Companies urged to manage their corporate governance risks

By: Johannes du Plessis, Legal Advisor at RBS

Corporate governance is rapidly becoming the widest business risk in South Africa, as the number of large corporates facing accusations of involvement in corruption and unethical behaviour continues to grow.

This according to Johannes du Plessis, Legal Advisor at RBS (Risk Benefit Solutions Pty Ltd), an authorised financial services provider, who says that it is vital for businesses to ensure that they protect themselves against damages as a result of poor governance decisions by their executive members.

“Every year there are companies that go into financial distress, business rescue, or even insolvency due to lapses in governance, resulting in major losses to stakeholders. In 2016 alone, two high profile directors were sentenced to 20 and three years respectively for committing fraud against their companies,” he says.

According to PWC’s 2016 Global Economic Crime Survey, South African companies’ risk of economic crimes between 2014 and 2016, was around 69%, with asset misappropriation as the main type of crime experienced. “As a result of the current recession, South African companies’ risk of economic crimes might increase even further in future,” Du Plessis says.

“In terms of the Companies Act, directors, prescribed officers and committee members have the fiduciary duty to act with the required degree of care, skill and diligence. Executive members who do not act with the required degree of care, skill and diligence, and cause damage to their businesses, can be held civilly as well as criminally liable for the damages to the company,” he says.

Du Plessis adds that directors, prescribed officers and committee members further have a duty to act in good faith and in the interests of the company, duty to avoid a conflict between their own interests and that of the company, duty not to use their position or information in their possession for personal gain, and the duty to use their position and information in their possession only for the benefit of the company. A director who intentionally does not disclose such a conflict to the board of the company can be held to be both civilly and criminally liable for the damages to the company.

“A director, prescribed officer or committee member’s liability is not limited to the company. If they carry on business recklessly, with gross negligence, with the intention to defraud any person or for any fraudulent purpose, they can also be held liable to any other person, such as shareholders and creditors, for their damages” he adds.

According to Du Plessis, Directors and Officers (D&O) insurance has become exceedingly important in South Africa, since the executive members of organisations are often held personally liable for lapses in good governance that cause significant damages or losses to stakeholders.

“D&O policies cover the executive members’ liability for negligent conduct, their legal costs when defending allegations made by stakeholders regarding wilful misconduct or wilful breach of trust. They also need a fiduciary liability insurance policy, which covers liability in the case that they breach their fiduciary duties. These policies will however not cover any fraudulent, personal gain or wilful misconduct,” Du Plessis says.

He notes that a company also needs to insulate itself from liability where governance is concerned. “To protect itself against commercial crimes committed by its employees, a business needs to have a commercial crime policy. This will cover the company for dishonest, fraudulent or criminal acts by any employee that results losses for the company. The business would then also need a professional indemnity policy to cover its liability for the negligent acts, errors or omissions of employees in the performance of professional services to external clients.”

Finally, Du Plessis advises that the stakeholders who contract, invest or conduct business with companies should confirm that the company, directors, board committee members, officers, managers as well as employees, are all insured properly.

“It is therefore prudent for a business to ensure that it creates and maintains proper and effective corporate governance to manage its risks effectively, and to ensure that the business is properly covered for its liabilities,” Du Plessis concludes.