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FOREWORD
Fasset, as a public entity, is governed by the Public Finance Management Act and is also
committed to ensuring that the recommendations of the King Reports are adhered to. In
this regard a comprehensive set of policies have been designed and implemented in
accordance with the Fasset Constitution and in support of Fasset's Sector Skills Plan and
Business Plan. These policies contribute towards the effectiveness of corporate
governance strategies and are in accordance with the Public Finance Management Act
and King Reports.
Fasset has also undertaken to assist employers in its sector by developing guidelines on
corporate governance and advice on how the strategies relating to corporate governance
can be implemented. These guidelines have been published as a part of Fasset’s
commitment to promoting the highest standards of corporate governance in South Africa.
This guideline document not only embraces the King recommendations, but goes beyond
these principles in setting out the most important duties and responsibilities for all
directors, trustees, sole proprietors, members and partners.
Fasset believes that these guidelines will assist employers in the sector in performing
their duties and fulfilling their responsibilities. In addition to acting as a source of
reference to newly appointed directors, members or trustees a review of the guidelines
may identify new methods and ideas.
The guidelines have been prepared for Fasset, by our attorneys, Webber Wentzel Bowens.
Should you have any suggestions and or questions with regard to corporate governance,
please contact the corporate department at Webber Wentzel Bowens, the author of this
document.
Cheryl James
Fasset
Blackheath
November 2002
W
This publication has been prepared as a guideline and is not intended to be
exhaustive. While the utmost care has been taken in the preparation of the
publication, it should not be used or relied upon as a substitute for detailed advice or
as a basis for formulating a business decision.
The above notice serves as a warning to third parties that Webber Wentzel Bowens
claims to be the proprietor of the copyright subsisting in the literary work. In the
event of there being any infringement, it will impute knowledge on the infringing
party and assist in recovering damages.
TABLE OF CONTENTS
PART I.............................................................................................................................7
PART II............................................................................................................................8
3. Sole proprietorships.....................................................................................................9
4. Partnerships.................................................................................................................9
5. Close Corporations.....................................................................................................10
6. Trusts.........................................................................................................................11
7. Companies.................................................................................................................12
PART III.........................................................................................................................24
12. Corporations affected by the Code of Corporate Practices and Conduct ("the Code")
.......................................................................................................................................24
Appointment of directors................................................................................................27
Board meetings.............................................................................................................29
Board committees.........................................................................................................29
Risk management.........................................................................................................31
PART IV........................................................................................................................35
16. Conclusion................................................................................................................35
1. Fasset........................................................................................................................39
1
paragraph 23 on page 15
Many companies in the corporate arena today have a distinctive split between
control and ownership. The need for corporate governance becomes ever
increasing as directors are becoming more accountable to their shareholders and
stakeholders.
The primary sources of law and regulation relating to corporate governance and
director's duties comprise:
• statute, particularly the Companies Act, the JSE Listings Requirements of the
JSE and the Securities Regulation Code on Take-overs and Mergers. In
addition, there is special-purpose legislation such as the Banks Act, 1990, the
Long-term Insurance Act, 1998, the Short-term Insurance Act, 1998, the
Financial Markets Control Act, 1989, the Stock Exchanges Control Act, 1985,
the Unit Trusts Control Act, 1981 and the Public Finance Management Act,
1999;
• King II.
The first part of this publication will detail the common law and statutory duties
and responsibilities of directors, sole proprietors, partners, members of close
corporations and trustees whilst the second part of the publication will detail the
recommendations laid down in the King Reports on corporate governance. It is
our aim that this section will explain the principles of corporate governance in
the South African context and provide practical guidance to the people who are
responsible for ensuring good corporate governance in their enterprises.
PART II
2. Different types of enterprises
• sole proprietorships;
• partnerships;
• close corporations;
• business trusts.
In the paragraphs that follow, we will briefly explain the way in which each of
these enterprises operate and more importantly, we will outline the duties and
responsibilities of the people who control the specific enterprises.
3. Sole proprietorships
As sole proprietors are single owner businesses, the business is operated with
full personal risk. The sole proprietor’s estate is ultimately liable for all the
commitments of the business.
Due to the fact that sole proprietors run their own affairs and are not
accountable to shareholders, the principles of corporate governance applicable
to the manager/ owner relationship are generally not applicable to the sole
proprietor. In a later part of this report, we do however highlight the manner in
which these entities can apply certain corporate governance principles to the
conduct of their business.
4. Partnerships
Various rights and obligations in respect of partners arise from the partnership
agreement. There are further rights and obligations which arise as
consequences of a partnership. These include:
Unlike a company, the partners owe duties to one another whereas directors owe
duties to the company and its shareholders. In light of the absence of a
partnership’s independent legal personality and the relationship that partners
have with one another, corporate governance principles applicable to the
internal management of an organisation may serve only as guidelines for good
practice. In certain circumstances they will be neither applicable nor sufficiently
extensive. However, those principles outlined in paragraphs 14 and 15 below,
may be implemented.
5. Close Corporations
The introduction of the close corporation into our law in 1984 created a new form
of business for small businessmen. The close corporation is a juristic person
2
HS Cilliers, Ml Benade, JJ Henning, JJ du Plessis, Pat, JSA Fourie, L de Kocker: Entrepreneurial Law at page
10
distinct from its members. The close corporation enjoys succession and its
members have limited liability in respect of the corporation’s debts. The main
source of law and regulation with regard to close corporations, is in terms of the
Close Corporations Act, 1984.
Each member of the close corporation must act honestly and in good faith and
must exercise powers he or she has to manage or represent the corporation in
its interests and for its benefit. A member should not exceed his or her powers.
A member must further avoid a conflict between his or her interest and that of
the corporation and may not derive any personal economic benefit from the
corporation or anyone else, nor compete with its business activities.
6. Trusts
but does not include the case where the property of another is to be
administered by any person as executor, tutor or curator in terms of the
Administration of Deceased Estates Act.
A trust is not a legal person. The assets, liabilities, rights and duties of the trust
vest in the trustee. The primary source of law and regulation relating to a trust
and the trustees duties, are in terms of the trust deed and the Trust Property
Control Act.
A trustee must comply, inter alia, with the following general duties:
• he or she must fulfil his or her duties impartially and in good faith;
• in the performance of his or her duties and in the exercise of his or her
powers, the trustee must act with care, diligence and skill which can
reasonably be expected of a person who manages the affairs of another;3
• he or she must take control of the trust assets and keep these clearly
separate from his or her personal property;4
• the trustee must preserve the trust property and keep it free from
burdens such as liens;
• the trustee must maintain a proper account of trust funds and trust
business, retain documents relating to the administration of the trust 5 and
render account of his or her administration of the trust when the Master of
the High Court requests him to do so;6
7. Companies
Two types of limited liability companies are capable of being formed: public
companies (whose shares may, but are not obliged to, be listed on the JSE
3
Section 9(1) of the Trust Property Control Act 57 of 1988
4
Section 10 and 11 of the Trust Property Control Act 57 of 1988
5
Section 17 of the Trust Property Control Act 57 of 1988
6
Section 16 of the Trust Property Control Act 57 of 1988
Securities Exchange South Africa ("the JSE")) and private companies. Both are
created in terms of, and are governed by, the provisions of the Companies Act.
In the paragraphs that follow, we discuss in detail the duties and responsibilities
of directors in terms of the common law and the Companies Act, 1973.
General
The duties of directors are regulated by their contracts with the company,
statute, the memorandum and articles of association of the company and the
common law.
The duties that directors have, at common law can be summarised as follows:
• Directors are required to act both lawfully and honestly in their official
as well as personal capacities. Failure by a director to act lawfully will result
in him being held criminally liable and also to being disqualified to act as a
director either automatically or in terms of a court order.
• Directors are also expected to act with care, skill and diligence when
conducting the business of the company. Where a director fails to exercise
the necessary skill, care and diligence required and as a result, he or she
breaches the duty of care owed to a third party and the director may incur
personal liability for any loss suffered as a result of the breach. Liability in
this instance will be based either on delict, where a duty of care is owed to a
third party, or on breach of contract, if there is a contract between the
director and the company.
In addition to the common law duties and any other duties or restrictions which
may be imposed on directors in terms of statute or their contracts with the
company, the Companies Act imposes obligations on directors of companies.
The obligations imposed on directors in terms of the Companies Act, include:
Number of directors
Appointment of directors
• sign and lodge with the company, his or her consent to act as a
director, on a form CM27;
• a body corporate;
• any person who is the subject of any order under the Companies Act,
which disqualifies them from being a director;
• an unrehabilitated insolvent;
• any person who has at any time been convicted of theft, fraud, forgery
or uttering a forged document or any offence involving dishonesty or in
connection with the promotion, formation or management of a company
and has been sentenced therefor to imprisonment without the option of
a fine or to a fine exceeding R100;
Every company must keep in one of the official languages of the country, a
register of directors and officers of the company and secretaries which are
corporate bodies. The Companies Act prescribes the particulars of each of the
parties, that are to be entered into the register.
Loans to directors
• the company; or
Issue of shares
• Directors must ensure that the company does not commence business
before a certificate to commence business has been issued by the Registrar
of Companies. Failure to do so is a criminal offence.
Attendance registers
The directors of a company present at a directors' meeting must sign their
names under the date of the meeting in an attendance register, which must be
kept at the company's registered office, or at the office where it is made up.
Failure to do so is a criminal offence.
Minute books
• The directors are responsible for ensuring that minutes are kept of all
meetings of directors or managers.
Appointment of auditors
Accounting records
• Every company is to keep, in one of South Africa's official languages,
accounting records that are necessary to fairly represent the company's state
of affairs and business and to explain its transactions and financial position.
The records must include:
• records of all goods sold and purchased and (except in the case of
ordinary retail trade) records showing the identity of the buyers and the
sellers; and
Financial statements
• an auditor's report.
• The contents of the annual financial statements must be approved by
and are the responsibility of the directors.
There are many and varied potential liabilities, both in common law and in
statute, which could render a director to both criminal and civil liability. The
Companies Act prevents a company from validly exempting or indemnifying
directors of a company against negligence, default, breach of duty or breach of
trust. It is however possible for a company to take out insurance against such
liability. It is not clear whether such insurance will protect the company or the
directors themselves.
The first King report on corporate governance ("King I") was released on 29
November 1994. The purpose of King I was to promote the highest standards of
corporate governance in South Africa. The King Committee was formed at the
instance of the Institute of Directors.
The Code of Corporate Practices and Conduct in King II replaced the Code of
Good Corporate Practices and Conduct in King I, with effect from 1 March 2002.
• companies with securities listed in the JSE Securities Exchange, South Africa;
Although King II, including the Code, applies only to certain categories of
business called "affected enterprises", it is suggested that all companies should,
nevertheless, give due consideration to the application thereof.
• discipline;
• transparency;
• independence;
• accountability;
• responsibility;
• fairness; and
• social responsibility7.
7
King Report on Corporate Governance issued by the Institute of Directors at pages 11 and 12
13. Recommendations of King II
• The Companies Act requires every public company to have at least two
directors and every private company to have at least one director. The JSE
Listings Requirements provide for a minimum of four directors for a listed
company. There is no maximum limit on the number of directors. A
company's articles of association may provide for a minimum or maximum
number of directors and for a means of determining such number.
Appointment of directors
Board meetings
The board of directors should sit at least once a quarter. The frequency of
meetings should however be determined with reference to specific
circumstances within the company.
Board committees
• The board or its directors should determine a policy for the frequency,
purpose, conduct and duration of its meetings and those of the formally
established committees.
• There should be transparency and full disclosure from the board
committee to the board, except where the committee has been mandated
otherwise by the board.
• The Companies Act provides that the annual general meeting shall deal
with the matters assigned to it in the Companies Act and may deal with
matters provided for in the articles of association of the company, or matters
which may be dealt with by any general meeting of the company. The issues
usually addressed at an annual general meeting include, for example:
Risk management
• King II suggests that the board has the responsibility to ensure that the
company has implemented an effective ongoing process to identify risk, to
measure its potential impact against a broad set of assumptions and to
activate what is necessary to proactively manage these risks. It is,
furthermore, recommended that a board committee should be appointed to
assist the board in reviewing the risk management process and the risks
facing the company.
8
King Committee on Corporate Governance, issued by Institute of Directors at page 40
• that it is the director's responsibility to prepare the financial
statements that fairly represent the state of affairs of the company
as at the end of the financial year and the profit or loss and cash
flows for that period;
• King II recommends that every company should report, at least annually on the
nature and extent of its social, transformation, ethical, safety, health and
environmental management policies and practices. It is further recommended
that the board must determine what is relevant for disclosure, having regard to
the company’s special circumstances.9
9
King Committee on Corporate Governance, issued by Institute of Directors page 35
• reporting on environmental corporate governance;
PART IV
16. Conclusion
10
King Report on Corporate Governance, issued by Institute of Directors at pages 36 and 37
11
King Report on Corporate Governance, issued by Institute of Directors at page 37
• As many companies in the modern corporate arena, have a distinct
split between control and ownership, the need for transparency and
accountability to the stakeholders has increased. For these reasons,
corporate governance is becoming more and more important.
• Due to the nature of the other corporate entities which have been
discussed above, there will not necessarily be a need for these entities to
comply with the requirements of corporate governance. However, in so far
as they can, these enterprises should apply the principles of openness,
honesty, fairness, accountability, responsibility and transparency in relation
to all business dealings, but particularly with regard to the persons to whom
they are required to report. These enterprises should also conduct their
affairs, with due regard to the principles of corporate governance that relate
to environmental, health and safety, economic empowerment and human
capital development issues. It is also recommended that these enterprises
codify their standards in a code of ethics.
• The Board
• The Chair
• should have a distinct role from the chief executive officer.
• Directors
• Director's remuneration
• Board meetings
• Board committees
• Internal control
• Conflicts of interest
In our view, all businesses in Fasset's sector should design and adopt effective
governance systems which incorporate a means for enforcement and
accountability to stakeholders and/or other interested bodies, persons or
entities. To assist businesses in overcoming this challenge, we suggest that the
recommendations outlined in this publication be adapted to the specific
business' needs and implemented by those who govern them.
USEFUL TELEPHONE NUMBERS
(011) 403-4893
29. Labour Court (Cape Town) (021) 424-9035
30. Labour Court (Durban) (031) 301-0140
31. Labour Court (Port Elizabeth) (041) 586-4923
32. Registrar of Companies 0861 843 384
33. Auditor General (011) 842-4814
34. Department of Finance (Cape Town) (021) 464-6100
35. Department of Finance (Pretoria) (012) 315-5372
36. Department of Trade and Industry 0861 843 384
37. Johannesburg Stock Exchange (011) 520-7777
38. Receiver of Revenue (Bloemfontein) (051) 506-3000
39. Receiver of Revenue (Cape Town) (021) 460-2911
40. Receiver of Revenue (Durban) (031) 360-8911
41. Receiver of Revenue (East London) (043) 722-7270
42. Receiver of Revenue (Johannesburg) (011) 374-8000
43. Receiver of Revenue (Kimberley) (053) 831-2250
44. Receiver of Revenue (Port Elizabeth) (041) 505-7500
45. Receiver of Revenue (Pretoria) (012) 317-2000
46. South African Reserve Bank (Bloemfontein) (051) 403-7500
47. South African Reserve Bank (Cape Town) (021) 481-6700
48. South African Reserve Bank (Durban) (031) 310-9300
49. South African Reserve Bank (East London) (043) 707-3400
50. South African Reserve Bank (Johannesburg) (011) 240-0700
51. South African Reserve Bank (Port Elizabeth) (041) 501-6600
52. South African Reserve Bank (Pretoria) (012) 313-3911