A critical evaluation of non-executive directors’ liability for breach and overreach in corporate governance duties in state-owned companies in South Africa

Abstract

Section 77 of the Companies Act provides for the liability of directors and officers of a company in South Africa. The liability of directors must be understood in context, and as one which must be hinged on their conduct. The conduct of directors should be seen as aligning with or arising from other provisions in the Companies Act. In terms of section 66(1), a shift in corporate law in South Africa is evident. The shift is that directors have been given sweeping powers to use in controlling and managing a company. The powers directors have been given are admirable and significant in clarifying as to where directors stand in the corporate governance of the company. It is these powers and the duties contained in section 76(3) which point to the justifi-cation to hold directors of a company accountable for the way it is governed. For they are vested with the powers to govern the company. The thesis focused on the liability of non-executive directors in state-owned compa-nies (SOCs), for corporate governance breaches and overreach. SOCs are compa-nies incorporated under the Companies Act. As such SOCs are subject to regulation by the Companies Act, unless expressly exempt from some provisions. In addition to the Companies Act, SOCs may come into being through an enabling law in which provision may be made that such institutions be incorporated under the Companies Act as a company whose shares would be held by the State. In other cases, SOCs can be directly brought into life by incorporation under the Companies Act without any exclusive enabling law. SOCs are further regulated under the Public Finance Management Act, though mainly from a financial perspective. The Public Finance Management Act contains schedules classifying SOCs into certain categories. In this regard, some SOCs are major public entities. The National State Enterprises Bill has recently been tabled in Parliament and if enacted into law will cause inroads in exist-ing legislation applicable to SOCs. Amongst others, it will affect the composition of SOCs, as a holding company will be established, inevitably implying subsidiaries below it. It will also affect the appointment and composition of boards of directors. SOCs are organs of State which are placed within the overarching regulation and application of the Constitution. This is a significant placement especially when regard is paid to the Constitution as supreme law wherein which there is a Bill of Rights which determines its application to juristic persons as far as possible. Seen from this perspective, accountable governance provided for in the Constitution and which spe-cifically applies to SOCs as it applies to other institutions, buttresses the duties of directors, especially non-executive directors. Much has been said, and will still be said about SOCs, often in a negative light. There are many reasons for this. It is noteworthy that these are public entities. They play an important role in the improvement of public welfare. Many of these entities provide critical services that buttress massive industrial activities. If poorly governed, the brunt is excruciating on the public and private institutions, by extension, the South African economy. Non-executive directors play a significant role in mitigating this situation by ensuring effective corporate governance in SOCs. Serving on SOCs’ boards is precisely to engender and entrench a sustained tone of good corporate governance. The reality, however, has been somewhat the opposite of the expected. Non-executive directors are pivotal to the success of SOCs they serve given the scope of powers at their disposal to ensure good corporate governance in SOCs. Thus, it is imperative that the law provides for clear guidelines as to how non-execu-tive directors should fulfil their duties when serving on SOCs. It should also provide for liability against non-executive directors for breach and overreach in the perfor-mance of corporate governance duties in SOCs in South Africa. It is in this context that the thesis examines the most pertinent legal instruments, including codes of corporate governance in South Africa. The thesis also includes a legal comparative study with a view to enhance the South African position. The un-derlying aim was to examine the spectre of liability against non-executive directors in SOCs. Recommendations for improvements are made at the end of the thesis.