What and who is a Company Director?
A company director is a member of a board of a company or an alternate director of a company. It is the responsibility of the board of directors to see to the day to day running of the company.
Minimum number of Company Directors in South Africa:
– A Private Company must appoint at least one director upon company registration.
– A Public Company and a Non-Profit Company must appoint at least three directors.
In the event of the minimum requirement of directors not being met, a shareholder meeting has to be called by the board within 40 business days, to appoint the prescribed number of directors.
Section 66 – recognizes the following types of Company Directors:
- De jure director – is a company director validly and formally appointed who has freely consented to the appointment.
- Nominee director – is a de jure company director who is appointed due to his/her nomination by a shareholder or other third party e.g. bank. Nominee directors are useful for a significant shareholder as board representation. This director could be placed in a difficult position when the interests of the shareholder conflicts with those of the company. This person is obliged to serve in the best interest of the company.
- Puppet director – this company director has been placed on the board with the intention that he/she should blindly follow the instructions of his/her controller who is known as the Shadow director who lurks in the shadows sheltering behind the puppet director. A puppet director will not escape liability for breach by blaming the shadow director.
- Ex officio director – refers to a person who is a director as a consequence of his office e.g. CEO or CFO. This person has powers and functions as any other director, unless restricted by the MOI.
- Alternate director – a person appointed to serve as director in substitution for a particular appointed director. This alternate may act as a director only in the absence of his/her appointer. The MOI must make provision for the appointment of an alternate. When the appointer resigns, the alternate ceases to hold office.
- De facto director – is a person not formally or validly appointed as a director, but is proved to be undertaking functions in relation to the company that could properly have been discharged only by a director.
Executive Company Director / non-executive and independent Directors:
The act does not distinguish between these directors but an important distinction is made between these in the King III Report.
Executive company director = a full time salaried employee and under a contract of service with the company. Involved in the day to day running of the business.
Non-executive = a part time director and not an employee of the company and not involved in the day to day running of the business. This person brings objective judgement, independent from management.
Independent non-executive officer = one who does not have a relationship with the company outside his/her directorships.
Prescribed officers – Section 1, Section 66(10) defines it as follows:
a) exercises general control over and management of the whole, or a significant portion, of the business and activities of the company.
b) regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.
Normally known as the Chief Executive Officer, Financial Director and the Chief Operating Officer.
- The grounds for ineligibility and disqualification for directors apply for prescribed officers (Section 69).
- Section 75 (personal financial interest) and Section 77 (liability of directors and prescribed officers) applies.
- Prescribed officers and directors are subject to the same strict duties and accountability.
- The persons who fall within the definition of prescribed officer must be identified by the board to make them aware of the consequences of accepting this appointment.
- The annual financial statement of a company required to be audited must include particulars showing the remuneration and benefits received by directors as well as prescribed officers.
Because directors have the power to manage the company’s business and to make vital decisions, higher standards are continually being expected of directors.
Duties, responsibilities and powers of Directors in South Africa:
1) Duties of the Director Section 67 (the Act and common law)
A director (also a prescribed officer and board committee member) must:
- To exercise with care and skill that would be expected of a person in that position
- Not use corporate property info or opportunities for personal gain
- Exercise independent judgment in decision making
- Duty to exercise unrestrained discretion
- Exercise powers for their proper purpose for which they were conferred
- To act only under available powers
- Act solely in the interest of the company and in good faith
- The duty to prevent any conflict of interest
- Duty to disclose any interest in a contract with the company
- Duty to account for secret profits
- Duty not to misappropriate corporate opportunities
- Duty not to improperly compete with the company
- Duties as per MOI
- Not use the position of director, or any information obtained while acting in the capacity of a director
- to knowingly cause harm to the company or a subsidiary of the company
- To gain an advantage for himself or any person other to the company or a wholly owned subsidiary
- Communicate to the board any information that comes to the directors’ attention unless the info is immaterial or generally available to the public or known to the other directors or the director is not bound to disclose the info by reason of confidentiality
- If a company does not meet the solvency and liquidity test (Section 4) it may not enter into certain corporate actions (Duty of director)
- If a company is financially distressed it may potentially be obliged to initiate business rescue proceedings or is obliged to furnish written notice to all affected persons of the fact and stating the reasons for not applying for business rescue. (Duty of director)
If a company is not liquid it may be required to cease (Section 22(3))
2) Rights of directors
- Participate in the strategic management of the company and attend and vote at board meetings
- Take independent professional advice at the expense of the company
- Inspect the company’s accounting records, assisted by an accountant
- To receive reasonable notice of meetings
- To claim reimbursement for expenses incurred
- To discharge duties without interference from co-directors
3) Powers of directors
- Section 15 – to make rules relating to the governance of the company
- Section 21 – to ratify pre-incorporation contracts
- Section 38 – to issue shares
- Section 44 – may authorize financial assistance for the subscription of securities (with prior special resolution approval)
- Section 45 – loans or other financial assistance to directors and inter or inter-related companies (with prior special resolution approval)
- Section 46 – authorisation of any distributions
- Section 48 – may authorise share buy backs
- Section 66 – unfettered powers to manage the company
- Section 120 – to resolve to institute business rescue proceedings
Decision making and delegation:
- Directors appoint and supervise management, while shareholders hold ultimate responsibility for the company and they delegate the day to day running of the company, they also have the power to re-appoint directors or not to re-appoint them.
- While many of their duties can be delegated to management, directors still have a duty to monitor management’s performance. Directors hold overall responsibility over management.
- As a director it is responsibility to ensure the smooth running of the company.