October 22, 2023 In Consultancy

The Critical Role of a Board in Companies

Most corporate executives know that a Board of Directors is important to set the strategic direction of the organization, direct and control its affairs, as well as provide oversight on the management and assets of the company. The eternal debate globally is whether the board should be more focused on increasing the profits for the shareholders or to be more biased towards all “other stakeholders” of the company, this would include employees, suppliers, the community and the environment.

Although King IV code has placed a great emphasis on the role of the “other stakeholders”, including recommending the appointment a Stakeholder Relationship Officer (“SRO”). The jury is still out on this point, and it really depends on whether you are a private corporation or a State-Owned Company (“SOC”). It goes without saying that private corporations are inherently profit oriented, whilst SOC’s have more socio-economic obligations and would be more sympathetic to the other stakeholders.
Notwithstanding the above, the role of the board whether private or public remain the same. So, what are the various roles of the boards in corporations?

1.The board hires management,personified by the CEO—and management makes most of the “enterprise decisions” (e.g. should the plant be in Amsterdam or Durban?).

2. The board itself must make some basic decisions under the statutory framework (e.g. approving the company’s annual financial statements, annual reports and declaring a dividend).

3. The board makes strategic planning decisions and some high-level remuneration decisions. These decisions usually affect the corporation’s wealth directly and the shareholders’ wealth indirectly.

4. The board is also responsible for oversight, safe-guarding of company assets, risk management as well as relationship management with the shareholders and most recently in King III and IV “other stakeholders” involved with or affected by the company.

5. The board must also know the business, be smart, honest and hard-working.

6. Shareholders also expect a board that is not risk-averse. In a nutshell the board must be “enterprising” rather than mere “compliance junkies” who let opportunities slide by because of fear of the unknown. A calculating and driven board is thus ideal from a shareholder point of view.

Ownership decisions usually affect shareholders’ interests directly. Shareholders benefit from a profitable company—one that can attract capital and one that has ever-expanding earnings and earning potential. Probably and usually, they want a good percentage of the board to be independent. Do they want, however, a bureaucratic board of nit-picking independent directors that slow down the capital-attracting and profit-making decisions of expert management supported by knowledgeable directors? Of course not.

Do shareholders benefit from a board engaged in meaningful oversight? Director oversight of management is in the investors’ best interests. No doubt directors who have a habit of sustained inattention may create an atmosphere in which profit-making is static or stultified. Likewise, “utter failure” to put in place some rational mechanism for monitoring legal compliance could harm the corporation and might result in director liability.

As to business decisions, the business judgment rule has the effect of freeing directors and the CEO to take business risks. Thus, directors’ decisions will be respected by courts unless the directors are conflicted or lack independence relative to the decision, do not act in good faith, act in a manner that cannot be attributed to a rational business purpose or reach their decision by a grossly negligent process that includes the failure to consider all material facts reasonably available. Courts do not measure, weigh or quantify directors’ judgments outside of the parameters mentioned above. My recommendation is always that the board should seek independent verification of facts and figures where critical decisions need to be made by them.

As already noted, there is no liability for a bad business judgment reached in good faith, even if the decision was irrational by hindsight, unless, of course, the decision fails the business judgement rule or the decision-making process was materially flawed or grossly negligent or fraudulent. There is, to be sure, an exposure of boards, in making enterprise decisions, for fraud, dishonesty, unlawfulness, bad faith and the like. There is also exposure of directors to personal liability in damages for gross negligence that forfeits the protection of the business judgment rule. This is now enshrined in the Companies of 2008 which saw the creation of the Delinquent Director section.

The investors have said to the directors, in effect: “Don’t worry about personal liability in damages in the performance of your duties; we will not only exempt you from such threats, but we will also provide you with indemnification and insurance protection, just in case. You are expected to devote your energies to doing good work for the corporation, and that is to our benefit.” It is therefore extremely important that board members insist and ensure that professional indemnity cover is in place at all times during their tenure. Such cover should also ideally cover them post their terms of office.

Nevertheless, the shareholders expect general principles of fiduciary duty to apply to the conduct of directors and that these fiduciary duties will be enforced by courts. Perhaps the most effective shareholder protection device is the independence of directors. Shareholders vote for and appoint company directors and expect prudent governance from them. The expectation is a strong bond of trust vested in the directors. Courts enforce that trust as has been recently demonstrated in the few Delinquent Director judgements in South Africa. At the same time, courts should be reluctant to interfere and should not create surprises or wild ideological swings in their expectations of director behaviour.


The current corporate scandals in South Africa, both in the private and public sector is a clear indication of a lack of proper recruitment, vetting, selection and training of board members to understand their duties. The common denominator between these two boards are their casual approach to the prescripts of good corporate governance. Often the board has induction programmes for their benefit, but exclude their executives, naturally you would have an organization that has a gap in understanding governance from the boards view vis-à-vis the executives views on governance. A recipe for disaster!

Ronny Mkhwanazi is a Corporate & Trade law expert based in South Africa