Governance

and ethics
Jocelyn Damon
[email protected]
My details
• Jocelyn Damon
• Email: [email protected]
• Available during workdays,
Monday to Friday, 08:00 to
17:00
• Please allow me 48 hours
to respond
Learning Unit
3:
Stakeholders
in Corporate
Governance
Theme 1: The
role of the
shareholder
 Learning Outcomes
LO1: Explain the role of shareholders in governance.
LO2: Explain how the balance between power and accountability is achieved
between the board of directors and shareholders.
LO3: Advise on all aspects of shareholder’s meeting.
LO4: Distinguish between shareholders meetings and the Annual General Meeting
(AGM).
LO5: Differentiate between the two types of shareholder resolutions and apply to
a set of facts.
LO6: Fully explain the derivative action with reference to the appraisal rights of
dissenting shareholders.
L07: Elaborate on how the King IV code approaches the recognition of stakeholder
interests, including that of shareholders.
LO8: Critically discuss the concept of shareholder activism and differentiate
between the two schools of thought.
LO9: Advise on the role of institutional investors and the best practice guidelines
 King IV = a stakeholder inclusive
approach to corporate governance.
INTRODUCTI THEREFORE: we must look at the
ON shareholders of the company as an
(the most?) important stakeholder.

A company acts through its

Shareholders in general meetings.
 The
Shareholders Companies
are the Shareholders They may also
Act provides Shareholders
owners of generally do have duties
great exercise
the flexibility to
not have any and
duties
control by
company and shareholders obligations
towards the means of
thus to achieve, towards each
company, voting at
through the other in
possess the except the shareholders
MOI, the terms of the
ultimate duty to abide meetings by
necessary shareholder’s
control over by the way of
SHAREHOLDERS
balance of agreement.
the company’s resolutions
power
company’s MOI.
between the
affairs. board and the
 provide for
matters that are
not dealt with In
COMPANY’S terms of the
Companies Act;
MOI CAN:
change any of
the alterable
provisions
contained in the
Companies Act
• S 1 defines shareholder as:
• the holder of a share issued by a company and who is entered as such in the certificated or
uncertificated securities register of the company.
• Part F of Chapter 2 a ‘shareholder’ is
• a person who is entitled to exercise any voting rights in relation to a company, irrespective
of the form, title or nature of the securities to which those voting rights are attached
• A share is part of the securities of a company
• Act defines securities as any shares, debentures or other instruments, irrespective of
their form or title, issued or authorised to be issued by a profit company
• When Act refers to securities, it refers to both shares and debt instruments such as
debentures
• For purposes of Part F, a shareholder could include the holder of a debt instrument who has
been granted voting rights
• share
• one of the units into which the proprietary interest in a profit company is divided
• shareholders meeting
• a meeting of those holders of a company’s issued securities who are entitled to exercise
How shareholders govern
• Ultimate control of
company’s affairs lies in
hand of shareholders as
owners of Co
• role of shareholders: appoint
directors & auditors & then hold the
directors accountable for proper
governance of Co
• Two main structures: GM of
shareholders & BOD
• Shareholders who are unhappy
with the way in which Co
managed should use their powers
to force removal of board
• Shareholders exercise power through
Shareholders’ meeting: GMs or
AGMs
Striking a balance
• As said before need to
strike a balance between
power and accountability
• Power to call
shareholder’s meeting:
Directors or Shareholders
A SH meeting must be called in the following instances:

1.Any time a 2.Meeting is

board is required demanded by SH,
to convene a provided the
meeting & refer a demand is signed
matter to the SH by persons with
for decision least 10% of the
voting rights
Shareholders’ meetings
• CA distinguishes between an AGM and a shareholders’ meeting
• AGM : within 18 months of incorporation & then yearly no more than 15
months after previous one
• There are prescribed issues to be dealt with at AGM:
• presentation of directors’ report
• presentation of AFS for previous financial year
• presentation of audit committee report
• election of directors to extent required by CA or MOI
• appointment of auditor for next financial year
• appointment of audit committee
• any matters raised by the shareholders
• AGM is forum where business of company can be discussed by
shareholders & directors – shareholders can question the directors on
their report, contents of financial statement & other matters of concern
Giving Notice
• Before meeting is held, must give notice of
meeting
• Proper notice:
• must be in writing
• must include the date, time and place
for the meeting
• if record date, notice must include the
record date
• should explain general purpose of
meeting / specific purpose
• Public company / non-profit
• 15 days before date of meeting
• Other company
• 10 days before date of meeting
•Proper notice continued:
• proposed resolution must accompany the notice convening the
meeting
• indicate percentage of voting rights required for resolution to be
adopted
• AGM: contain a summary of the AFS that will be tabled at the meeting
& procedure to obtain complete copy
• statement that shareholder can appoint a proxy in place of
shareholder
• participants required to provide proof of identity at the meeting
• Company failed to give notice / defect in notice
• meeting can proceed if:
• the persons who are entitled to vote in respect of each item on the
agenda are present at the meeting
• acknowledge actual receipt of the notice
• agree to waive notice of the meeting
• ratify the defective notice
• A shareholder who is present at a meeting is deemed to have received or waived
notice of the meeting
Proxy

• a person who is appointed to represent a shareholder at a meeting

• Companies Act allows a shareholder to appoint any individual as his /
her proxy
• does not have to be a shareholder in a company
• must be in writing and signed by the shareholder appointing the person
• remains valid for one year after it was signed
• can appoint for a specific period of time
• can appoint two or more in respect of different types of shares
• proxy may delegate authority
• must deliver copy of proxy appointment form to company before proxy can act

• suspended where shareholder acts directly in matter

• shareholder has right to revoke the appointment by cancelling it in writing
• proxy votes as sees fit unless proxy appointment form specifies how proxy
must vote
Quorum
• Shareholders’ meeting may not begin until sufficient persons
are present at the meeting to exercise at least 25% of all the
voting rights that are entitled to be exercised in respect of at
least one matter to be decided at the meeting
• MOI may specify higher or lower percentage in place of
the Act’s default quorum of 25%
• If company has more than 2 shareholders, at least 3 must
be present
Postponement and adjournment of meetings
• Meeting may be postponed or adjourned for a week under
following conditions:
• withinone hour of the time the meeting is to start a quorum is not
present
• at the next meeting those present will constitute the quorum
• Meeting can be adjourned without further notice on a motion
supported by persons entitled to exercise in aggregate a majority of
voting rights held by all of the persons who are present at the
meeting at the time
• either fixed time and place or
• until further notice
• not more than 120 days after the record date or date that is 60 business days
after the date on which the adjournment occurred
• can be altered in the MOI
Some exceptions to applicable rules and
formalities
• Shareholder of profit company with only one shareholder
• may exercise all of the voting rights pertaining to that company
• rules iro record date, proxies, notice of meetings are not
applicable
• Does not apply to SOC
• Company has only one director
• director may exercise any power or perform any function of the
board at any time without notice or compliance with any other
internal formalities
• Except if MOI provides otherwise
• Does not apply to SOC
Voting at Shareholders’
meetings
• MOI determines voting rights of shareholders and holders of other
securities
• Every share issued by Co has associated with it
irrevocable right of shareholder to vote on any proposal
to amend preferences, rights, limitations and other terms
associated with that share
• If Co has one class of share – those class of shares have right
to vote on every matter that may be decided upon by
shareholders of company
•JSE Listing Rules require that MOI of listed companies
provide that every holder of ordinary shares must have
one vote iro each share that he / she holds & must be
entitled to vote at every general & AGM
•MOI of listed Co may also provide that holders of
preference shares shall have right to vote at any
general meeting or AGM
•Not all holders of securities can vote at AGM – holders of
debt instruments must be prohibited ito MOI from voting
at general meetings
THE ACT THE JSE
REQUIREMENT
S
Flexibility in determining voting rights. MOI must provide that every holder of an
Determined by MOI – for example, more ordinary share MUST have one vote iro
voting rights than other for certain each share that they hold and must be
transactions. entitled to vote at every general and
AGM.
Certain classes could be special, Not all holders of securities are entitled
conditional or limited voting rights. to vote a meetings.

MOI CANNOT alter the right of a SH to The MOI of a company must prohibit
vote on any proposal to amend the holders of debt instruments from
preferences, rights, limitations and other VOTING
attending and voting at general
terms associated with shares. meetings.
Irrevocable right and attaches to each RIGHTS
share.
• electronic communication
• must allow for concurrent
communication
• notice must give details to
shareholders on how to
access electronic
communication for voting
 DECISIONS OF SHAREHOLDERS AND
OTHERS
1.Ordinary Resolutions 2.Special Resolutions

Ordinary Resolution: means a Special Resolution: supported by more

Resolution supported by 50% +1 of than 75% of voting rights exercised
voting rights exercised at the meeting

MOI may provide for higher percentage MOI may provide for ↑ or ↓ percentages
provided always a 10% margin

Must always be a 10% margin between Companies Act provides for a list of
ordinary and special decisions that require a special
resolution – page 107

Most company decisions require an

ordinary resolution
Protection of minority Shareholders

•Act provides protection to minority shareholders

against abuse majority
•Remedies include:
• derivative action
• relief from oppressive or prejudicial conduct
• appraisal rights
• ADR
• filing complaint with Companies Commission
Derivative action – What is it?
• Where the wrongdoers are in control of the company, the
derivative action allows for a shareholder to sue on behalf of the
company
• For example, a majority SH influences the directors of the Co
appointed by him not to pursue a matter in breach of fiduciary
duty. Minority SH can demand action be taken
• Minority shareholder can demand that company commence or
continue legal proceedings against defaulting director / majority
shareholder
• Company can apply to court to have demand set aside or can
appoint independent person to investigate demand & report to
board
• Should company fail to comply with demand of minority
shareholder – minority shareholder may apply to court for leave to
bring or continue legal proceedings in name of company
The derivative action ito S165
•Derivative action is a court action
• instituted by any of the persons described in S 165
• on behalf of the company
• in order to protect the company’s legal interests
•S 165 provides that the persons who may use the statutory
derivative action are:
• a shareholder
• a director, including prescribed officer
• a representative of employees
• any other person with leave of the court
The derivative action ito S 165 continued…
• Remedy is available against an alleged wrongdoer who is in control of the company
• 5 steps:
1. serve a demand on the company requiring it to commence / continue legal proceedings
to protect the interests of the company
2. company must:
• set aside if frivolous, vexatious or without merit
• appoint an independent / impartial person or committee to investigate the demand
and report to the board on whether in best interests of the company to continue with
the proceedings
3. within 60 days either continue with proceedings or serve notice refusing to comply with
demand
4. that person may then apply to court to bring / continue proceedings on company’s Behalf
5. court must be satisfied that
• company has failed to comply with statutory requirements
• applicant is acting in good faith
• proceedings will involve the trial of a matter of material consequence to the company
• it is in the best interests of the company that leave be granted
Prejudicial conduct
• Minority shareholder may apply to court for relief if any act or omission of
company results in oppressive or prejudicial conduct against minority shareholder
• If powers of director are being or have been exercised in manner that is
oppressive or unfairly prejudicial to or unfairly disregards interests of minority
shareholder – such minority shareholder may approach court for relief
• Examples: minority shareholders are unfairly prejudiced by conduct of
majority when company’s MOI is altered or rights attaching to shares in
company are varied
• Court has discretion iro remedies: restraining order, order directing company to
amend its MOI or any order varying or setting aside transaction or agreement to
which company is party
 SHAREHOLDERS WHO ARE VICTIMS OF
OPPRESSIVE OR UNFAIRLY PREJUDICIAL
CONDUCT

The applicant (minority Alternatively, the

SH) must establish that applicant must establish
an act or omission of the that the powers of a
company (or a related director are being or have
person) has had a result been exercised in manner
that is oppressive or that is oppressive or
unfairly prejudicial to the unfairly prejudicial to the
applicant. interests of the applicant.
APPRAISAL RIGHTS
The Companies Act, 2008 has introduced a
new and fundamental concept into the
regulation of mergers and acquisitions,
and other fundamental transactions =
appraisal remedy.

If the shareholders disagree with these

transactions, they are entitled to require
the company to acquire their shares at
fair value.

Amounts to an ‘out option’ by minority

shareholders in respect of their shares
against the company on the happening
of certain events, including the passing
Dissenting shareholders’ appraisal rights in
terms of S 164 continued…

•To exercise appraisal rights – 5 step procedure:

1.dissenting shareholder must notify company in writing of that shareholder’s
opposition before the relevant resolution is put to the vote
2.if resolution passes – shareholder must demand payment of the fair value
of the shares from the company
3.fair value must be determined by the company
4.dissenting shareholders who do not accept the company’s offer can either
allow the offer to lapse / apply to court for the court to determine fair value
5.shareholders can surrender their shares for the amount determined by the
court / withdraw their respective demands if they regard the fair value
determined by the court as unacceptable
Shareholder activism
• Increasing globally – primarily because of growth of institutional investors who
have ability to mount effective challenges to managers & boards who
underperform
• Done to align interests of management with those of shareholders
• Activist shareholders target companies for following reasons:
• share price underperformance
• low sales grown
• conservative financial strategy
• see example of Apple Inc on page 105 of textbook – illustrates how activist
shareholders can create value for themselves when company has financial
strategy which is too conservative – argument is surplus cash should be
returned to shareholders rather than be retained by company management &
earning low-interest return or being invested in wasteful or unproductive
products
•Forms of shareholder activism:
• voting against proposed resolutions
• proposing resolutions for consideration at meetings of shareholders
• attending AGM or other shareholders’ meeting to ask directors questions regarding
contentious issues
• engaging with management & boards of companies on matters of concern to
shareholder
• public targeting by use of media
• co-ordinating activism activities with other shareholders
SHAREHOLDER ACTIVISM AND
SHAREHOLDER
APATHY
Arguments against Shareholder
emphasiseActivism
that it disrupts the
efficient working of widely held
public companies. It is also
argued that activist shareholders
are often self-serving and thus
place their interests first before
the interests of the company.

Arguments for Shareholder

emphasise
Activism that the
shareholder is the owner of
the company and their
interests are closely aligned
with the interests of the
company.
 Companies’ response to shareholder activism

• Best way for companies to deal with shareholder activism is to follow good
principles of corporate governance
• Entails:
• appropriate, timely, balanced & fair disclosure regarding both
financial & non-financial matters
• regular engagement & dialogue with shareholders in order to
better understand shareholder expectations
• understanding relationships with key stakeholders
• establishing efficient communication channels with key
stakeholders &
• adopting set of ethics & core values
Role of Institutional Investors
•Institutional
investors have become major owners of
shares in publically listed companies worldwide – can
influence way in which companies are governed
•Several codes & guidelines establish principles &
recommend best practices on how institutional
investors should act as shareholders
• ICGN Governance principles
• G20/OECD Principles of Corporate Governance
• In SA we have the Code for Responsible Investing in South Africa (2011)
• King 3 recommended that such code be developed
• Provides guidance on how institutional investor should execute
investment analysis & investment activities & exercise rights so as to
promote sound governance
• See five key principles on page 109 of textbook – these are voluntary and
on an ‘apply or explain’ basis
• These principles are supplemented by practice recommendations
 Directors are responsible for the
day to day running of the
company.
 The board of directors are the
focal point and custodians of
corporate governance. (King IV
TM – principle 6)
 Thecompany is a legal entity
which exists separately from its
management and shareholders
 T H E R E F O R E - cannot act on its
own behalf and representatives
act on its behalf
 The board of directors is one of
the organs through which the
company acts.
GOVERNING BODIES:

 The King I V ™ report refers broadly to governing bodies that are defined
as: the structure that has primary accountability for the
governance and performance of the organisation.

 Depending on the context, it includes, among others,

 1. the board of directors of a company,
 2. the board of a retirement fund,
 3. the accounting authority of a state-owned entity and a municipal
council.”
 Steers & sets
strategic
direction

Ensures GOVERNING BODY’S PRIMARY Approves

accountabilit GOVERNANCE ROLES policy &
y planning

Oversees &
monitors
 S66(1) Companies Act
provides that:

 the business and aff airs

of a company must be
managed by or under the
direction of the board
(inherent powers of
management)
Introduction:
 B O D is focal point for & custodian of corporate governance
 B O D should be structured effi ciently and should comprise mix of
executive & non-executive directors to perform role effectively
 For B O D to function effectively:
 mutual trust between directors
 competent non-executive directors
 effective chairperson
 well-run meetings
 excellent systems of risk management & control
Board Structures
 There are two types of board structures (par 7.2) :
 unitary board – combines supervisory & managerial roles of B O D s
 two-tier board (Germany) – clear distinction between roles of supervisory
board and management board
 In theory different but in practice actual board practices are
signifi cant : both systems recognise supervisory function and
managerial function
 Generally board elected by shareholders
 Appoint members of the managerial body
 Two-tier system benefits: clearer, formal separation between
supervisory body and those being supervised
 Unitary-tier system benefits: closer relation & better information
flow between supervisory & managerial bodies
 In S A – unitary board

 C A says “the business and aff airs of a company m u s t be managed by

or under the direction of the board”
Responsibilities of the Board of Directors
 C A – business & aff airs of Co must be ‘managed by or under direction of
the board’.
 Role & function of B O D as per O E C D principles of Corporate Governance
 to review & guide corporate strategy
 to monitor eff ectiveness of corporate governance practices of company &
implement changes as needed
 to select, compensate & monitor management & oversee succession planning
 to align key executive & board remuneration with longer term interests of
company
 to ensure formal & transparent board nomination & election process
 to monitor & manage potential confl icts of interest of management, board
members & shareholders
 to ensure integrity of accounting & reporting systems & that appropriate systems
are in
place – in particular systems for risk management, fi nancial & operational
control & compliance with law and relevant standards
 to oversee process of disclosure & communication
 Board h a s dual role:
 to lead &
 to supervise
 Study the principle and recommended
practices on page 49 of the report.

 King I V ™ states in principle 6 that:

 “the governing body should serve as the

focal point and custodian of Corporate
Governance in the organisation.”
COMPOSITION OF THE BOARD – 7.4

Executive Independent
Director non-executive
director

Non-Executive
Director
 COMPOSITION OF THE BOARD
COMPANIES ACT KING IV J S E LISTING
R EQ UI R EMEN TS
does not distinguish between principle 7 = “the governing
executive, non-executive body should comprise the
and independent non-executive appropriate balance of
directors. knowledge, skills, experience,
diversity and independence
for it to discharge its
governance role and
responsibilities objectively and
effectively.
provides that the board of • Appropriate mix of executive, • All listed Companies must
directors of a private non- executive and appoint an audit and
company must comprise of independent non- executive remuneration committee.
at least one director. members; • If nature and composition
The board of directors of a • Suffi cient number of of business require it,
public company or non- members to serve on the must also have a risk
profi t company must committees; and nomination
comprise of at least three committee.
directors.
The recommended practices for
the nomination, election and
appointment of members
include the approval of
COMPANIES ACT KING IV J S E LISTING
REQUIREMENT
S

the majority of All listed Co’s must

directors should be have an executive
non-executive and fi nancial director.
independent.

the C E O of the Must be a clear

company should not balance of power at
be the chairman of board level.
the governing body. therefore, C E O and
chairman cannot be
the same person.
Composition of the board of directors
 C A:
 B O D of private company / personal liability company – 1 director min
 B O D of public company / NP – 3 directors min + additional directors to
satisfy any requirement ito MOI or Act to appoint audit committee or
social or ethics committee
 MOI can specify higher number of directors as minimum
 Any director can be appointed to more than one committee of C o
Composition of the board of directors
 King 4:
 composition of board should be such that it comprises balance of skills,
experience, diversity, independence & knowledge needed to discharge
its function effectively
 composition should be diverse ito academic qualifi cations,
expertise, skills, experience, nationality, age, race & gender
 appropriate mix of executive & non-executive directors &
independent members
 C E O & one other executive should be appointed to the board
 rotation of directors should be staggered to ensure retention of valuable
skills while introducing new directors with new ideas & expertise
(including establishment of succession plan)
  Involvement in th e day-to-
day management of the
company salaried
 full-time or
of the company (or
employment
subsidiar
its or
EXECUTIVE y) both
DIREC TOR –  intimateknowledge of
the workings of the
par 7.4 company.

 entrusted with ensuring

that the information laid
before the board by
management is an
accurate refl ection of
their understanding of
the aff airs of the
 Section 1 of the Companies Act 2008 defines a
Director as:
 a member of the board of a company as
contemplated in S66, or an alternate
director.
 S66 – a person only becomes a director
when they receive written consent after
having being appointed or elected.

 DIRECTORS, ACCORDING TO THE ACT,

THEREFORE INCLUDE ALTERNATE
(SUBSTITUTE) AND DE FACTO DIRECTORS
(NOT OFFICIALLY APPOINTED)

 Regardless of the category of director their duties

and liabilities remain the same.
Not involved in the management of the
company

independent of management on all issues

including:

strategy,

performance,

sustainability,

resources,

transformation,

diversity,

employment

equity,
Composition of the board of
directors

 J S E listing requirements:
 J S E requires listed companies to have policy to ensure clear balance
of power at board level to ensure that no one director has unfettered
powers of decision- making.
 C E O & Chairperson should not be same person
 All listed companies must appoint audit committee & remuneration
committee
 If necessary listed companies should also appoint risk & nomination
committees
 All listed companies must have executive fi nancial director
 The role of independent non-executive directors
 bring objective perspective to activities of the board
 expected to be involved in
 formulation & strategy
 appointment of senior executives
 ensuring compliance with legislation
 detecting fraud
 measuring & rewarding managerial performance
 Boards with majority independent directors are perceived to
better serve shareholders’ interests
 In short, an independent
director is:
 free from any business or other
relationship (contractual or
statutory) which
 could
to be seen by
interfere an objective
m aterially with
outsider
individual’s capacity to act the
independent
in manner, an
 su c h
as being a director of a
material customer of or supplier to
the company.
 Appointment of chairperson
 Chairperson – crucial role – leadership & guidance for B O D
 C A does not provide for election of Chairperson – found in MOI
 King 4 – recommends B O D elect Chairperson who is independent non-
executive director
 King 4 – recommends C E O is not also Chairperson
 J S E listing requirements – C E O & Chairperson must not be same person
 non-executive director
 lead independent director
 Role and functions of chairperson
 Chief role of chairperson is to provide leadership to
board
 Sets tone for ethical decision-making
 Chairperson must not accumulate to much power
 King 4 recommends his / her membership of certain
critical board committees is curtailed
 must not be member of audit committee / not chair
remuneration committee
 Evaluation of chairperson
 Good corporate governance practices require regular
performance evaluation of board & its committees
 including performance evaluation of chairperson
 King 4 – board should clearly establish criteria applicable
in performance evaluation generally
 should be done by non-executive director
 done every second year
O F F I C E R S O F T H E COM PANY

The following persons are the offi cers of the company:

The chief executive offi cer;

The company secretary - primary role is to advise &
assist the board in fulfi lling its corporate
governance mandate

The auditor;

Prescribed offi cers.

KING IV COMPANIES ACT

C E O implements strategy approved by Does not describe the role and functions of
board and reports to board. the C E O

C E O should not be a member of the Normally appointed by the board.

remuneration, audit or nomination
committee.

Collective responsibilities of management

vests in C E O , therefore bears all
responsibility for management functions.
COMPANIES ACT KING IV – J S E LISTING
recommended
REQUIRMENT
S
Public Co and State owned Co principle 10 - “the board The B O D must consider and
must appoint a company should ensure that the satisfy itself, on an annual
secretary (CS) appointment of, and basis, about the C S’ s
delegation to, management competence, qualifi cations and
MOI of private company may contribute to role clarity and experience.
require C S the effective exercise of
authority and
responsibilities.
Is accountable to the board for, In terms of this principle,
inter alia: boards should ensure that
1.providing directors with they have access to
guidance for their duties; professional and
2.making directors aware of independent guidance on
any law that applies to the issues of Corporate
Co; Governance and the legal
3.report to board on failure duties of the organisation.
to comply with the Act. In a company, the
4.Ensuring minutes of all company secretary
shareholders meetings, fulfi ls this role.
board
Auditor
 Public C o & S O C – m u s t appoint auditor

 Priv C o / Inc / N P C – may be required to appoint auditor under

certain circumstances
 Could also be prescribed in MOI
 Act independently

 Mu s t act with care and skill

Prescribed offi cers
 Person is prescribed offi cer if that person ‘exercise general control
over & management of whole or signifi cant portion of business &
activities of company or regularly participates to a material
degree in the exercise of general executive control over and
management of the whole, or a signifi cant portion, of the
business and activities of the company’
 Broad definition includes most persons with senior managerial
responsibility
 CEO
 CFO
 COO
 Both the Companies Act and King IV provides that the board of a
company may appoint a number of committees in which the board
can delegate any of its authority, to assist the governing body in
the execution of their duties.
 Either standing or ad hoc.
 Audit

Types of Social
Risk and
committees ethics

Remuneration
 In terms of principle 8 a “governing
body should ensure that its
arrangements for delegation with its
own structures promote independent
judgement, and assist with balance of
power and the effective discharge of its
duties. ”

 The governing body should delegate

certain functions to committees, without
abdicating its responsibilities.
Composition of board committee:

 except if MOI provides otherwise –

 Board committee may inclu de persons who

are not directors but not ineligible or
disqualified and cant vote;

 All committees sh ould comprise a majority

of non-executive members.
K ING 4 R E C O MME NDS TH AT F O RM AL TE R MS O F R E F E R E NC E TH AT
MUST B E APPROVED BY T H E GOVE R NING BODY F O R E AC H COMMIT T E E
WHICH SHOULD INCLUDE: COMPOSITION AND ROTATION O F
ME MB E RSHIP, DETAIL O F ITS RO L E & D E L EGAT E D AUTHORITY,
R E S O U R C E S AND A C C E S S TO FORMATION AND ME E T ING P RO C E D U R E S .
Responsibilities of committee members:
BOD still remain responsible for proper
performance of the duty delegated
non-director members & audit committee are
subject to same duties & liabilities as
directors
The audit committee
 Public & S O C must appoint audit committee
 MOI of private company may also require
appointment of audit committee
 Elected at each AGM
 Appointed by shareholders – not the board
 Primary purpose: focus on financial issues that
are crucial to company but cannot be fully dealt
with by BOD because of time constraints
 CA – must have at least 3 members
 1/3 must have academic qualifications or experience in economics, law, corporate
• governance, fi nance, accounting, commerce, industry, public aff airs or h u m a n
resource management
 may not be executive, prescribed officer or full-time employee, material supplier or
customer of C o or be related to any of these
 King 4 recommends – must be independent non-
executive directors
The audit committee
 Duties & Responsibilities: as per pages 42 – 43
in textbook
 King 4 describes roles of audit committee:
provide independent oversight of organisation’s
assurance functions & integrity of reports
 see principle 8 of King 4
Companies Act King IV

Every public and state owned as well as Even if not obliged to, C o should
any other C o that has scored a public establish one to monitor and report on
interest score above 500 in any 2 of organisational ethics, responsible
the previous 5 years corporate citizenship, sustainable
development and stakeholder
inclusivity.
 Social & Ethics committee:
 comprises of at least 3 directors / prescribed
officers – one must be a non-executive director
 Functions – see page 44 of textbook
 Risk Committee
 King 4 recommends that board appoints risk
committee
 should comprise of majority of non-executive
directors
 Role: advise the Co on risks & opportunities it is
facing & to oversee implementation of risk
management plan
 O ne oftheaims of King IV™ is to enhance the
accountability of governing bodies as it deals with
remuneration.

 In King IV, provision is also made for the creation of a

committee dedicated to the oversight of remuneration.
(recommended practice)
 Remuneration committee
 non-executive directors only
 majority should be independent
 should be chaired by non-executive director

 Purpose: to ensure that directors & executives are

appropriately rewarded in fair, responsible &
transparent way
 Remuneration policy would address:
 base pay & bonuses
 employee contracts
 severance & retirement benefi ts &
 share-based & other long-term incentive schemes
 The Companies Act provides that a company may pay its directors
remuneration for their services, except to the extent that the
Memorandum of Incorporation of a company provides otherwise.

 This is subject to the provisions whereby remuneration may be paid

only in accordance with a special resolution approved by the
shareholders within the previous two years.
 KING IV
J S E LISTING REQUIREME NT

The J S E listing requirements Principle 14 governing bodies

require full disclosure of the “should ensure that the
remuneration policy and organisation remunerates
implementation report in the fairly, responsibly and
annual report, in line with the transparently so as to
‘apply and explain’ regime. promote the achievement of
strategic objectives and
positive outcomes in the short,
medium and long term
 Nomination committee
 Purpose: Ensure B O D contains appropriate mix of skills & experience
to lead company
 Membership: King 4 recommends all members of committee should
be non- executive directors of whom majority should be independent
 Listed companies: nomination committee must be chaired by
chairperson f board
 Functions: page 46
 Suitability of person to be director
 His / her appointment or election
 His / her removal or retirement
 All aspects when considering good corporate governance
 Really important to have the right candidates & their tenure & contribution
managed effectively
 Also important: remuneration of directors & alignment of their interests
with those of company & shareholders
 Internationally : more and more disclosure requirements & shareholder activism
around directors remuneration
 Non-alignment of interests = corporate strife & non-optimal performance of
company
 Section 1 of the Companies Act 2008 defines a
Director as:
 a member of the board of a company as contemplated
in S66, or an alternate director.
 a person occupying the position of director or
alternative director, by what ever name designated
 What is a de facto director? see page 48 of textbook
 S66 – a person only becomes a director when they
receive written consent after having being appointed or
elected.

 DIRECTORS, ACCORDING TO THE ACT, THEREFORE

INCLUDE ALTERNATE (SUBSTITUTE) AND DE FACTO
DIRECTORS (NOT OFFICIALLY APPOINTED)

 Regardless of the category of director their duties and

liabilities remain the same.
Incorporators of
Co are first
directors of C o

Categorisation
does not
influence their
duties and
liabilities
 C A says that director of profit company must be elected by persons entitled to
exercise voting rights in s u c h an election
 In profit co at least 50% of directors must be elected by shareholders
 elected to serve for indefinite term / term set out in MOI
 King 4 recommends that procedures & recommendations for appointment to
the board should be transparent – background & reference checks should be
performed before nomination of candidate & whether candidate meets
appropriate criteria taking into account collective knowledge, skills and
experience required by board & diversity of board
 Act does not set out qualifications for person to be director
 B ut imposes grounds for ineligibility and disqualification
INELIGIBLE DISQUALIFIED

absolutely prohibited from becoming C O U RT S have wide discretion to either extend

director, no exceptions. any disqualification for no
longer than a period of five years at a time, or to
exempt any person from the disqualifications as set
out below.

FO R EXAMPLE: FO R EXAMPLE :
• Juristic person, • Persons prohibited by a court of law,
• un-emancipated minor or with a • person declared a delinquent by court in terms
similar legal disability, of the Act,
• any person who does not satisfy a • Un-rehabilitated insolvent,
requirement in the MOI • prohibited in terms of a public regulation,
• person removed from an office of trust due to
dishonesty,
• person convicted and imprisoned without option
of fine, or fined more than prescribed amount for
theft, fraud, forgery, perjury or certain other
offences
MOI may impose additional grounds for MOI may impose additional grounds for
ineligibility of directors & minimum disqualification of directors
qualifications
 C A – court may declare director delinquent or under probation
 may be brought against current director or against former director within
24 months of s u c h person ceasing to be director of company
 Persons that can bring the application: company, shareholder, director,
company secretary, prescribed officer or trade union
 C A – court must make order declaring person to be delinquent director if
person
 acted as director while ineligible or disqualified to be director
 contravened probation order
 grossly abused position of director
 took personal advantage of information or opportunity contrary to his / her duties
as director
 intentionally or by gross negligence inflicted harm on company or subsidiary
 acted in manner that amounted to gross negligence, wilful misconduct or breach of
trust in relation to performance of his / her functions within and duties to company
 purposed to represent company while knowing that he / she lacked authority to
do so
 acquiesced in carrying on of company’s business in reckless manner or was party
to act or omission of company knowing act or omission was intended to defraud
 repeatedly been personally subject to compliance notice or similar enforcement mechanism
 has at least twice been personally convicted of offence / subjected to administrative fine or similar
penalty in terms of any legislation
 was within period of 5 years director of one or more companies or managing member of close
corporation or controlled juristic person that was convicted of offence or subjected to administrative
penalty & court is satisfied that declaration of delinquency is justified having regard to nature of
contraventions & person’s conduct in relation thereto
 Effect of order of delinquency
 person is disqualified from being director of company
 Rabinowitz v Va n G ra a n – if as a result of fraudulent or reckless trading by
company – may also be held liable by 3 r d parties
 First 2 contraventions = unconditional order for lifetime

 other contraventions = may be made subject to conditions court considers

appropriate & is for 7 years or court can determine longer perid
 C A – court may make order placing director under probation if director:
 was present at meeting & failed to vote against resolution despite inability
of company to satisfy solvency & liquidity test
 acted in manner materially inconsistent with duties of director
 acted in or supported decision of company to act in manner that was oppressive or
unfairly prejudicial or
 within any period of 10 years after 1 May 2011 was director of more than one
company / close corporation & during that time 2 or more of those companies or
close corporations had each failed to pay all their creditors or meet all their
obligations
 Effect of probation order
 may not serve as director
 may be subject to conditions court considers appropriate
 usually for 5 years
 Court can order person ordered delinquent / placed
under probation to
 undertake designate program of remedial education
 carry out designated program of community service
 pay compensation to any person adversely affected by director’s conduct but only to
extent that s uch victim does not otherwise have legal basis to claim compensation
 in case of order of probation that person be supervised by mentor in any future
participation as director while probation order remains in force or that person
be limited to serving as director of private company of which that person is sole
shareholder
 Person declared delinquent may apply after 3 years to court to suspend
order of delinquency & substitute it with order of probation with or without
probation
 Persona declared delinquent / probation - after 2 years apply to have it
set aside
 Must have satisfied conditions that were attached to original order
 court may grant order if person concerned has demonstrated satisfactory
progress towards rehabilitation & there is prospect that person would be
able to serve successfully as director of company in future
The remuneration of directors has been a highly debated topic in the Corporate
Governance arena.
 International guidelines
 focus on disclosure & transparency of director remuneration
 shareholder approval of directors’ equity remuneration is required in most
instances
 International Corporate Governance Netork
 recommends remuneration structures of senior management should be
aligned with interests of company & its shareholders
 equity-linked proportion of remuneration of key executives should always be
subject to shareholder approval
 pay for non-executive directors should not be done in way that risks
their independence from management or controlling sharholders
 companies must make substantive disclosure of all significant aspects
of remuneration policies & structures to key executives
 Organisation for Economic Co-operation and Development Principles of
Corporate Governance
 recommends board develops and discloses remuneration policy that
aligns key executive and board remuneration with longer term interests
of company & its shareholders
 such policy should specify the relationship between remuneration &
performance and should include measurable standards that
emphasise longer-term interests of company
 remuneration committees to have at least majority of non-executive
directors
 remuneration policy to include ‘clawback’ rules which determines that
bonuses could be recovered if fi nancial statements have to be restated
in future due to misrepresentation of fi nancial results of company
 remuneration policy of board & key executives should also be
properly disclosed on individual basis
 equity component of compensation schemes for board members &
senior employees should be subject to shareholder approval
 O ne of the aim s of King IV™ is to en h an ce the ac c ountability of
governing bodies as it deals with remuneration.

 In King IV, provision is also made for the creation of a committee dedicated to
the oversight of remuneration. (recommended practice)

 INTERNATIONAL TREND ON D I S C LO S U R E
 Debates revolves around link between pay and performance.

 INTERNATIONAL C G NETWORK
 The equity linked portion of the remuneration of key execs should always be
subject to S H approval.
 see example on page 59 of textbook – BP shareholders revolt against C E O pay
package

 S A corporate framework follows international trend of increasing focus on

disclosure of director remuneration
 also requires shareholder approval of director remuneration
 The Companies Act provides that a company may pay its directors
remuneration for their services, except to the extent that the Memorandum of
Incorporation of a company provides otherwise.
 This is subject to the provisions whereby remuneration may be paid only in
accordance with a special resolution approved by the shareholders within
the previous two years.
 Shareholders decide whether director entitled to compensation not board of
directors
 Remuneration received must be disclosed in A F S
 KING IV
J S E LISTING REQUIREME NT

The J S E listing requirements require Principle 14 governing bodies

full disclosure of the remuneration “should ensure that the
policy and implementation report in organisation remunerates fairly,
the annual report, in line with the responsibly and transparently
‘apply and explain’ regime. so as to promote the achievement
Details to be included: fees, basic of strategic objectives and positive
salary, bonuses & other outcomes in the short, medium
performance related payments, and long term
expense allowances, any other
material benefi ts, pension
contributions & commission, gain or
profi t-sharing arrangements
Any questions?