Office bearers, beware, beware….!

Much has been written about the many, often onerous requirements of directors and people deemed to be directors of a company.  We have not heard the last word on this complex matter.

Prescribed officers:
Several articles have to date appeared on “prescribed officers” of companies, which is a new concept introduced by the Companies Act.  The Act is quite clear on this.  The common law duties of a director are equally applicable to prescribed officers, who are bound by the same standard of conduct as that of a director.
The Act provides in section 66(10) that the Minister may regulate that any specific function(s) within a company constitutes a prescribed office.  Regulation 38 defines a person as a prescribed officer if he:

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

The first element of the definition is usually objectively definable, but the second element poses some difficulty. Indeed, different schools of thought exist as to how it should be interpreted. Some believe that members of the executive committee of the group, and even the group financial manager who controls the funds flow of the subsidiary, could be defined as prescribed officers.  Others believe this is too wide an interpretation.

It is recommended that the board determines who the prescribed officers of the group are, if any, following consideration of the Act and Regulations and such other aspects as group structure, delegated authorities, management organogram and reporting lines.

Employees serving as office bearers:
Employees invited to serve as directors or corporate office bearers often at subsidiaries of a group of companies – must be aware that holding a particular office as defined in the Companies Act may potentially expose them to criminal and civil liability.

Of particular importance is that fact that an employee whose tasks and responsibilities meet the definition of, for instance a prescribed officer, could end up being considered as such irrespective of the actual title of his/her position.

Persons who are neither directors nor prescribed officers:
A further category of director is created in sections 75 to 78 namely a person who serves on a board committee, but is neither a director nor a prescribed officer.
The following aspects are covered under these sections, cutting to the core of the role, function and liabilities of being a director:

  • the declaration of personal financial interests in matters to be considered by the board;
  • standards of conduct as a director of a company;
  • liability of directors;
  • indemnification and directors’ insurance.

For instance, sections 66 to 74 of the Act dealing with directors, refer to the definition of a director per section 1, and no mention is made of the broader definition per sections 75 to 78.
Issues such as board and committee receipt of meeting notices and round-robin voting procedures do not make reference to persons deemed to be directors in accordance with the provisions of the above-mentioned sections. In fact, section 72 specifically provides that such persons do not have a vote on any matter to be decided by the committee.

Any employee who serves on a board committee on the basis of his/her expertise or specialist knowledge potentially has little upside and all the downside of such an office.

Representative directors:
It is fairly common practice for a senior employee of a holding company to serve on the board of a subsidiary. It is equally common to see director(s) nominated to the board of a company by significant shareholders.

The apparent objective with these appointments is to ensure that the nominated person represents the interests of the party who nominated him, on the board of the company. This creates a difficult, and often an impossible situation for such a representative director.

In the first place he must at all times act in the best interests of the company in accordance with the provisions of section 76, and secondly, may well be bound by confidentiality provisions not to disclose the content of deliberations at board meetings. Furthermore, if the representative director is also an employee of the holding company, he is not even allowed to disclose the outcome of board meetings to his superior, even if it potentially could cost him his job!

How are we to manage these potentially conflicting issues?  How does a group grow and develop its leaders of the future?

Again it is recommended that the board of the holding company formulates and documents a governance framework within which all parties, being the individual, the board of directors of each subsidiary and the group itself, can operate.