) of the directors
of the bank may be employees of the bank or
its subsidiaries. Where the bank is controlled
by a controlling company, only 49% of that
company’s directors can be employees of that
company or the bank.
In addition, at each directors meeting, the votes
of the executive directors may only count at
most 49% of the total votes on each resolution
voted on by the board. Audit Committee
It should be noted that section 94 of the
Companies Act (dealing with the audit
committee) applies concurrently with section 64
of the Banks Act. However, the provisions of the
Companies Act pertaining to the appointment
and requirements for membership of the
audit committee, do not apply to the audit
committees of banks.
The Banks Act in section 64 requires that the
board of directors establish an audit committee.
Regulation 64 to the Banks Act further requires
that at least three directors be appointed to the
committee. The majority of directors appointed
to the committee must, in terms of section 64 (3)
be independent non-executive directors.
The chairperson of the board may not serve on
the audit committee. Also, the chairperson of the
committee may not be an executive director.
The Banks Act in section 64 (4) allows an
exemption from creating an audit committee in
the circumstances where the bank is part of a
group of companies and the holding company has
appointed an audit committee that has assumed
responsibility for all the banks within the group.
Section 64 (2) of the Act provides guidance for
the functioning of the committee. The section
states that the primary responsibilities assumed
by the members of the committee are to:
“assist the board of directors in its evaluation
of the adequacy and efficiency of the internal
control systems, accounting practices,
information systems and auditing processes
applied within that bank in the day-to-day
management of its business.”

78
The members of the committee are therefore
required to have a reasonably detailed
understanding of the workings of the bank,
including the design and operation of the internal
controls, the pertinent accounting issues, the
information technology applied and the scope
and function of the internal audit department.
“facilitate and promote communication,
regarding the matters referred to in paragraph
(a) or any other related matter, between the
board of directors and the executive officers of,
the auditor appointed under section 61 or 62
for, and the employee charged with the internal
auditing of the transactions of, the bank.”
As in other companies, the audit committee
is intended to bridge the gaps between
management and the external and internal
audit functions at the bank. Any unresolved
differences that occur within the three parties
must be brought before the committee for
resolution.
“introduce such measures as in the committee’s
opinion may serve to enhance the credibility and
objectivity of financial statements and reports
prepared with reference to the affairs of the
bank.”
It is clear that the audit committee is entrusted
with the responsibility for optimising the
disclosures made by the bank, whether in the
annual report or in the statutory returns made to
the Registrar of Banks.In addition to the functions set out in the
Banks Act, the audit committee appointed in
terms of section 64 of the Banks Act will also
be responsible for the functions of the audit
committee as set out in section 94 of the
Companies Act. The legislative duties of the
audit committee as provided for in section 94 of
the Companies Act include:

nominating an auditor that the audit
committee regards as independent
• determining the audit fee
• ensuring that the appointment of the auditor
complies with the Companies Act and other
relevant legislation
• determining the nature and extent of
non-audit services
• pre-approving any proposed agreement with
the auditor for the provision of non-audit
services
• preparing a report to be included in the annual
financial statements describing how the
committee carried out its functions, stating
whether the auditor was independent, and
commenting on the financial statements,
accounting practices and internal financial
control measures of the company
• receiving and dealing with relevant complaints
• making submissions to the board regarding
the company’s accounting policies, financial
controls, records and reporting, and
• any other function designated by the board.
Responsibilities of a director
The Regulations to the Banks Act provide
guidance for directors in carrying out their
responsibilities.
Regulation 38 states that the board of directors
is responsible for establishing an effective
corporate governance process within the bank.
The scope of this process is intended to be
consistent with the risks, complexity and nature
of the bank’s operations. Sub-committees may
be established to assist the board in carrying out
these corporate governance processes.

Duties of Directors 79
The regulation stresses that a bank’s business
revolves around the effective management of the
different risks impacting the bank. These risks are
listed in the regulations as:
• Solvency
• Liquidity
• Credit
• Currency
• Market or position risk
• Interest-rate
• Counterparty
• Technology
• Operational
• Compliance
“In view of the fact that the primary source of
funds administered and utilised by a bank in
the conduct of its business is deposits loaned to
it by the general public, it shall be the duty of
every director and executive officer of a bank to
ensure that risks that are of necessity taken by
such a bank in the conduct of its business are
managed in a prudent manner.”
Regulation 39 (3) to the Banks Act 94 of 1990
The board has the responsibility for evaluating
the effectiveness of the corporate governance
processes at the bank (or controlling company)
on an ongoing basis. While this task may be
operationally delegated to a sub-committee
of the board, the responsibility for corporate
governance at the bank remains with the board.
At least once a year the corporate governance
assessment is required to be formally
documented. Directors’ duty to establish a compliance
function
As a result of the numerous pieces of legislation
impacting a bank, there is a considerable risk
that the bank does not comply with all laws and
regulations impacting it. In order to manage this
risk, Regulation 47 to the Banks Act requires that the
directors establish an internal compliance function.
The function should be headed by a compliance
officer who has the necessary senior status
within the organisation to effectively address the
bank’s regulatory risk.
To be effective, the Regulation suggests that the
compliance function should:

be independent of internal audit;
• have direct access to, and be supported by the
CEO of the bank;
• report to the board and the audit committee
on compliance with laws and regulations and
submit a copy of this to the Registrar; and
• avoid any conflict of interest with other internal
functions.
The compliance function performs an important
monitoring role within the bank. The Regulation
reinforces this by requiring the following
activities to be performed:
• a culture of risk management and compliance
should be established
• create a channel of communication to line
management to monitor compliance with laws
and regulations
• instil a compliance focus into line management
• incorporate regulatory requirements into
operational manuals, and
• recommend improvements to ensure greater
compliance with laws and regulations.

80
In terms of reporting, recommendations and
findings reported by the compliance officer
should be documented together with the action
plan for rectifying problems. In order that issues
are resolved promptly, the channel for the
compliance officer to report problems should
always be available and open.
The compliance function should be staffed
by capable individuals that receive regular
training to enable them to remain technically
up to date with regulatory issues at the bank. A
comprehensive compliance manual should be
developed and kept up to date.
Reporting by directors
The board of directors of a bank is required by
Regulation 39 (4) to the Banks Act to report to
the Registrar of Banks on certain matters within
120 days of the end of the financial year of the
bank, including whether:
• the bank’s internal controls provide reasonable
assurance as to the integrity and reliability of
the financial statements and safeguard, verify
and maintain accountability of the bank’s assets
• the internal controls are based on established
policies and procedures and are implemented
by trained, skilled personnel , whose duties
have been segregated appropriately
• adherence to the implemented internal controls
is continuously monitored by the bank
• all bank employees are required to maintain
high ethical standards, thereby ensuring that
the bank’s business practices are conducted in
a manner that is above reproach, and
• anything has come to the directors’ attention to
indicate that any material malfunction , as defined
and documented by the board of directors, which
definition has to be submitted to the Registrar of
Banks, in the functioning of the aforementioned
controls, procedures and systems has occurred
during the period under review. In addition, the directors are required annually
to report to the Registrar of Banks on the going
concern assumption at the bank. Where there is
a potential going concern problem, the details
thereof should be disclosed.
When making supervisory returns to the Registrar of
Banks, both the CEO and Chief Accounting Officer
are required to certify that the returns are correct.
8.2 Directors of insurance companies
Audit committee
Both the Long Term Insurance Act (in section 23)
and the Short-Term Insurance Act (in section 22)
require that the board of directors establish an
audit committee unless exempted by the relevant
Registrar on the grounds of impracticality or
inappropriateness. The committee must have at
least three members, and at least two of those
must be directors of that insurance company.
The chairperson, as well as the majority of the
members must be non-executive. The Acts state
that the objectives of the committee are to:

assist the board of directors in its evaluation
of the adequacy and efficiency of the internal
control systems, accounting practices,
information systems and auditing and actuarial
valuation processes applied by the insurer in
the day-to-day management of its business
• facilitate and promote communication and
liaison concerning the matters referred to
above or a related matter, between the board
of directors and the managing executive,
auditor, statutory actuary and internal audit
staff of the insurer
• recommend the introduction of measures
which the committee believes may enhance
the credibility and objectivity of financial
statements and reports concerning the business
of the insurer, and
• advise on a matter referred to the committee
by the board of directors. The audit committee
of an insurance company therefore has a
similar brief to that of a financial institution.

Duties of Directors 81
9. Contact information
Dr Johan Erasmus
Tel: 082 573 2536
[email protected] le Riche
Tel: 082 331 4840
[email protected]

82

Duties of Directors 83

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