New corporate governance legislation
THE NEW (Act 71 of 2008) has a specific focus on corporate governance. Company leadership is now legislated and a hybrid system based on both legislative and voluntary approaches is to be implemented.
The central chapter in the new Act, titled ‘Governance of Companies’, deals with the directors’ fiduciary duties and requires directors to act in good faith, in the best interest of the company. The Act codifies duties and responsibilities previously based in common law and addresses the board, its committees and the appointment and removal of directors.
The new Act provides a broader definition and description of the concept of ‘conflict of interest’. Directors are to disclose their personal financial interest in business transactions as well as the interests of ‘related persons’. Directors are advised to thoroughly investigate disclosures as the Act makes them responsible and account- able for interests about which they ought to have known.
The Act also broadens its descriptions of directors’ liabilities and holds that they may be held personally liable for company loss, damages or costs. The Act provides for a defence (called the ‘Business Judgment Rule’) for directors who face liability if they can demonstrate that: 1. Sufficient steps were taken by them to remain fully informed regarding the particular issue/s (the use of expert opinion is recommended); 2. They had no personal financial interest in
the issue/s; 3. They did not know of any related persons
that may have such interest; 4. Any interests, whether personal or from related persons, were indeed dealt with as required by the Act; 5. As a rational, reasonable and responsible person their decision was made in the best interests of the company. For example, the Act states that it is an offence for a company to trade when its liabilities exceed its assets and directors should involve expert valuators to avoid reckless trading charges being brought against them. The Act will benefit directors and their companies and will ensure that directors discharge their duties with care and skill, and remain fully informed and focused on the best interests of the company.