Risks trump rewards for non-executive directors

By Willie Coetzee

There may be a public perception that there is significant status involved in being appointed a director of a company. However, changes to various statutes over the past number of years have made the role of director an increasingly onerous one and it is becoming questionable whether individuals will in future be prepared to accept an appointment, particularly as a non-executive director.

The common law has always required that a director act with due care and diligence in the interests of the company, and that he act in good faith and not breach of his fiduciary responsibilities.

The Companies Act of 1973 lists a number of transgressions that could lead to criminal prosecutions but most of these have hardly ever led to any successful prosecutions or convictions. Examples of companies or third parties suing directors are few and far between.

In one of the few examples of a conviction of a director, Jeff Levenstein, the former chief executive of Regal Treasury Bank, was recently convicted eight years after the collapse of the bank.

However, the case against the alleged tax offenders Gary Porritt of Tigon and Dave King just drags on and on.

It would also appear that the liquidator of Regal Treasury Bank intends suing a number of the non-executive directors, based on a claim that they either allowed the bank to trade recklessly or that they failed in their duty to stop Levenstein.

Times are clearly changing. Increasingly, statutes are providing for both civil and criminal liability of directors with draconian consequences for those who fail to comply. Examples of this are:

# The VAT Act which provides that directors who are regularly involved in the financial affairs of the company can be held personally liable for VAT penalties and interest payable by the company.

# The National Environmental Management Act which deems a director to be guilty of the same offence as the company in the event of pollution or degradation of the environment, unless the director can show that he took all reasonable steps to prevent the harm.

# The proposed amendments to the Competition Act, which seek to hold liable directors who are aware of or who fail to prevent prohibited practices.

The new Companies Act of 2008, which is scheduled to become effective next year, codifies in detail the standards of conduct expected of directors in section 76.


In particular, a director must act in good faith for a proper purpose, in the best interests of the company and with the care and skill that may be reasonably expected of a person carrying out these functions and having the general knowledge, skill and experience of the director.

Section 77 spells out the liability of directors, prescribed officers and members of committees of the board. In particular, it specifies that all of these persons may be held liable either for losses, damages or costs suffered by the company as consequences of breaches of their duties.

The only saving grace is that a court may excuse a director, either wholly or partly, if the court accepts that he has acted reasonably and honestly or if it would be fair in the circumstances to excuse the director.

Section 78 precludes a company from indemnifying a director from most of his obligations or relieving him of any duties or liabilities.

Although a company may purchase insurance for directors, it may not do so in respect of wilful misconduct or breaches of primary duties, such as fiduciary duties.

No distinction is drawn in any of the statutes mentioned between executive directors, non-executive directors and independent non-executive directors.

However, in the King 3 draft code of governance, it is recommended that boards should comprise a majority of non-executive directors and that the chairman should be an independent non-executive director.

While the report does provide that non-executive directors should be fairly remunerated, the question is what is fair with regard to the onerous obligations that a non-executive director incurs? This concern is of course greatly exacerbated where the director is not involved in the day-to-day management of the company.

While it is quite clear that the authorities believe there is a need to provide for onerous liabilities in the case of delinquent directors, there is little doubt that these increasingly stringent provisions will frighten off reasonable and honest people from accepting appointments.

And smaller companies will find it difficult to remunerate their non-executive directors adequately to enable them to accept the inherent risks involved.