Khaya Sithole: Board directors are meant to sing for their supper

In the world of buccaneering corporate kleptocrats, few names are as prominent as that of Lord Conrad Black. The Canadian-born media baron became famous firstly for investing in the news, then infamous for being the news. When he acquired the Daily Telegraph in 1986, Black cemented his place in the echelons of modern media barons. But his predilection for the high life somehow persuaded him to plunder resources from Hollinger International, the holding company of his corporate interests.

In the aftermath of his looting spree, an unusual step was taken to try and recover some of the company’s losses. In the US courts, Black was accused and charged breaching his fiduciary duties. The legal instrument used to nab Black, was a little-known provision in US law — the honest services statute — that is colloquially referred to as the 28-word statute.

At the heart of the US statute, lay the proposition that fraudulent actions that deprive “another of the intangible right of honest services”, were indeed punishable by law. The longstanding criticism of the statute was the rather elusive nature of the intangible right. From the time it had been enacted in 1988, the statute had become a useful arsenal for prosecutors seeking to throw the book at those accused of white-collar crimes in particular. 

When the Enron scandal broke, it was this statute that saw the duo of Jeffrey Skilling and Kenneth Lay eventually thrown behind bars for corporate fraud. When John Rigas of Adelphia had been more than generous in helping himself to company resources and concealing the true state of the company’s finances, the honest services statute resulted in a conviction and 12-year sentence.

The usefulness of the instrument to prosecute corporate crimes rested in the interplay between the vague idea of “right to honest services” and fiduciary duties owed by directors to companies. The duty element is naturally important because one with no duty to provide a service — honest or otherwise — cannot possibly be guilty of failing to provide such a service. 


For Black, his tendency to reward himself with unauthorised payments to the detriment of other stakeholders of Hollinger, became the turning point that indicated that he had breached his fiduciary duties.

Ironically though, the vast resources under Black’s command enabled him to challenge the validity of the statute itself. When Black petitioned the US Supreme Court to look into his case in 2009, the court’s arch-conservative — Antonin Scalia — had taken exception to the wide-ranging use of the statute by federal prosecutors. In his plea for the meaning and constitutionality of the statute to be revisited, Scalia stated that the chaos associated with the lack of certainty and wide-ranging use of the statute needed to be addressed. 

A year later — in what must be one of the few instances where Ruth Bader Ginsburg found common ground with Scalia — the court did declare the statute unconstitutional. It declared that the statute could only apply in cases of kickbacks and bribes. The change made it far less effective as an instrument of holding errant directors in breach of their fiduciary duties — unless clear evidence of bribes and kickbacks existed.

The genesis of fiduciary duties stems from the fact that corporate entities are legal persons that rely on human beings — directors — to breathe life into the entity. Such directors are then bound by fiduciary principles — the expectation that they will act in the best interests of the company. The dimensions of fiduciary principles range from loyalty to the company, the duty of care, and the need to act in good faith.

Ten years ago, when the Companies Act became law in South Africa, such duties were crystallised in section 76 which sets out the standards of conduct expected from board directors. A company seeking to add directors to its board is expected to have an awareness of such duties and only appoint individuals who are committed to acting in good faith for the best interests of the company. When this happens, corporate failures are more avoidable. Alternatively, when it all goes wrong, disaster ensues. 

The problem with such laws, is that little evidence exists of directors being held accountable for breaches of duty.

In December 2017, Steinhoff announced that its CEO — the buccaneer from Stellenbosch, Markus Jooste — would resign in light of “accounting irregularities”. Since then, the focus has been on trying to unpack those irregularities and to compensate the multiple stakeholders who lost money as a result. 

A far-less explored question relates to the other directors on the board at the time. Gifted with some of the most experienced and prominent board sitters in South Africa, Steinhoff’s understanding of fiduciary duties should have been better than most — if not all — entities in the country. 

The common feature of its business model — global acquisitions — meant that directors were constantly engaged in decisions about mergers and acquisitions. That on its own, escalated their need for oversight to the type of levels referred to in the Revlon Standard of Enhanced Scrutiny as articulated during the days of the proposed takeover of Revlon by Pantry Pride.

That a company staffed with the best directors and also with a business model that invited superior vigilance, would still collapse into failure, should leave us all wondering about the quality of the services on offer in South African boardrooms. 

A feature of modern boardrooms is the mix between independent and non-independent directors. The former tend to enjoy a sense of detachment from the daily operations that makes their duty of asking questions even more important. Non-independent directors tend to enjoy proximity to the financial information either as material investors or through their roles as executives. On a comparative basis, they can be said to be more familiar with the company information than the non-executive directors and even the regulators.

The key among them — Christo Wiese — has been cited as the one who lost the most. Therein lies an interesting feature of governance. As a material shareholder whose personal financial fate is tied to the fortunes of the company, acting in the best interests of the company would inevitably translate to acting in the best interests of his own circumstances. 

Similarly, Jay Naidoo — who somehow convinced the PIC to back him and his Lancaster outfit to form part of the complex Steinhoff behemoth, was a director of the group as it plunged into crisis. He also — through Lancaster — had a material personal interest in the fortunes of Steinhoff. Although the remaining directors each shared a duty to be vigilant in their oversight of the empire, these two in particular, would have been expected to be even more engaged in interrogating and understanding what they were fed by executives. 

All of this works on the assumption that directors are primarily engaged for their expertise. But as we keep seeing in the case of Prasa and testimonies relating to Eskom and Transnet, whether boardroom sitters in South Africa actually know what they are doing is highly debatable.

As individuals who assume responsibility for the type of public disclosures the company makes, directors cannot underestimate the importance of paying attention to their jobs. This makes the recent decision by Naidoo to sue the South African Reserve Bank a truly bizarre state of affairs. At the heart of Naidoo’s contention, is the theory that the bank relied on less-than-accurate representations in order to grant multiple approvals for Steinhoff’s international buccaneering endeavours. 

On that basis, Naidoo seeks to hold the Reserve Bank liable for losses suffered by Steinhoff stakeholders — especially himself. In 2018, Wiese resolved to sue Steinhoff for R59-billion for losses he suffered.

Whereas one may indeed empathise with the two billionaires who have seen a plunge in their fortunes, unavoidable questions relating to their true intentions emerge. In Steinhoff’s latest offer to all affected stakeholders, an amount of R19-billion is being allocated to the universal pot from which all claimants must share. Such a settlement would generate just over R230-million for Naidoo who has a claim of over R12-billion. Just like Wiese in 2018, the idea seems to be aimed at finding a way of prioritising his claim above all other claimants. Naidoo’s gambit — citing the Reserve Bank as a contributing factor to why the universal pot is so low to begin with — may end up buying nothing more than additional time. 

This is mainly because, of all the people who can claim to have been duped by Steinhoff, Naidoo and Wiese deserve to be asked the simple question of what exactly they looked at before signing off on all the deals that we now know, were nothing more than an exercise in financial musical chairs. For Naidoo to think that he can sue the Reserve Bank in relation to Steinhoff, is perhaps an apt illustration of the type of flawed reasoning that prevailed on the board.

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Khaya Sithole
Khaya Sithole is a chartered accountant, academic and activist who writes regularly for the Mail & Guardian and discusses the issues raised in his columns on his Kaya FM show, On The Agenda, every Monday from 8pm to 9pm

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