Guiding boards. Growing business.

Directors, Pay Attention: Direct Well, or Else!

A recent finding against a group of directors in a South African legal firm is a very good reminder of the scope and extent of the role and responsibility of directors in governing companies.

The Supreme Court of Appeal (SCA) found that all implicated directors held full responsibility for the financial misdeeds. despite claims of ignorance.

In short, the case was about financial misappropriation by a legal firm in cases of personal injury. The defence that the bulk of the directors presented was that they were not directly involved in the financial dealings in the firm. This defence was rebutted by the court which stated that “To plead ignorance of financial matters when faced with allegations of misappropriation does not absolve a director. Every director has a fiduciary duty towards the company”.

This case is a timely reminder for all directors, whether executive or non-executive, that:

  • All directors are equal in the eyes of the law – there is no distinction based on actual involvement in the day-to-day affairs of the business, or not.
  • The relationship between each and every director and the company is that of a fiduciary – they are required to act in the best interests of the company at all times. The different roles they may play as manager in the business, or shareholder of the business cannot override this responsibility.
  • The law assumes that directors know what they are doing when they sit in the director’s seat – pleading ignorance about the functions and impact of the business is no defence.

What are some things that directors can do to ensure they direct well?

  • Get training on the roles and responsibilities of being a director – and ensure that this training goes well beyond an academic approach and addresses the practical questions of how to apply this knowledge in the boardroom.
  • Ensure that the company runs an effective board process that ensures that the board engages well to govern the company effectively. This will include getting the right information at the right time to make decisions, and holding others accountable for the decisions made.
  • Structure the board well to ensure the right balance of competency, accountability and engagement. More intentional thinking when it comes to proper board composition is essential in today’s challenging world.
  • Regularly and effectively evaluate the performance and effectiveness of the board and its individual members.

When action is taken against directors, we all need to sit up and take notice, re-examine our own competency as a director, and take the right actions to improve. If we do not, we could be the next front page news!