It is important to understand which body ultimately governs a private company, so that the correct procedures are followed by the respective bodies,in order to ensure the legitimacy of actions and decisions taken.
Where an executive committee comprising the various heads of the departments within the company is appointed, there may be a tendency towards regarding that committee as the ultimate governing body of the company. This model may result in the hasty appointment of a board of directors and the (at times, last-minute) convening of board meetings aimed at fulfilling legal requirements, in an almost “tick-box” fashion.
I will demonstrate below that this model must be avoided, and that, to ensure the validity and enforceability of a company’s actions, care should be taken to ensure that it adopts and lives by the proper hierarchy of bodies to govern its operations.
Key Sources of Corporate Governance
Regardless of the size, age or profitability of a private company, it is important to be aware of – and adhere to – the applicable rules and regulations. The key sources of these include –
- the Companies Act (the “Act”) – the Act contains the basic/default rules and regulations that all companies need to follow. Different rules apply depending on whether the company is public or private and the size and turnover of the company. In addition, it outlines the roles and responsibilities of the directors and officers of the company;
- a company’s Memorandum of Incorporation (“MOI”) – the MOI further defines the object and nature of the company, may alter certain default provisions contained in the Act (to the extent that those provisions are said to be alterable in the Act) and sets out more requirements in terms of shareholders and related meetings and approval requirements; as well as directors and related meetings; and
- the company’s shareholders agreement – where the company has a shareholders agreement, this agreement is not in the public domain and regulates certain additional aspects regarding the relationship between the shareholders of the company, to the extent permissible.
All of the above need to be read together to identify the rules and regulations that apply to each company and its board of directors and committees.
The King Report on Corporate Governance (“King”) is a booklet of guidelines for the governance structures and operation of companies in South Africa. It is issued by the King Committee on Corporate Governance. Four reports have been issued: King I in 1994; King II in 2002; King III in 2009 and King IV in 2016. Although not a binding source for private companies, the King Report on Corporate Governance is regarded as a helpful source of guidance on good corporate governance.
The Board of Directors
Under South African law the company’s board of directors is the ultimate governing body in any company. The Act provides that the business and affairs of a company must be managed by or under the direction of its board of directors, which has the authority to exercise all of the powers and perform all of the functions of the company, except to the extent that the Act or the company’s MOI provide otherwise. To this end –
- in certain instances the Act restricts directors from taking certain decisions without shareholder approval; and
- the MOI of a company can also include certain restrictions on directors.
The Executive Committee
The board of a company has many roles and responsibilities and for this reason the Act entitles directors/companies to appoint board committees and to delegate the authority of the board (in whole or in part) to these committees. Of these committees, some boards appoint executive committees.
An executive committee acts as a steering committee, prioritising essential operational aspects of the company. This helps to alleviate the load placed on boards and allows for the smooth and efficient operation of the company. A committee may include persons who are not directors (if not restricted in the MOI), but only directors have a vote on the committee.
The functions of the executive committee do not entirely discharge the directors from their duties, and the executive committee does not replace the board of directors. The board of directors still has to have oversight over the executive committee and bears the ultimate responsibility in relation to the company’s operation. It is therefore important that a company’s board of directors approves the delegation of the prescribed powers and functions held by the executive committee (and any other committees of the board). King recommends that the delegation of powers to a committee be made official, in order for the members to have formal terms of reference to determine the scope of their powers, and the responsibilities they bear.
If an executive committee heads up the operations of your company, you may want to look into whether it has been correctly established by the board of directors and functions, in all respects, as a subsidiary body to the board.
Shaylyn has an LLB (cum laude) from Wits and was admitted as an attorney in 2008 after having completed her articles at Werksmans where she rose to the level of senior associate. After joining Bell Dewar (now Fasken) she took up an in-house position at Transunion where she rose to the level of general counsel. Shaylyn joined Caveat in 2018 specialising in corporate and commercial work.