Directors who fail to ensure their companies comply with the provisions of broad-based black economic empowerment (BEE) legislation, or fail to take into account the requirements of the legislation, may be in breach of their fiduciary duty and find themselves saddled with a claim for damages from the company, warns Kunyalala Maphisa, an attorney at law firm Jan S de Villiers.
“As the Act does not make any provision for the enforcement and monitoring of compliance, there are no penalties flowing from non-compliance with the Act.
“However, where a company fails to comply with the requirements of the Act, in all likelihood it will lose the bulk of its business from its clients who require BEE compliance in terms of their own procurement scorecard. That loss of business — and income — may be attributable to the directors’ lack of proper exercise of their fiduciary duties.”
The consequences of this could be dire, says Maphisa.
“In law, a director is liable to compensate the company for losses arising from the breach of his fiduciary duty.
“Directors’ fiduciary duties are part of the common law. In general terms, the directors’ primary duty or function is that of acting collectively to manage the company and help it realise its goals.
“Directorial management requires a general monitoring of corporate affairs and policies, such as setting goals for the company, appointing the company’s chief executive, overseeing plans of managers for the acquisition and organisation of financial and human resources towards attainment of the company’s goals, and reviewing at reasonable intervals the company’s progress towards attaining its goals.”
Maphisa says the director’s fiduciary relationship with the company arises from the purpose for which a director is entrusted with that office, and for which he and his co-directors are entrusted with their powers to manage the affairs of the company.
“The fiduciary duty seeks to ensure that office is used and that those powers are exercised for, and only for, the benefit of the company as a whole. Out of this arises a duty of reasonably protecting the interest of the company. Consequently, an inference can be drawn that the duty and the responsibility to comply with the provisions of the BEE Act lies with the board of directors.”
Therefore, says Maphisa, the possibility does exist that a company may have a remedy in the form of a claim for damages against the board of directors for neglecting to take reasonable steps to comply with the provisions of the BEE Act.
“The damages claim would stem from the alleged negligence on the part of the board of directors to ensure that the company remains relevant for purposes of carrying on business in the market in which it exists.
“Of course, the company would need to allege and prove the cause or connection between the damages claimed and the breach of fiduciary duty giving rise thereto, which may not be easy to do. But directors should nonetheless be careful.” — I-Net Bridge