When does directing a company become Board interference?

SOEs_100.jpgPerformance of SOEs remains a top priority for the president and by extension the minister of public enterprises. The question remains, to what extent will these changes affect procurement and supply chain? What is the proper way of governing SOEs?

At the recent 13th Annual Smart Procurement World Indaba, discussions centred around the restructuring of state-owned enterprises, focusing on methods to increase economic impact and development. Further discussions showed the danger of executive influence on procurement and performance of SOEs.

So, when does directing a company become Board interference?

Matodzi Ratshimbilani, an attorney and director of Tshisevhe Gwina Ratshimbilani Inc., expressed his views on Fin24.com.

News broke recently of senior executives at the South African Broadcasting Corporation reportedly threatening the public broadcaster with resignations over alleged interference by board members.

The Zondo Commission of Inquiry, for its part, also subsequently heard allegations of interference by the board in the work of the executive management team.

The contest for areas of responsibility between directors of companies and executives is not uncommon, especially in state-owned entities, which often have a dual mandate of profit making and social or developmental role – as is the case with the SABC.

Where allegations of interference by directors are raised, it is often the case that the affected directors will contend that what executives perceive as interference is a misconception of directors discharging their fiduciary responsibilities and their duty to manage and direct the affairs of the company.

What the law says

From a legal point of view, Section 66 of the Companies Act provides that the business and affairs of any company must be managed by, or under, the directions of its board; which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Companies Act – or such company’s constitution (memorandum of incorporation) provides otherwise.

Given this provision of the Companies Act, directors are within their rights to insist that they be responsible for the management and direction of the affairs of the company.

In most instances, the directors of the company’s terms of appointment do not require them to manage the day to day affairs of the company, as this would be impractical. It is partly for this reason that good corporate governance dictates that directors delegate their statutory obligation to manage and direct the affairs of the company to selected individuals – who have the right skills and experience to manage and direct the day-to-day affairs of the company.

It is a well-established principle of our law that when a person with authority delegates such authority to another, such delegation does not divest the originally authorised person of such powers.

Accountability, good governance and trust

Where the board has delegated responsibilities to a managing director or executive, the directors should be content that the person appointed will do their job diligently, and in the best interests of the company. This is simply the result of good corporate governance, pragmatism and the need for good order, insofar as management of companies is concerned. It is undesirable that directors should at a whim strip the delegated powers from the managing director or chief executive, as doing so will blur the lines of responsibility, and may lead to a situation where no-one can be held accountable for the actions that they take.

It is no wonder that the King Report on Corporate Governance, and similar international instruments, demand it as a matter of good corporate governance that the roles of the directors and the executives should be clearly defined and separated.

Other legislation

The SABC is also governed by the Public Finance Management Act No 1 of 1999 (PFMA). Although it can be argued that the PFMA was envisaged by the Constitution to regulate financial management of state-owned entities, government departments and constitutional entities, Section 50 of the PFMA also half-heartedly regulates the fiduciary duties and conduct of directors or board members of state-owned entities.

In this regard, Section 50(1)(d) – somewhat out of sync with the common law on the directors’ duties and the Companies Act – provides that boards of state-owned entities must seek, within their sphere of influence, to prevent any prejudice the financial interests of the state.

The specific reference to the sphere of influence in this section of the PFMA seems motivated by the acknowledgement that directors of state-owned entities are not to be involved in all aspects of managing and directing the affairs of such entities – notwithstanding that they have the legal powers to do so.

So, what is undue influence?

It is often a contentious matter between directors and executives of companies, let alone state-owned companies, when the conduct of directors amounts to undue interference.

The classic solution has been the well-established understanding that non-executive directors are not to be involved in the day to day affairs of the company.

Further, when senior executives are appointed often at a high cost to the company, they are so appointed for their skills and experience.

It will serve the boards of state-owned entities well to understand that directors have no business involving themselves in tasks that a highly paid chief executive or chief financial officer is hired to do. The urge to participate in the minutiae of the company’s affairs by directors is unwarranted and can result in conflict.

Allowing executives to discharge responsibilities on behalf of the organisation does not strip directors of their legal authority to manage and direct the affairs of the company as envisaged in the Companies Act and the PFMA in the case of state-owned entities.

More often than not, where a complaint of interference manifests, it is either lack of experience on the part of directors, and/or executives. In some instances, the source of differences maybe personality clashes.

Ultimately, a healthy tension between the board and executives is what all involved should strive for. Hostile relations do not auger well for good governance.

Originally posted on Fin24.com

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