2: SOUTH AFRICA – The Duties and Functions of a Governing Body (Board) Copy

MODULE TWO

SECTION 7.0 – THE GOVERNING BODY (Board)

Globally there is a shift away from ‘Boards of Directors’ towards ‘Governing Bodies’ which is a more inclusive way of describing those tasked with governing an organisation.

The Governing body is the body through which the organisation acts and its main responsibilities are to ensure that the organisation operates within its Founding document, the requirements of the relevant Act and common law, and the resolutions passed at general meetings of members and meetings of the Governing body.

The Governing body is ultimately responsible for the organisation’s undertakings, performance and compliance with all business and legal obligations. Governing body Members are, with membership organisations, elected by the members of the organisation at their Annual General Meeting (AGM) and must be duly registered with the relevant registration offices where applicable. Appointments to the governing body should be confirmed in writing by the Chairperson of the governing body, and such letter of appointment must set out the specific function and role that each governing body member is expected to perform.

The members of the governing body of all NPO structures should receive at least the following information upon their appointment:

Copy of the minutes of the AGM at which they were appointed.
Copies of the Founding document of the organisation.
Copy of the latest financial reports.
Copy of the current business plan and budget.
Minutes of all governing body meetings held in the previous year.
Copy of the governing body Charter.
Copies of contracts, agreements and undertakings of a major nature such as with sponsors and business partners.

Unless otherwise recorded in the minutes of a governing body meeting or reduced to writing by any governing body member, the acceptance of an appointment to the governing body is deemed to be an acknowledgement that all the relevant information required to function responsibly, with duty, care and skill has been received, is understood and accepted.

The governing body must retain full and effective control over the organisation and ensure that the decisions on all material matters remain in the hands of the governing body.

The governing body shall meet regularly, but at least four times a year, and all governing body members are required to attend governing body meetings.

Every organisation must keep minutes of all meetings and resolutions of governing body, or governing body committees, or the audit committee, if any, for a period of seven years after the date of each such meeting or on which such resolution was adopted.

The date, time and place of the next meeting should be set at the end of each governing body meeting and governing body members are required to agree to this before receiving the notice of confirmation of the next meeting. Such notice and agenda should be received by the governing body members together with the minutes of the last meeting at least one month before the time.

Governing body members must not rely on the minutes as an aide to remind them of their assigned tasks, but should draw up their own list of actions at the meeting. If any action has been delegated to a governing body member not present at a meeting, it is the duty of the Chairperson to ensure that such assignments are conveyed to the relevant person.

Decisions taken by the majority of governing body members in attendance will constitute a governing body decision if a quorum was present, depending on the requirements laid down in the founding document of the organisation. Governing body members not present at a governing body meeting for which due notice was given, and who have objections to any decision carried, would usually be allowed to appoint proxies to represent them at the meeting. The quorum for a governing body meeting and the voting protocol is set out in the founding document.

The duties and responsibilities of governing body members are described in Section 8.0 of this Manual, but collectively, the main functions of the governing body are as follows:

To ensure that a strategic plan including a financial and operations plan for the organisation is in place and that the plan is being implemented by management.
To ensure that the plans adequately address the main business of the organisation.
To ensure that the organisation has sufficient funds to meet its creditor obligations and to continue to perform in the manner as detailed in its plans.
The governing body members must each year ensure that the organisation prepares annual financial statements within six months after the end of its financial year and all financial statements of the organisation (not only those prepared annually) must comply with the required and generally accepted accounting principles.
To ensure that the organisation has adequate systems of operational and financial controls and levels of decision-making authority and those systems are being applied.
To select a senior executive and appoint new governing body members in event of removal or resignations from the governing body. To this end the governing body must ensure that there is senior manager, chairperson and governing body succession plan in place.
To ensure that organisation information is provided timeously to all parties entitled to it, and that such information is accurate, reliable and valid.
To ensure that the organisation operates responsibly and in accordance with the spirit and letter of this manual.
To ensure that all requirements for representativeness, delivery and fidelity applicable to the organisation, both Statutory and contractually are being satisfied.
To ensure that all employment conditions and benefits are being complied with and that employees are treated fairly, with due respect for their dignity and rights.
To identify the organisation’s internal and external stakeholders and develop a policy that determines how they will be related to and communicated with.

The governing body members must not exceed the organisation’s power under its founding document, and it must also operate within any limitations on their powers as may be imposed by its founding document. The organisation’s assets and resources belong to it, and must be applied for proper purposes in terms of its main object and approved plans. The governing body members will be liable if they misapply or misappropriate resources.

SECTION 8.0 – DUTIES AND RESPONSIBILITIES OF A GOVERNING BODY MEMBER

Governing body members individually and collectively are responsible for the direction of the organisation and are therefore accountable to the Members of the Company, if the Company has members. Despite this accountability to those who nominated and elected them, once appointed, Governing body members must act honestly and with objective integrity in the best interest of the aims and objectives of the Company as described in the founding documents.

Unlike a business enterprise where Governing body members have a duty of loyalty to the shareholders and are expected to act with enterprise, ie. being willing to engage in undertakings of risk for gain so that the shareholders obtain a satisfactory return on their investment, the Governing body members of a Company without shareholding have a fiduciary (duty of loyalty) responsibility to the Company and more specifically, its stated aims.

Their main function can best be described as that of Responsible Stewardship over the plans, funds and resources of the organisation and their provident application towards the accomplishment of the declared purpose of the business.

Unless they are employees of the organisation, the Governing body members are in effect non-executive Governing body members. However, all Governing body members have equal responsibility and the law makes no distinction between executive and non-executive Governing body members.

The collective function and responsibilities of the Governing body is described in Section 7.0, but the main duties and responsibilities of Governing body members individually are summarised as follows:

The fiduciary duty which prohibits governing body members from using their position or any information obtained whilst being governing body members to gain an advantage for him/herself or another person or to cause harm to the company. This duty is not new as it has been recognised by the South African courts for many years.
The duty to communicate which requires governing body members to communicate to the governing body any information that comes to their attention, unless they reasonably believe that such information is immaterial to the company or publicly available or cannot be disclosed for reasons of confidentiality.
The duty to exercise good faith, care, skill and diligence which requires governing body members to govern the company in good faith, for a proper purpose and in the best interests of the company. A director must further act with the degree of care, skill and diligence reasonably expected of a person carrying out similar functions and having the general knowledge, skill and experience of that director.
The duty to disclose personal financial interests which requires governing body members having a personal financial interest in matters considered at a governing body meeting to disclose such interest and any material information relating thereto, leave the meeting immediately after such disclosure and not take part in the consideration of such matter.
As overseers and not operators of the business, Governing body members must obtain a good working knowledge of the Company’s operation, management and administration.
Governing body members have the right to present their views and to table any information they have which has bearing on matters under discussion at Governing body meetings, and conversely must respect the rights of other Governing body members to act in the same way.
Governing body members may not divulge confidential Company information, matters or plans to any unauthorised persons without the explicit and prior approval of the Governing body.
If a Governing Body Member is in any doubt about the veracity or adequacy of information presented to the governing body, they may obtain independent professional advice. The cost for such service may only be to the Company’s account if the Governing body has approved it in advance.
The King report on Corporate Governance recommends that a Director should not be liable for a breach of the duty of care and skill if they have exercised a business judgement in good faith and within the following criteria:
- An informed decision was made based on all relevant facts.
- The decision is rational.
- There is no self-interest.
Governing body members are entitled to rely on the advice of:
- Employees whom are deemed reliable and competent,
- legal counsel, accountants and other professional persons whom the governing body believes reasonably within professional or expert competence or merits confidence, and
- a sub-committee, unless the sub-committee does not merits confidence.
Governing body members should become knowledgeable about the political, economic, social, technological and industry environment in which the Company operates.
Governing body members must not act outside of their limits of responsibility or beyond their levels of authority as specified in their letters of appointment, the Company’s Memorandum of Incorporation and any other document in which their terms of reference are explained.
The Governing body of Governing body members must ensure that all financial statements of the non-profit company must:
- Present the state of affairs and business of the company fairly,
- Explain the transactions and financial position of the business of the company,
- Show the company’s assets, liabilities and equity, income and expenditure,
- Set out the date of its production and the accounting period, and
- State on its first page:
  - Whether the reports have been audited, independently reviewed, or neither, and
  - The name and professional designation of the individual who prepared or supervised the preparation of the statements.
Annual financial statements must include a report approved by the governing body covering:
- The company’s state of affairs, and
- The business and profit or loss of the company.

SECTION 9.O – THE CHAIR

Although there is no legal requirement for the Governing body to have a Chair, it is however impliedly required pursuant to section 73(8) of the Act which provides that: “Any minutes of a meeting, or a resolution, signed by the chair of the meeting, or by the chair of the next meeting of the governing body, is evidence of the proceedings of that meeting, or adoption of that resolution, as the case may be.”

KING III & IV

[Part 5.3 Recommended practice 31]

The governing body should elect an independent nonexecutive member as chair to lead the governing body in the objective and effective discharge of its governance role and responsibilities.

[Part 5.3 Recommended practice 34]

The CEO of the organisation should not also chair the governing body and the retired CEO should not become the chair of the governing body until three years have passed after the end of the CEO’s tenure.

King III Practice 40 of Principle 2.16 contained elaboration on the core role of the chair. Due to the approach of King IV being more succinct and less prescriptive, detailed guidance on the role of the chair was not provided in the Code.

Furthermore, King III only recommended the appointment of a lead independent director in situations where the chair was not considered independent. This approach has changed in King IV, where a practice recommends that a lead independent member of the governing body should be appointed regardless of the independence of the chair (as outlined below), to fill specific functions.

This practice note should be read in the context of proportionality as well as any applicable sector supplement, where certain nuances as to both the appointment and role of the Chair may exist, by virtue of legislation and or other guidelines and codes.

Role of the chair

The primary role of a chair of a governing body is to provide leadership to the governing body of an organisation; set the tone for its performance and undertake the management thereof. The chair should play an active role in engaging governing body members and building upon their strengths and addressing/developing any weaknesses.

The chair ensures focus is maintained by the governing body on what is best for the organisation; and that the tone for organisational success is set.

The chair is accountable to the governing body. Working with fellow members of the governing body, the chair sets the direction and priorities for the execution of the duties by the governing body and acts as the communication channel for governing body decisions where appropriate.

In addition to the above general role of the chair, refer to Annexure A for further specific duties.

Lead independent member of the governing body – the new approach

King IV’s approach is that a lead independent (LI) should be appointed as a matter of course, regardless of whether the chair is independent or not.

This change in approach resulted from the view that aspects of the role that the LI plays are relevant and necessary, not only when the chair is conflicted, but in general, to perform certain specific duties primarily around strengthening the role of the chair, overseeing evaluation of the chair and being an avenue of communication for the other governing body members on any issues relating to the Chair.

This change was considered necessary to, amongst others:

give the other non-executive governing body members a stronger voice, particularly where there is
a dominant chair but without undermining the authority of the chair ;
achieve a balance of power and reinforce accountability mechanisms;
mediate conflict/dysfunction on the governing body, where the chair is involved;
be forearmed with a LI in place from the start, before things go wrong.

It is not envisaged that a deputy chair would be required, as the LI could fulfil the duties usually assigned to a deputy chair.

With regards to the role of the lead independent, Part 5.3, Principle 7, Practice 32 of King IV states:

The governing body should appoint an independent non-executive member as the lead independent to fulfill the following functions:

a) To lead in the absence of the chair.

b) To serve as a sounding board for the chair.

c) To act as an intermediary between the chair and other members of the governing body, if necessary.

d) To deal with shareholders’ concerns where contact through the normal channels has failed to resolve concerns, or where such contact is inappropriate.

e) To strengthen independence on the governing body if the chair is not an independent non-executive member of the governing body.

f) To chair discussions and decision-making by the governing body on matters where the chair has a conflict of interest.

g) To lead the performance appraisal of the chair.

The Chairperson of the Governing body (the Chair) is expected to preside over Governing body meetings and in terms of the Memorandum of Incorporation, would usually have a casting vote. Should the chairperson be unable to attend any meeting of the Governing body, the Governing body members may nominate any one of the Governing body members present to preside over the meeting, who will hold the full authority of the Chair and may also exercise the right of a casting vote.

The fundamental role of the Chair is to ensure the smooth and effective functioning of the Governing body not only at meetings, but as a team of informed and responsible stewards with a duty of care and attention at all times. The King Code recommends that the Chair be a non-executive Director and that the roles of Chief executive and Chair be separated. Although the chairperson is not ultimately responsible for the selection and appointment of Governing body members to the Governing body, the following are regarded as the main functions of the Chair:

To ensure as far as is possible within the power and influence of the Chair, that the composition of the Governing body is balanced in terms of skills, expertise and experience necessary for the proper direction of the Company.
To ensure, in consultation with the Executive Director or Managing Director, that the assignment of portfolios, duties and tasks to Governing body members is balanced and that this distribution of work is actually carried out by the responsible persons.
To ensure that the Governing body is rational and objective in all its deliberations, always acting in the best interest of the Company and its aims.
To ensure that all Governing body members are as fully informed as possible on the matters under discussion or on which decisions must be made.
To ensure that the setting and climate for Governing body meetings is conducive to the professional engagement of Governing body members with each other and for their full and undisturbed attention to the matters before them.
To ensure that time spent at Governing body meetings is productively applied and that non-relevant discussions do not impede the flow of the agenda.
To ensure that all new Governing body members have formal letters of appointment and service agreements if applicable, and that they have received all the documents listed in Section 7.0.
To ensure that Governing body procedures and protocols are followed and that Governing body members display due respect for the rights and views of all members of the Governing body.
To ensure that the backgrounds, values and cultural diversities of members of the Governing body is acknowledged and respected and that no discrimination on any grounds whatsoever be exhibited towards any Director.
To ensure that all Governing body members perform their duties and obligations to the levels expected of their position, and that they participate in the deliberations and decisions of the Governing body.
To ensure that the Governing body information due to stakeholders is provided timeously and that such information is complete, accurate and valid.
To ensure that the Code for Corporate Governance is understood, applied and adhered to by the Governing body and managers of the Company.
To ensure that the notices and agenda for governing body meetings are clear and accurate concerning the venue, time and date of future meetings, and that the minutes of the last meeting and new matters for discussion are received in good time, and that the register of attendance is duly signed by all in attendance.
If in the considered judgement of the Chair, the Governing body is not sufficiently informed on a matter before it, the decision can be delayed or the meeting adjourned until more information can be obtained.
The Chair may adjourn any meeting or postpone any discussion over which disagreement is so intense that the objectivity of a decision would be in doubt if a vote were to be taken.
To ensure that a policy is formulated on the issuing of statements to the media and outside stakeholders and that confidentiality of the matters discussed at Governing body meetings is honoured by Governing body members.

Decisions taken by governing body members are in most cases by “tacit majority,” often misconstrued as consensus unless the matter expressly becomes the subject of an open vote due to irreconcilable positions. The most important role of a Chair is to allow sufficient constructive debate through which all the information available and as many views possible can be brought to bear on the process of critical deliberation. Failure to do so can restrict the quality of decisions taken to the level of the best efforts of those holding the strongest views, which is not a reliable guarantee for effective decisions.