Exercising director’s fiduciary duties - when it’s time to step down?

With the financial and governance issues that have affected the reputation and financial health of companies such as Eskom and Oakbay Resources and Energy (Oakbay), questions arises as to how a director exercise his or her fiduciaries duties towards a deteriorating company.

This article was originally published by Chartered Secretaries South Africa (CSSA).

My initial answer to this question: directors need to step back and see which issues he or she should consider before joining a board (or not).  A good start could be for a director to understand his/her own motives for wanting to join a specific board.  Reasons could include financial gain, a stepping stone to other opportunities, a desire to make a contribution to society or a combination of motives.

An aspiring director should also consider the financial and governance health of a company in assessing whether it is wise to the join the board or not.  If these issues all check out and the director has the relevant skills to make a contribution to that board, then it is an easy decision to accept the appointment.

The decision becomes more complex if you are dealing with a dysfunctional board or a company facing financial issues, particularly if it is due to a governance failure - which is the case in many instances. 

Complying with governance requirements 

Exercising director’s fiduciary duties and acting with due care and skill has become arduous in recent years, partly due to the increasing requirements encapsulated in the Companies Act 71 of 2008 and partly because of the ever-increasing governance requirements directors must meet. Also, director’s liability has become more onerous, as in some instances a director may be liable where matters go wrong in a company.

So, what should a director do if approached to sit on a troubled board? I would argue that, after doing a thorough assessment of the financial and governance health of the company, the director should examine any other stakeholder that could play a critical role in turning around the company’s fortune. This analysis should include examining the integrity of the current directors and the power of the institutional shareholders and lenders to exert pressure on the company to force a change for the better. Having done this analysis, and after understanding the key stakeholders’ vision on how the company could be turned around to achieve its objectives, the director could assess whether he or she shares that view and if those key stakeholders would make good allies to effect positive change in the companies.

To illustrate…

In the case of both Eskom and Oakbay, the evidence suggests that the board did not exercise ethical leadership in conducting the affairs of these companies in a way that would lead to long-term sustainability.  However, providers of capital and loans showed leadership. Eskom’s leaders, the Development Bank of South Africa, Rand Merchant Bank and Barclays Africa, forced CFO Anoj Singh to take special leave, until his role in the company’s financial issues was investigated. Likewise, Oakbay’s bankers and other service providers - such as their most recent sponsor, River Group - withdrew their support, forcing Oakbay to delist from the JSE Limited. These examples show the power of other stakeholders to effect change if it’s believed the board may be acting in a dysfunctional and ineffective way.

Directors are required to apply independent judgment when making decisions.  A board full of “yes” people adds no value. Just imagine what could have been achieved if there had been one or more directors on the board, who had cultivated a good relationship with the company’s bankers, and worked out a strategy in advance on how to exert pressure on the board and shareholders to better handle the company’s affairs.

Let us take the same principle I am advocating and apply it to politics. Without the involvement of people like Nelson Mandela, Helen Suzman,Thuli Madonsela, Ahmed Kathrada, Pravin Gordhan and many others, change in our society may have taken much longer to materialise – and may have possibly followed a more violent trajectory.

My argument is that we have moved from Milton Friedman’s concept that the purpose, and only purpose of a company, is to make money for its shareholders - as long as it is done in an ethical manner to an inclusive stakeholder approach where the legitimate interests of all stakeholders need to be considered in the context of the best interest of the company. Thus, directors must consider the impact of their actions on the wider stakeholder groups of a company. Serving their own narrow interests may lead to problems for shareholders, employees and customers, amongst other stakeholders.

When it’s time to step down?

Leaving a board when things go wrong is an easy solution and makes a decisive statement - if the director makes public his reason for resigning instead of making a public statement about “pursuing other interests”. The latter approach raises questions rather than answers. Staying on a board to protect your own interests, and watching a disaster unfold without doing anything is also an abdication of your fiduciary duties.

Directors must act with integrity and courage. This means trying every legitimate strategy and tactic possible to help solve the company’s issues. This can go from starting alliances with other board members, bankers or other stakeholders who support your vision, to ensuring appropriate director liability coverage is in place, and ensuring that decisions and actions of the board are correctly documented to support an ensuing court case, if necessary.

What I am suggesting can be a difficult, uncomfortable and a lonely route to take. But, if our South African leaders had avoided the difficult route, we would not be enjoying our democracy today. Stepping down from a board that is overseeing a troubled company should be the last action to take by a director, having exhausted all other moral options.

 

Disclaimer

The views expressed in this article are the experts’ and do not necessarily represent those of TMF Group. 

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Joanne  Matisonn
Opinion
  Opinion

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