Who is qualified to be called a Director?

Who is qualified to be called a Director?

The term “director” has been defined in law. The Companies Act, 2008 (the Act) defines a director 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”.

“A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person is a de facto director of a company, it is necessary to plead and prove that he undertook the functions in relation to the company which could properly be discharged only by a director

In terms of section 66 of the Act, the business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company.

The powers of the board may be limited by specific provisions of the Act or by the company’s Memorandum of Incorporation. It is interesting to note that the definition of a director includes not only those individuals that are appointed to the board of the company (as well as alternate directors) but also “any person occupying the position of director or alternate director, by whatever name designated”. The effect of this wide definition is that the provisions will apply not only to members of the board but also to “de facto” directors.

The Act requires private companies and personal liability companies to appoint at least one director, whereas public companies, state-owned companies, and non-profit companies are required to appoint at least three directors. This number would be in addition to the number of directors required where an audit committee and/or social and ethics committee is required.

It should be noted that this is the minimum requirement. Given the complexities of running a corporate, it may be necessary to appoint more directors. Furthermore, where companies apply the governance principles set out in the King Report on Governance for South Africa (King III), it may be necessary to have more than the minimum number of directors.

In general terms, the directors of a company are those individuals empowered by the Memorandum of Incorporation of that company to determine its strategic direction. As a consequence of the nature of a company, being a lifeless corporate entity, human intervention is required to direct its actions and therefore determine its identity.

The directors are entrusted by the shareholders of the company with the ultimate responsibility for the functioning of the company. While some of the day-to-day runnings of the company is generally delegated to some level of management, the responsibility for the acts committed in the name of the company rests with the directors.

Prescribed officers

Prescribed officers include every person, by whatever title the office is designated, that:

• exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company; or
• regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.

Most of the provisions in the Act pertaining to directors apply equally to prescribed officers. The Act determines that prescribed officers are required to perform their functions and exercise their duties to the standard of conduct as it applies to directors. Prescribed officers will be subject to the same liability provisions as it applies to directors. As is the case with directors, the remuneration paid to prescribed officers must be disclosed in the annual financial statements. The following provisions, inter alia applicable to directors, will also apply to prescribed officers:

• Section 69 – Ineligibility and disqualification of persons to be directors or prescribed officers;
• Section 75 – Directors’ personal financial interest;
• Section 76 – Standards of directors’ conduct;
• Section 77 – Liability of directors and prescribed officers;
• Section 78 – Indemnification and directors’ insurance; and
• Section 30(4) and 30(5) – Disclosure of remuneration.

A person will be a prescribed officer regardless of any title or office they are designated.

Although it is not a legislative requirement, it is recommended that the board records the names of all those individuals who are regarded as prescribed officers. The list of names will be necessary, among other requirements, when the company has to disclose the remuneration paid to or receivable by its prescribed officers in the annual financial statements.

Note that regardless of whether a company has officially identified a particular individual as a prescribed officer or not, that person may nevertheless be classified as a prescribed officer to the extent that the person’s role in the company meets the definition.

The different types of directors

In law, there is no real distinction between the different categories of directors. Thus, for purposes of the Act, all directors are required to comply with the relevant provisions and meet the required standard of conduct when performing their functions and duties.

It is an established practice, however, to classify directors according to their different roles on the board. King III has provided definitions for each type of director.

The classification of directors becomes particularly important when determining the appropriate membership of specialist board committees, and when making disclosures of the directors’ remuneration in the company’s annual report.

Executive director

Involvement in the day-to-day management of the company or being a full-time salaried employee of the company (or its subsidiary) or both, defines the director as an executive. An executive director, through his or her privileged position, has an intimate knowledge of the workings of the company. There can, therefore, be an imbalance in the amount and quality of information regarding the company’s affairs possessed by the executive and non-executive directors.

Executive directors carry an added responsibility. They are entrusted with ensuring that the information laid before the board by management is an accurate reflection of their understanding of the affairs of the company.

King III highlights the fact that executive directors need to strike a balance between their management of the company, and their fiduciary duties and concomitant independent state of mind required when serving on the board. The executive director needs to ask himself “Is this right for the company?”, and not “Is this right for the management of the company?”

Non-executive director

The non-executive director plays an important role in providing objective judgment independent of management on issues facing the company.

Not being involved in the management of the company defines the director as non-executive. Non-executive directors are independent of management on all issues including strategy, performance, sustainability, resources, transformation, diversity, and employment equity, standards of conduct, and evaluation of performance.

The non-executive directors should meet from time to time without the executive directors to consider the performance and actions of executive management.

An individual in the full-time employment of the holding company is also considered a non-executive director of a subsidiary company unless the individual, by conduct or executive authority, is involved in the day-to-day management of the subsidiary.

Independent director

An independent director is defined in detail in King III. In essence, an independent director is a non-executive director who:

• is not a representative of a shareholder who has the ability to control or significantly influence management or the board
• does not have a direct or indirect interest in the company (including any parent or subsidiary in a consolidated group with the company) which exceeds 5% of the group’s total number of shares in issue
• does not have a direct or indirect interest in the company which is less than 5% of the group’s total number of shares in issue, but is material to his or her personal wealth
• has not been employed by the company or

the group of which it currently forms part in any executive capacity, or appointed as the designated auditor or partner in the group’s external audit firm, or senior legal adviser for the preceding three financial years

• is not a member of the immediate family of an individual who is, or has during the preceding three financial years, been employed by the company or the group in an executive capacity
• is not a professional adviser to the company or the group, other than as a director
• is free from any business or other relationship (contractual or statutory) which could be seen by an objective outsider to interfere materially with the individual’s capacity to act in an independent manner, such as being a director of a material customer of or supplier to the company, or
• Does not receive remuneration contingent upon the performance of the company. King III suggests that it may be useful to appoint a lead independent director who, as a result of his or her senior status, has the authority to facilitate any issues that may arise between executive and non-executive directors of the board. Such a function is noted as being especially relevant where the chairperson is an executive director.

Appointment of a director

Shareholders are ultimately responsible for the composition of the board and it is in their own interests to ensure that the board is properly constituted from the viewpoint of skill and representativity.

Certainly one of the most important responsibilities of shareholders is the appointment of directors. While the Act and the company’s Memorandum of Incorporation may prescribe the required qualifications and disqualifications for appointment as a director, it is vitally important that the existing directors assess the qualitative characteristics necessary in an individual to effectively perform their functions and integrate with the culture and style of the organization.

From a legal perspective, it is important to ensure that the required procedures of the appointment as set out in the Act and the company’s Memorandum of Incorporation are carried out correctly. This may avoid any unwanted ramifications in the future.

In practice, companies may encounter difficulties in identifying suitable individuals to approach as potential directors. The directors of small companies are often hampered by the fact that they do not possess the extensive network of contacts that the directors of larger companies have.

In such instances, it is often best to enquire of the company’s auditors or other professional advisors or to contact a professional organization such as the Institute of Directors to identify suitable individuals. Further, companies could make use of executive search agencies to identify suitable individuals for consideration.

Who qualifies as a director?

With a few specific exceptions, anyone can be appointed as a director of a company. Legal qualities required to be a director The Act is the primary determinant of who may or may not be appointed to be a director. A company’s Memorandum of Incorporation may provide additional grounds for ineligibility or disqualification, or minimum qualifications to be met by directors.

Section 69 of the Act in essence provides that any 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

Memorandum of Incorporation. Also, a person is disqualified from being a director, if the person:

• has been prohibited to be a director by the court
• has been declared by the court to be delinquent in terms of this Act or the Close Corporations Act
• is an unrehabilitated insolvent
• is prohibited in terms of any public regulation to be a director of the company
• 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 offense under the Companies Act, the Insolvency Act, the Close Corporations Act, the Competition Act, the Financial Intelligence Centre Act, the Securities Services Act, or the Prevention and Combating of Corruption Activities Act.

It is interesting to note that the Act provides the courts with wide discretion to either extend 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 above.

The Act determines that the appointment of an ineligible or disqualified person as a director is null and void.

Register of Directors

The Act requires the Commission to maintain a public register of persons who are disqualified from serving as a director, or who are subject to an order of probation as a director, in terms of an order of a court.

2.2 The legal mechanics of appointment Directors are either appointed or elected. The Act provides that the company’s Memorandum of Incorporation may provide for:

• the direct appointment and removal of directors by any person who is named in, or determined in terms of, the Memorandum of Incorporation (e.g. shareholder representative)
• ex officio directors (e.g. the CEO), and
• the appointment of alternate directors.

The Act makes it clear that, in the case of a profit company other than a state-owned company, the Memorandum of Incorporation must provide for the election by shareholders of at least 50% of the directors, and 50% of any alternate directors.

The first directors of the company

The Act determines that each incorporator of a company will also be the first director of that company. This directorship will be temporary and will continue until a sufficient number of directors have been first appointed or first elected in terms of the requirements of the Act.

The first appointment of directors should be done in terms of the provisions of the company’s Memorandum of Incorporation (e.g. the Memorandum of Incorporation may permit the majority shareholder to appoint a certain number of directors). The first election of directors should be done in accordance with the provisions of section 68.