This article is the last in our three-part series on company directors. As we’ve discussed in the previous articles, directors have several duties, namely:
- to act in good faith;
- to avoid conflicts of interests;
- to act for a proper purpose; and
- to act in the best interests of the company.
In this article we will discuss how each of these duties are qualified by the fact that directors, in the course of carrying out their duties, can only be expected to act with similar care, skill and diligence that would reasonably be expected of a person carrying out the same functions in relation to the company as those carried out by that director, having a similar level of general knowledge, skill and experience of that director.
The starting point is that all directors are expected to carry out their duties honestly, in good faith and for a proper purpose, without exception. However, the yardstick used to assess whether each duty was carried out effectively will differ on a case by case basis. This assessment will be dependent on the general knowledge, skill and experience of that particular director. This means that your actions as a director will effectively be tested in light of your ability and your knowledge of the company and how it operates.
On that basis, it is accepted that not all directors have the same skills and experience, and not all directors have the same understanding of how companies function. Naturally, this raises the question as to what can be expected of different directors (who have different backgrounds and experience) when it comes to determining whether they have acted appropriately in any given circumstance.
In the case Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) Ltd 1980 (4) SA 156 (W), the court clarified that the test is applied differently to different directors, stating that the “extent of a director’s duty of care and skill” depends on the “nature of the company’s business and the particular role played by the director”. There is a different expectation between the so-called full-time or executive director, who participates in the day to day management of the company’s affairs, and the “non-executive” director who is not an employee.
In other words, a different expectation will be applied to each of these categories of directors. A non-executive director is not expected to give continuous attention to the affairs of the company and has an intermittent (even part time) relationship with the company. Therefore they would not be expected to have the same level of knowledge as the executive director, who is involved in the day to day operations of the company, and so more is expected of them.
Courts have acknowledged that directors do not have to have special business acumen in order to be a director, highlighting the subjective nature of the test. In carrying out a director’s duties, directors may assume that employees, professional advisors, and company officials acting under the board’s instruction will perform their duties honestly unless they have proper reasons for querying this.
If a director takes a decision which, in hindsight, turns out to have been a poor decision, directors can rely on the “business judgement rule” which provides directors with protection from liability to the company incurred as a result of a poor decision, provided that the director:
- took reasonably diligent steps to become informed about the matter;
- had no personal financial interest in the subject matter of the decision (and had no basis to know that any person/entity related to the company had a personal financial interest in the company); and
- had a rational basis for believing that the decision was in the best interests of the company at the time.
If there is a dispute over whether the decision taken by the director was in the best interests of the company, the courts will apply the “business judgement rule” by considering what the director believed at the time in light of their general knowledge, skills and experience.
With this in mind, directors will be protected by the law if, relying on their skills and experience, they approach company related decisions by taking intentional steps to become properly informed about a matter, remain aware of and avoid any conflicts of interest, and ensure that there is a rational basis for believing that their decisions are in the best interest of the company at that time.