Part 2: Appointment of directors and functions of the board of directors
The Companies Act, 71 of 2008 (as amended) (“the Companies Act”) provides that the business and affairs of a company must be managed by or under the direction of its board of directors (“the Board”). If you are considering incorporating a company or have already done so, it is important to understand the process involved for the appointment of directors and the roles and responsibilities of the Board. It is also essential to understand the distinction between the roles of the shareholders of the company, versus that of the Board.
Appointing / electing directors
What is a director?
A director is defined as: “A member of the board of a company …, or an alternate director of a company and includes any person occupying the position of director or alternate director, by whatever name designated”. In law, there is no real distinction between the different categories of directors. It is an established practice, however, to classify directors according to their different roles on the Board, for example executive directors, non-executive directors and independent directors.
How many directors must be appointed?
The Board of a private or personal liability company must comprise of at least one director. The Board of a public or non-profit company must comprise of at least three directors. These thresholds are in addition to the minimum number of directors the relevant company must have to satisfy any other requirements of the Companies Act, for example, to appoint an audit committee. That said, the company’s Memorandum of Incorporation (“MOI”) may specify a higher minimum number of directors.
Who qualifies for appointment / election as a director?
In principle, anyone can be appointed or elected as a director of a company, however the Companies Act contains a number of grounds which disqualify a person from being appointed. A company’s MOI may also provide additional grounds for ineligibility or disqualification, and/or minimum qualifications to be met in order for an individual to become a director of the company.
The Companies Act provides that a person is ineligible for appointment as director if that person is a juristic person, an unemancipated minor (or is under a similar legal disability), or does not satisfy the qualifications as per the company’s MOI. Other grounds for disqualification include: if the person has been prohibited to be a director by a court, is an unrehabilitated insolvent, has been removed from an office of trust on the grounds of misconduct involving dishonesty, or has been convicted and imprisoned without the option of a fine, or fined more than the prescribed amount, for theft, fraud, forgery, perjury or an offence under other specified legislation.
How are the directors appointed / elected?
Each incorporator of a company will also be a first director of that company. Such directorship will be temporary and will continue until a sufficient number of directors have been appointed or elected in terms of the requirements of the Companies Act and the company’s MOI.
While it is usually the directors themselves who identify and nominate a new director to be elected, it is the responsibility of the shareholders to evaluate and legally appoint / elect each new director. In terms of the Companies Act, each director must be voted on by a separate resolution at a general meeting of the company (or by way of written “round robin” resolution). Once elected, the person will only become a director once his or her written consent to serve as a director has been delivered to the company.
In relation to a profit company, other than a state-owned company, the company’s MOI must provide for the election by shareholders of at least 50% of the directors, and 50% of any alternate directors. In addition, the company’s MOI may –
- authorise one or more named persons to appoint and remove one or more directors;
- provide for one or more persons to be ex officio directors of the company (for example, the CEO); and
- provide for the appointment or election of one or more persons as alternate directors of the company.
What are the functions and responsibilities of the Board?
The Board is ultimately entrusted with the overall operation of the company. Although the day-to-day running of the company is often delegated to the company’s management, the responsibility for the acts committed in the name of the company rests with the Board. The Board acts as the custodian of corporate governance and should therefore manage the company’s shareholders, other stakeholders of the company as well as the company’s management, in accordance with ethical corporate governance principles. Importantly, the Board is not an agent of the shareholders, but each director does owe the shareholders a fiduciary duty.
The Board has the authority to exercise all of the powers and perform all of the functions of the company, except to the extent that the Companies Act or the company’s MOI provides otherwise. The functions and responsibilities of the Board include, among others, the following –
- to develop and approve the strategy of the company;
- appreciate, govern and negate risk;
- evaluate and monitor the performance of the company;
- provide effective and ethical leadership;
- ensure that the company is aware of, and complying with, all laws, rules and regulations; and
- ensure that the company’s reporting is sound.
In exercising its functions, the Board is required to act honestly, in good faith and in a manner the directors reasonably believe to be in the best interests of, and for the benefit of, the company.
How does the role of the Board differ from that of the shareholders?
Whereas the role of the Board is to ensure the proper management and functioning of the company, a company’s shareholders are financially invested in the company through their ownership of the company’s shares, and typically are not directly involved in the running of the company. As such, except for certain fundamental transactions, or changes and decisions that expressly require the approval of shareholders, they normally do not participate directly in company decision-making.
Although shareholders don’t play an active role in the day-to-day decision making of the company, they do have certain rights and duties as defined in the Companies Act and the company’s MOI. Generally, shareholders have the right to –
- vote on the appointment of directors and other company related matters;
- inspect the company’s books and records;
- attend the company’s annual general meeting;
- approve certain types of transactions including the sale of the company’s assets;
- receive a pro rata portion of any dividends declared by the company; and
- share in the proceeds if the company is liquidated.
It is important to note that shareholders do not owe the company any fiduciary duties. Distinct from the Board’s responsibilities, shareholders are entitled to act in their own interest. This is a particularly important distinction, especially in the context of shareholders who also serve as directors of a company.