Yakhe Kwinana was required to show more than minimum care, skill and diligence
Evidence of various directors at the Zondo inquiry has raised questions about their comprehension of these duties towards the firms of which they are or were board members
The recent events at the Zondo state capture commission brought sharply to the fore the question of the requisite standard of directors’ conduct in relation to their duty of care, skill and diligence.
The evidence of various directors and former directors at the commission has raised questions about their comprehension of these duties towards the companies in which they are or were board members, none more so than that of former SAA and SAA Technical board member Yakhe Kwinana, a chartered accountant by profession.
Kwinana conceded, among other apparent mishaps, that she signed a contract awarded to a company called Swissport without reading it. In explaining herself, Kwinana absurdly said: “I didn’t think this was a contract, I thought we were approving terms and conditions, not the whole contract”. The said R1bn five-year ground handling services contract was awarded to Swissport by SAA without an open tender process nor a legal basis to inform the deviation.
During Kwinana’s evidence, judge Raymond Zondo kept reminding her that as a chartered accountant she ought to have known and done better under the circumstances in question. In response, Kwinana pleaded with Zondo to judge her as a person, not a chartered accountant. At some point Zondo appeared to be frustrated with what he may have perceived as Kwinana’s lax attitude towards her duties as a director, and remarked that the criteria through which directors of state-owned entities (SOEs) are appointed may have to be reconsidered.
But what are the legal demands on directors, bearing mind that they are, or should be, relatively more skilled in certain disciplines regarding the duty of care, skill and diligence? For clarity on the requirements of the Companies Act of 2008 it is necessary to briefly outline what the position was when the old act was in force (the Companies Act of 1973).
As a point of departure, the old act did not codify the directors’ duties. Consequently, the conduct of directors used to be evaluated against the subjective common law standards, in terms of which directors used to be expected to exercise care and skill that can be reasonably expected of a person of their knowledge and experience. The subjective nature of this standard proved inadequate as it essentially demanded much less, if not nothing, from a director who had limited skills, knowledge or experience.
The new act altered the previous position in at least three ways. Firstly, it partially codified the directors’ duties in section 76. Secondly, the duty was extended from being a duty of care and skill to also include diligence. Lastly, the standard of directors’ conduct was changed in terms of section 76(3)(c)(i) and (ii) from purely subjective to what is known as a “two limbs” approach or objective-subjective test, since one limb is objective while the other is subjective. It is important to note that the two limbs work in tandem.
The first limb is objective in that it sets the minimum standard of conduct all the directors must adhere to regardless of their knowledge, experience or personal attributes. The second limb is subjective in that it brings subjective considerations such as a particular director’s knowledge, skill and experience into play.
The cumulative effect of the two limbs approach introduced by the new act is that there is, on the one hand, a minimum standard of conduct that all directors must adhere to irrespective of their skills, knowledge and experience, while on the other hand should a director possess a high degree of knowledge, skill and experience, the required standard of conduct would be elevated accordingly from the minimum required.
The two limbs test was neatly applied by the high court in the Dudu Myeni vs Outa case, where the court observed that “objective and subjective standards must be applied in assessing gross negligence. This is made clear by section 76(3)(c) of the Companies Act, which will be dealt with later on.
Objectively, Myeni’s conduct must be weighed against the standards expected of a reasonable director in her position. Subjectively, Myeni's conduct must also be weighed against the skills, qualifications and experience she possessed. More could be expected of an experienced director, particularly a director who was on the SAA board for more than nine years and was, by her own account, a “corporate governance expert”.
From the Myeni case, it is evident that by virtue of her being a chartered accountant, Kwinana was required to display not simply the minimum required care, skill and diligence. A further applicable test in her case ought to be what would have been expected from a reasonable chartered accountant in her position. The answer, therefore, is that much more would have been expected from her, particularly in matters relating to finance.
The duty of care for board members of SOEs is re-referred by section 50(1)(a) of the Public Finance Management Act of 1999 (PFMA), which enjoins them to exercise the duty of utmost care to ensure reasonable protection of the assets and records of the public entity.
As to whether the facts in relation to Kwinana, and other directors of SOEs who have appeared before the commission for that matter, constitute a breach of duty of care, skill and diligence as a directors, I leave that in the capable hands of the honourable deputy chief justice Zondo.
• Nethavhani is a practising SA attorney.
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