You Need Independent Directors, not Herd Mentality

“Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently.” (Steve Jobs when he was reinstated as CEO of Apple)

The Companies Act tasks directors to apprise themselves of company activities and make up their own minds as to how decisions should be taken. Strong governance structures should also exist in companies. This spirit of independence and good governance should infuse leadership so that the best interests of the company are safeguarded.

Yet when we look around today, we see State Owned Companies floundering and some multinational heavyweights like KPMG, SAP, McKinsey and Bell Pottinger in serious trouble.

“Surely” you ask “why didn’t some of their directors stop these disasters?”

The herd mentality trap

It is human nature to adopt a herd mentality particularly when there is a forceful and strong CEO. That is precisely why the framers of the Companies Act required independent leadership and good governance.

Good governance and leadership consists of demonstrating accountability, honesty, transparency and respect for all staff and stakeholders. You don’t need committees and red tape if your business is a small one – your leadership should demonstrate these characteristics.

It also pays to be a good listener as this trait curtails “leadership cults”. Encourage your managers and staff to challenge you.

Short term thinking often gets a business into trouble. Listen carefully to your independent thinkers.

Directors and Shareholders: There’s Hope If You Forget Companies Act Compliance Requirements

The “new” Companies Act is pitted with clauses requiring that special resolutions be passed. There are also instances where as directors you are required to take certain actions such as recusing yourself if there is a conflict of interest.

It is important to note that transactions can be set aside if the necessary steps are not taken. Should this happen, a costly and time-consuming exercise would follow.

Can “unanimous consent” rectify non-compliance?

Both our “old” Companies Act and English company law allowed the concept of “unanimous consent” to override statutory non-compliance with certain requirements, such as the requirement for a special resolution to be passed authorising the sale of all (or the greater part) of a company’s assets. Simply put, if all of the shareholders were aware of the implications of a transaction and consented to the transaction, then the “unanimous consent” principle may be available to hold up the transaction despite the required statutory steps not having been taken.

In South Africa following the introduction of the “new” Companies Act in 2011, there was uncertainty whether “unanimous consent” would be accepted here until the Supreme Court of Appeal (SCA) recently pronounced on the subject.

What the SCA said

A company sold the major part of its assets and the directors had a conflict of interest in the sale. Part of the case revolved around setting aside the transaction as no special resolution was passed for the sale of the assets and the directors had not disclosed their interests. The company was owned by a single shareholder – a trust effectively controlled by one person.

The SCA said that the reason for requiring that a special resolution be passed was to “ensure that the interests and views of all shareholders are taken into account”. When reviewing the circumstances of this case the SCA found that the person who controlled the sole shareholder was party to the transaction and thus no special resolution was needed as the shareholder was clearly aware of and had effectively approved the transaction.

It used a similar line of reasoning in resolving the conflict of interest question.

The court specifically accepted the principle of unanimous consent, stating “that principle, long recognised in English company law, from which our courts have received much guidance, was accepted as part of our law relating to companies, under both the 1926 and the 1973 Companies Acts. I can see nothing in the current Act to suggest that the principle no longer finds application”.

The implications are that if a business is owner-managed or the board of directors are a tightly knit group then – even if in error you don’t tie up all the Company law requirements – the “unanimous consent” principle might be available to you.

Be sure however to seek professional advice – every situation will be different.

Directors’ Meeting Minutes: Why Are They So Important?

The Companies Act (the Act) gives directors the power to run and manage the company’s business. In return it places responsibilities and personal liabilities on directors who do not fulfil their fiduciary duties.

What is required of directors’ meeting minutes? 

Meetings of directors are to be kept and must contain at least:

  • All resolutions passed at meetings (these need to be sequentially numbered and dated), and
  • Any declarations of conflicts of interest.

As meetings of directors decide on the strategic direction of the company, the recording of these meetings is critical in reflecting what decisions are taken and how they are arrived at.

The Act also requires that directors understand the issues facing the company and take time to formulate their own, independent views, so they can actively contribute at directors meetings. The minutes should also reflect this.

Adequate control is to be exercised over minutes to ensure they are a fair reflection of the meeting. They should be circulated amongst the directors to prevent any omissions or misleading statements. As illustrated by recent revelations on State Owned Companies, this is a vital point to prevent malfeasance and ensure directors act only in the best interests of the company.

The golden rules of good minutes

Like a good newspaper article, minutes should follow the 5 Ws:

  • Who?  The names of the attendees and who sent apologies;
  • What?  What actually happened at the meeting, how the agenda was followed, the decisions that were made and significant events that had a bearing on these decisions. As someone said – it should not be a ball by ball commentary but must contain sufficient information to capture the essence of the meeting.
  • Where?  The minutes are kept by the company secretary or one of the directors and secured in a safe place.
  • When?  Minutes should be done timeously after meetings and circulated amongst the board whilst the meeting is fresh in the minds of the directors.
  • Why?  Directors’ minutes go to the heart of the business. They are the most important recordings of how and why decisions were taken. Take due care in recording them.

Finally, there needs to be a balance between confidentiality and transparency in terms of disclosure to staff and stakeholders. As minutes can be used by statutory bodies (such as SARS, the Competition Board etc), it is best to get a legal opinion as to what to record about contentious issues.