What Are Fiduciary Duties? A Director's Guide for South Africa

At the very core of being a director in South Africa is the concept of fiduciary duty. This is not merely a business term or an ethical guideline; it is a profound legal obligation that represents the highest standard of trust and confidence. When a person accepts the role of a director on a Board of Directors, they become a steward, entrusted with the company's assets, its reputation, and its future. They are legally and ethically bound to act with absolute loyalty and in the best interests of the company they serve.

Historically, these duties were developed over centuries through common law (judge-made law). However, the landscape of South African corporate law was fundamentally transformed by the Companies Act, 71 of 2008, which codified, clarified, and in some aspects, strengthened these duties. Today, a director's conduct is primarily measured against the statutory standards set out in the Act.

Understanding these duties is non-negotiable. They are the legal and moral compass for every decision a director makes. This guide provides a deep dive into the specific fiduciary duties as they exist in South Africa, with a focus on the Companies Act and the principles of good governance espoused by the King IV report.

The Legal Framework: Common Law and the Companies Act, 71 of 2008

A director's duties in South Africa flow from two primary sources:

1. Common Law: These are the duties that evolved through court judgments over many years, such as the duty to act with care and skill and the duty to avoid conflicts of interest.

2. The Companies Act, 71 of 2008: This Act is now the principal source of directors' duties. Section 76 of the Act is the cornerstone, codifying the common law duties into a more accessible and definitive legal standard. Section 75 deals specifically with conflicts of interest, and Section 77 outlines the personal liability of directors for a breach.

While the Companies Act is now the primary reference, the common law remains essential for interpreting the meaning and application of the statutory duties.

The Codified Duties of a Director: A Deep Dive into Section 76

Section 76(3) of the Companies Act sets out a director's fundamental duties. It requires a director to exercise their powers and perform their functions in the following manner:

The Duty to Act in Good Faith and for a Proper Purpose (Section 76(3)(a))

This duty has two distinct but related parts:

• In Good Faith: This is a subjective test. It means a director must act with honesty, fidelity, and sincerity. They must genuinely believe that their actions are in the company's best interests. A court will look into the director's state of mind to determine if they acted in good faith.

• For a Proper Purpose: This is an objective test. A director must exercise their powers only for the purposes for which those powers were conferred. For example, the power to issue shares is intended to raise capital. If a board issues shares primarily to dilute the voting power of a hostile shareholder, they would be exercising that power for an improper purpose, even if they genuinely believed it was in the company's best interest.

The Duty to Act in the Best Interests of the Company (Section 76(3)(b))

This is the central pillar of a director's duty of loyalty. It demands that a director's actions and decisions must be for the benefit of the company. In this context, "the company" means:

• The company as a separate legal entity.

• The collective interests of its shareholders as a whole, both present and future.

• Influenced by the principles of King IV, modern governance encourages directors to also consider the legitimate and reasonable needs, interests, and expectations of other stakeholders (employees, customers, suppliers, and the community) in the long-term interest of the company.

This duty requires a director to set aside their personal interests, or the interests of any group they might represent, and focus solely on what is best for the company.

The Duty of Care, Skill, and Diligence (Section 76(3)(c))

This section sets a significantly higher and clearer standard than the old, more lenient common law position. It requires a director to act with the degree of:

1. Care and Diligence: That may reasonably be expected of a person carrying out the same functions in relation to the company as those carried out by that director. This is an objective test. The court will measure the director's actions against what a "reasonably diligent" person in that same role would have done.

2. Skill: This has both a subjective and an objective element. It includes the skill that may reasonably be expected of a person with the same knowledge and experience as the director. This means that a director with specialised skills (e.g., a chartered accountant serving on the Audit Committee) will be held to a higher standard of skill in that area than a director without that expertise.

To fulfill this duty, a director must be proactive. They must prepare for meetings by reading the Board Pack, participate actively in the Agenda items, ask probing questions, and stay informed about the company's affairs.

The Business Judgment Rule: South Africa's Statutory Defence (Section 76(4))

Recognising that business involves risk and that not all decisions will be successful, the Companies Act provides a "safe harbour" for directors in Section 76(4). This is commonly known as the Business Judgment Rule.

A director will be deemed to have satisfied their Duty of Care, Skill, and Diligence if they can show that they:

1. Took reasonably diligent steps to become informed about the matter;

2. Had no material personal financial interest in the subject matter of the decision (or they properly disclosed it in accordance with Section 75); and

3. Had a rational basis for believing, and did believe, that the decision was in the best interests of the company.

This rule is not a blank cheque for negligence. It protects directors who make informed, disinterested, and rational decisions that, in hindsight, turn out poorly. It does not protect directors who are uninformed, conflicted, or irrational.

Conflicts of Interest: Section 75 in Practice

The duty of undivided loyalty is put to the test when a director's personal financial interests conflict with those of the company. Section 75 of the Companies Act provides a strict, non-negotiable procedure to manage such conflicts.

If a director has a personal financial interest in a matter to be considered by the board, they must:

• Disclose the nature and extent of that interest to the board in advance.

• Disclose any material information they have relating to the matter.

• Recuse themselves by leaving the meeting during the consideration of the matter.

• Not take part in the vote on the matter.

A failure to adhere to this procedure is a serious breach of duty, and any decision taken may be declared invalid.

Consequences of Breaching Fiduciary Duties in South Africa

The Companies Act, particularly in Section 77, makes it clear that there are severe consequences for breaching these duties.

• Personal Liability: A director can be held personally liable to the company for any loss, damage, or costs the company sustains as a result of the breach. This means a director's personal assets are at risk.

• Declaration of Delinquency: Under Section 162 of the Act, a court can declare a director "delinquent" for a gross abuse of their position or a wilful breach of their duties. A delinquent director is disqualified from serving as a director, potentially for life.

• Invalidation of Actions: Transactions or resolutions made in breach of fiduciary duties may be declared void by a court.

• Reputational Damage: A finding of a breach can cause irreparable damage to a director's professional reputation.

Frequently Asked Questions (FAQ)

To whom are fiduciary duties owed in South Africa?

Legally, the duties are owed to the company as a separate legal entity. This is often interpreted as acting in the best interests of the shareholders as a collective body. However, the principles of King IV and evolving jurisprudence encourage a stakeholder-inclusive approach, where the interests of employees, customers, society, and the environment are considered as part of ensuring the long-term sustainability and success of the company.

Do these duties apply to non-executive directors?

Yes, unequivocally. The Companies Act makes no distinction between executive and non-executive directors regarding their fiduciary duties. The objective standard of care, skill, and diligence applies to all directors, and they all share the same duty of loyalty.

What is the difference between the old common law duties and the duties in the Companies Act?

The Companies Act has codified the common law duties, meaning it has written them into statute. In doing so, it has clarified them and, particularly for the duty of care, skill, and diligence, has raised the standard, making it more objective and demanding than the previously lenient common law test. The Act is now the primary source of these duties.

Can a company indemnify a director for a breach of their duties?

A company can take out Directors and Officers (D&O) insurance. However, Section 78 of the Act prohibits a company from indemnifying a director for any liability arising from a wilful breach of their duties or if they acted in bad faith. Essentially, a director cannot be protected from the consequences of their own dishonesty.

Conclusion: The Foundation of Responsible Leadership

The fiduciary duties codified in the South African Companies Act are the legal and ethical foundation upon which the entire practice of directorship is built. They demand a standard of conduct defined by loyalty, diligence, honesty, and an unwavering focus on the best interests of the company. For any member of a Board of Directors, from a seasoned Chairman of the Board to a newly appointed director, a deep and practical understanding of these duties is not just a matter of compliance—it is the very essence of responsible leadership and good corporate citizenship in South Africa.