Directors’ accountability for delinquency: is five years enough?

The Companies Amendment Act extends the time bar to hold directors accountable for delinquency from 24 to 60 months, or even more with good cause. The question is whether five years is enough.

Professor Parmi Natesan, CEO of the Institute of Directors in South Africa, says it is a definite move in the right direction, but she questions whether it is enough.

The amendment is a direct result of the Zondo Commission of Enquiry into State Capture’s finding that directors of captured state-owned entities (SOEs) were not properly held accountable for what they did.

It called for an amendment of the Companies Act to extend the period wherein an application for an order declaring someone delinquent can be brought, as it can take several years for the facts of delinquency to be uncovered.

The Companies Amendment Act amends the Companies Act of 2008 to extend the 24-month time bar to launch proceedings to 60 months and gives the court the power to extend this period further where good cause is shown.

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What is director delinquency?

According to the institute’s guidance paper on director delinquency, delinquency arises when a director breaches his or her fiduciary duties towards the company.

If material acts of misconduct can be proved, as listed in Section 162(5) of the Companies Act, the High Court can declare the director delinquent and precluded from continuing to act as a director for seven years or more.

This statutory enforcement, which can be lifelong, is not intended to be a remedy for a trivial misdemeanour but rather for gross abuses of the fundamental trust inherent in the position of a director, such as unlawful conduct committed wilfully or recklessly.

The courts can also issue probation orders for up to five years against directors for material breaches of the standard of conduct required of a director, either with intent or through gross negligence.

“Directors, along with other prescribed officers in companies, can be held accountable for a considerable period after they committed the alleged offences. This is something that the institute has championed for long. We commend the extension of the timeframe but want to emphasise that this is not the whole answer.”

She says the reality is that the cost and length of time it takes to bring an application of director delinquency to court deters companies from using this remedy.

With no fast or easy means to address delinquency, directors guilty of gross misconduct are often simply removed from a board.

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What happens if delinquent directors are not censured?

However, she says, without censure or statutory action, they continue to serve on other boards and the misconduct, corruption and maladministration continue which is very costly for everyone.

In her presentation to the parliamentary portfolio committee recently, Natesan offered a comprehensive solution: the establishment of a statutory professional body that all directors must join to have a license to practice.

Such a professional body would govern the office of directorship, guiding the profession and setting and maintaining standards for ethical and professional practice.

“As things now stand, the institute is a voluntary professional body for directors and therefore its mandate to take disciplinary action is limited to its members,” Natesan points out.

“While every effort is made to advocate for good governance and directorship,  this is not enough to hold directors accountable.”

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The benefits of a statutory professional body for directors

A statutory professional body would require all directors to become members to be able to practice and ensure that standards are upheld, knowledge and skills are vetted and kept up to date and that directors abide by a code of conduct.

If they do not adhere to the code of conduct, their license to practice could be removed.  Ultimately this would result in a quicker and less costly manner to hold directors accountable, Natesan says.

The institute established a Director Competency Framework, which identifies 15 technical knowledge and application competencies and 15 personal attributes and behaviour competencies needed to serve as a director.

It also developed two director designations, namely chartered director and certified director recognised by the South African Qualifications Authority, to enable directors to gain, prove and maintain the necessary competencies.

“The Zondo Commission’s findings show just how badly directorial misconduct affects a company and how important it is to be able to hold rogue directors to account in terms of a rigorous, professional standard,” she says.

“I believe it is time for South Africa, including company stakeholders, owners, boards and professionals, to harness the momentum established by the Zondo Commission and the new Companies Amendment Act and take a stand to professionalise directorship.”

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The legal duties of directors

According to the institute, legal duties require directors to exercise their powers and perform their functions in good faith, for a proper purpose and in the best interest of the company and with the utmost degree of care, skill and diligence that may be reasonably expected of someone in the position of director and from a person with the general knowledge and specific skills of that director.

Section 76 of the Companies Act partially codifies these common law duties of directors and sets out the prescribed minimum standard of conduct for all directors and prescribed officers.

It includes, amongst others, the prohibition of directors from using their position to gain personal advantages or to harm the company.