The Liability of Non- Executive Directors in light of the New Companies Act

It has become an established principle of good corporate governance, that a substantial portion of a company’s board should be composed of non-executive directors. Indeed, the King III Report on Corporate Governance went as far as to recommend that the majority of the board should be independent non-executive directors, and that the only executive directors should be the CEO and the finance director.

The establishment of this principle has made many would be non-executive directors excited at the prospect of obtaining lucrative, well paying, and undemanding positions on the boards of companies. However, many of these would be directors will would be wise to pay attention to the new governance provisions of the new Companies Act, no 71 of 2008. The new act does not distinguish between executive and non-executive directors when attributing responsibility and liability for the losses of a company.

The following acts, amongst others, will lead to any director(including non – executive directors) being held liable losses incurred due to:

1.A breach of that director’s fiduciary duty.
(At least in this respect a non-executive director has a lesser duty than an executive director. The content and scope of fiduciary duty is relevant to the circumstances of the fiduciary relationship)
2.Failure to exercise the degree of care skill and experience expected of someone in their position and with their knowledge.
(Non-executive directors are often chosen because they have specialized knowledges such as experience in a industry and legal or accounting knowledge. A failure to communicate any potential future problems that fall within your skill set could lead to liability)
3.Signing or consenting to false or misleading financial statements
(Non-executive directors must be prepared to spend time ensuring that financial statements are valid. A failure to properly investigate any irregularities could lead to liability)
4.Failing to resist reckless trading
(This is an onerous duty. The point of a non-executive director is to prevent abuse by that company’s management. A non-executive director is expected to be an active supporter of prudent management, who takes action to prevent mismanagement.)
5.Approving a resolution for an unlawful dividend or allotment of shares.
(It is not enough to have technical knowledge or experience in the industry in which the company trades. A non-executive director must have basic accounting knowledge and be familiar with the company capitalisation laws.)