The importance of corporate governance

05 Jul 2021

A practical corporate governance framework is essential for the successful running of a company. It is the system of rules, practices and processes by which a company is run. Corporate governess epitomises the principles of responsibility, accountability, fairness and transparency. With various corporate governance theories that are practised throughout the world, your corporate governance framework is dependent on your chosen theory/approach. When implementing your corporate governance framework, you must identify who the role players are, who is responsible for the corporate governance and to whom this responsibility is owed. Shareholders and directors both have a role to play in ensuring there are adequate corporate governance practices within the company.

Roles of shareholders in corporate governance

As the ultimate controllers of the company, shareholders have a vital role and are responsible for the regulation of actions and transactions of the company at large. The Companies Act provides for certain transactions requiring the approval of shareholders before implementation by the board of directors. Shareholders additionally have the capability and responsibility to remove a director should they resolve that the director is not fulfilling his/her role adequately and in the best interests of the company.

Roles of directors in corporate governance

Section 66(1) of the Companies Act grants powers and functions to the board of directors as the controlling members of the company. The exercise of the powers and functions are to the extent that they are limited by the Companies Act or the company’s Memorandum of Incorporation. The board of directors must ensure that they have applied their mind to every scenario, including that of the financial position of the company and undertaking the correct due diligence processes. However, statutory liability is imposed on the directors in terms of Section 77 of the Companies Act. Should a director breach his/her fiduciary duties and/or the duties as set out in the Act, an interested party may make an application to court to declare the director to be delinquent on any ground as contemplated in section 162 of the Act. It is thus imperative that a director acts within his/her mandate and that an adequate corporate governance framework is in place to identify any errant conduct.

Conclusion

A useful framework that is implemented in a company will cover a range of policies and procedures that deal with decision-making, day-to-day activities and the conduct that is expected from management. We recommend that your company implement a customised Memorandum of Incorporation containing eligibility and accountability measures, board policies and service level agreements underpinned by the King IV Report on Corporate Governance.

Contact an expert at SchoemanLaw for any of your compliance or corporate governance needs today.

See also:

• Let’s talk corporate governance – What is it and what is it’s significance
• Harmonising corporate governance framework for South African mining companies: King IV, companies act and the mining charter
• Assurance, Risk, and Governance: International Perspective 2e
• The Removal of Directors and Delinquency Orders under the South African Companies Act

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)