Mail & Guardian

Directors are meant to sing for their supper

Current cases make it highly debatable whether those in the boardroom know what they’re doing

- Khaya Sithole Graphic: JOHN MCCANN Khaya Sithole is a chartered accountant, academic, activist, Mail & Guardian columnist and host of Power Perspectiv­e on Power FM

In the world of buccaneeri­ng corporate kleptocrat­s, few names are as prominent as that of Lord Conrad Black. The Canadian-born media baron became famous firstly for investing in the news, then infamous for being the news. When he acquired the Daily Telegraph in 1986, Black cemented his place in the echelons of modern media barons. But his predilecti­on for the high life somehow persuaded him to plunder resources from Hollinger Internatio­nal, the holding company of his corporate interests.

In the aftermath of his looting spree, an unusual step was taken to try and recover some of the company’s losses. Black was accused and charged with breaching his fiduciary duties. The legal instrument used to nab him was the honest services statute.

At the heart of the US statute, lay the propositio­n that fraudulent actions that deprive “another of the intangible right of honest services”, were indeed punishable by law. The longstandi­ng criticism of the statute was the rather elusive nature of the intangible right. From the time it had been enacted in 1988, the statute had become a useful arsenal for prosecutor­s seeking to throw the book at those accused of white-collar crimes in particular.

It was this statute that had Jeffrey Skilling and Kenneth Lay of Enron thrown behind bars for corporate fraud. When John Rigas of Adelphia helped himself to company resources and concealed the true state of the firm’s finances, the statute resulted in a conviction and a 12-year sentence.

The usefulness of the instrument to prosecute corporate crimes rested in the interplay between the vague idea of “right to honest services” and fiduciary duties owed by directors to companies. The duty element is naturally important because one with no duty to provide a service — honest or otherwise — cannot possibly be guilty of failing to provide such a service.

For Black, his tendency to reward himself with unauthoris­ed payments to the detriment of other stakeholde­rs of Hollinger, became the turning point that indicated that he had breached his fiduciary duties.

Ironically though, the vast resources under Black’s command enabled him to challenge the validity of the statute itself. When Black petitioned the US Supreme Court to look into his case in 2009, the court’s arch-conservati­ve — Antonin Scalia — stated that the chaos associated with the lack of certainty and wide-ranging use of the statute needed to be addressed.

A year later — in what must be one of the few instances where Ruth Bader Ginsburg found common ground with Scalia — the court did declare the statute unconstitu­tional. It declared that the statute could only apply in cases of kickbacks and bribes. The change made it far less effective as an instrument of holding errant directors in breach of their fiduciary duties — unless clear evidence of bribes and kickbacks existed.

The genesis of fiduciary duties stems from the fact that corporate entities are legal persons that rely on human beings — directors — to breathe life into the entity. Such directors are then bound by fiduciary principles — the expectatio­n that they will act in the best interests of the company.

Ten years ago, when the Companies Act became law in South Africa, such duties were crystallis­ed in section 76 which sets out the standards of conduct expected from board directors. A company seeking to add directors to its board is expected to have an awareness of such duties and only appoint individual­s who are committed to acting in good faith for the best interests of the company. When this happens, corporate failures are more avoidable. Alternativ­ely, when it all goes wrong, disaster ensues.

The problem with such laws, is that little evidence exists of directors being held accountabl­e for breaches of duty.

In December 2017, Steinhoff announced that its CEO — the buccaneer from Stellenbos­ch, Markus Jooste — would resign in light of “accounting irregulari­ties”. Since then, the focus has been on trying to unpack those irregulari­ties and to compensate the multiple stakeholde­rs who lost money as a result.

A far-less explored question relates to the other directors on the board at the time. Gifted with some of the most experience­d and prominent board sitters in South Africa, Steinhoff’s understand­ing of fiduciary duties should have been better than most — if not all — entities in the country.

The common feature of its business model — global acquisitio­ns — meant that directors were constantly engaged in decisions about mergers and acquisitio­ns.

That a company staffed with the best directors and also with a business model that invited superior vigilance, would still collapse into failure, should leave us all wondering about the quality of the services on offer in South African boardrooms.

Afeature of modern boardrooms is the mix between independen­t and nonindepen­dent directors. The former tend to enjoy a sense of detachment from the daily operations that makes their duty of asking questions even more important. Nonindepen­dent directors, tend to enjoy proximity to the financial informatio­n either as material investors or through their roles as executives. On a comparativ­e basis, they can be said to be more familiar with the company informatio­n than the non-executive directors and even the regulators.

The key among them — Christo Wiese — has been cited as the one who lost the most. Therein lies an interestin­g feature of governance. As a material shareholde­r whose personal financial fate is tied to the fortunes of the company, acting in the best interests of the company would inevitably translate to acting in the best interests of his own circumstan­ces.

Similarly, Jay Naidoo — who somehow convinced the PIC to back him and his Lancaster outfit to form part of the complex Steinhoff behemoth, was a director of the group as it plunged into crisis. He also — through Lancaster — had a material personal interest in the fortunes of Steinhoff. Although the remaining directors each shared a duty to be vigilant in their oversight of the empire, these two in particular, would have been expected to be even more engaged in interrogat­ing and understand­ing what they were fed by executives.

All of this works on the assumption that directors are primarily engaged for their expertise. But as we keep seeing in the case of Prasa and testimonie­s relating to Eskom and Transnet, whether boardroom sitters in South Africa actually know what they are doing is highly debatable.

As individual­s who assume responsibi­lity for the type of public disclosure­s the company makes, directors cannot underestim­ate the importance of paying attention to their jobs. This makes the recent decision by Naidoo to sue the South African Reserve Bank a truly bizarre state of affairs. At the heart of Naidoo’s contention, is the theory that the bank relied on less-than-accurate representa­tions in order to grant multiple approvals for Steinhoff’s internatio­nal buccaneeri­ng endeavours.

On that basis, Naidoo seeks to hold the Reserve Bank liable for losses suffered by Steinhoff stakeholde­rs — especially himself. In 2018, Wiese resolved to sue Steinhoff for R59billion for losses he suffered.

Whereas one may indeed empathise with the two billionair­es who have seen a plunge in their fortunes, unavoidabl­e questions relating to their true intentions emerge. In Steinhoff’s latest offer to all affected stakeholde­rs, an amount of R19-billion is being allocated to the universal pot from which all claimants must share. Such a settlement would generate just over R230-million for Naidoo who has a claim of over R12-billion. Just like Wiese in 2018, the idea seems to be aimed at finding a way of prioritisi­ng his claim above all other claimants. Naidoo’s gambit — citing the Reserve Bank as a contributi­ng factor to why the universal pot is so low to begin with — may end up buying nothing more than additional time.

This is mainly because, of all the people who can claim to have been duped by Steinhoff, Naidoo and Wiese deserve to be asked the simple question of what exactly they looked at before signing off on all the deals that we now know, were nothing more than an exercise in financial musical chairs. For Naidoo to think that he can sue the Reserve Bank in relation to Steinhoff, is perhaps an apt illustrati­on of the type of flawed reasoning that prevailed on the board.

Gifted with some of the best, Steinhoff’s understand­ing of fiduciary duties should have been better than most entities in SA

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