ESG Watch – July 2020: South Africa and delinquent directors: a new era of accountability?
8 July 2020
Former non-executive chair of South African Airways (SAA) Dudu Myeni was on 27 May 2020 declared by the Gauteng High Court to be a delinquent director. In her judgement, Justice Ronel Tolmay found that Myeni, who served on the board from 2009 to 2017, “displayed complete disregard for public funds”, “wilfully and recklessly contributed to SAA breaching its financial reporting obligations” and “did not have the slightest consideration for her fiduciary duty to SAA”. Tolmay declared a lifelong delinquency order. Myeni has indicated that she intends to appeal.
BusinessDay noted in its 4 June editorial Lying Dudu Myeni raises stakes for directors, that the ruling sets “a legal precedent which will shake up SA’s corporate governance landscape”; as it is both the “most stringent ruling yet against a director” and because it was brought by actors (Organisation Undoing Tax Abuse (Outa) and the SAA Pilots Association) other than shareholders. The editorial also noted that “true corporate accountability” might follow when boards and shareholders sue delinquent and negligent directors for loss.
New era of accountability?
It is clear that the Myeni judgement is important, but will it really lead to a new era of accountability? The judgement raises the stakes for directors, and should create further incentive for them to act according to their fiduciary duty. However, while the ruling reinforces delinquency orders as an important tool to hold directors to account, pursuing them is expensive and time-consuming. Outa and the SAA Pilots Association spent more than three years pursuing this case through the courts, fighting three interlocutory challenges by Myeni to have the case thrown out. There are not many organisations or individuals who have the resources required to see that kind of battle through.
Suing directors for damages stemming from their fiduciary failures is even more complicated. Although Tongaat Hulett is taking civil action against 10 executives found to have overstated profits and assets, companies largely appear reluctant to pursue claims against former directors. In several cases, such as Steinhoff, BAT and Tongaat, companies have also refused to share the findings of investigations into misdeeds with shareholders, citing legal privilege.
In a further blow for director accountability, two recent court rulings have found that shareholders themselves do not necessarily have the power to hold directors accountable for their losses. In June 2020, the South Gauteng High Court ruled that Steinhoff shareholders could not launch a class action for the losses suffered due to collapse in the share price in response to “accounting irregularities”. This was because “it is for the Steinhoff companies to hold the Steinhoff directors and Deloitte liable for any breach of duty to the companies that caused loss”.
Similarly, on 3 July, the Supreme Court of Appeal dismissed a case brought by two BEE schemes, which held around R2bn in African Bank Investments Limited (ABIL) shares before it was placed under curatorship in August 2014. The BEE partners, Hlumisa and Eyomhlaba, had appealed a North Gauteng High Court ruling that shareholders could not claim damages against 10 ABIL directors and auditor Deloitte as “only the company suffering the loss has a claim against the third party”.
This emphasises how critical it is for shareholders and regulatory bodies to ensure that directors are held accountable during their tenures, and also that they are not simply permitted to move on to other lucrative board positions. Where directors been shown to be involved, whether actively or passively, in governance failures, fraud, accounting irregularities etc., they should be prohibited from serving in other fiduciary roles.
The recent controversy surrounding the appointment of Jenitha John as CEO of the Independent Regulatory Board for Auditors (IRBA) and the appointment of Noel Doyle as Tiger Brands’ CEO are illustrative of the problem. John was chair of the audit committee at Tongaat Hulett during the period when serious financial reporting irregularities took place, while Doyle left Tiger Brands in 2008 after he was sanctioned for his role in a bread price-fixing scandal.
However, there is long list of corporate governance failures in South Africa over the past decade, from Steinhoff’s fraud to Eskom’s corruption. There are many other instances where there has been little to no effort to ensure accountability of directors.
For example, there appears to have been virtually no concern raised over the July 2019 announcement that Enoch Godongwana, the chair of the ANC’s economic transformation committee, had been appointed as an independent non-executive director of Mondi plc. Godongwana has faced allegations of corruption and, in the 2012 inquiry into Canyon Springs, was reportedly found to have been “party to the carrying on of the business of the company, either fraudulently or at least recklessly.”
Other cases where corporate governance failures have had far too little consequence for directors include African Bank and, more recently, Transnet.
The 2016 Myburgh Report on African Bank Limited, which was placed under curatorship in August 2014, found that the directors were in breach of their fiduciary duties and that boards were party to the bank acting negligently and recklessly. Part of Myburgh’s investigation considered the events surrounding African Bank, a wholly owned subsidiary of African Bank Investments Limited (ABIL), providing financial assistance to furniture retailer Ellerines, which was acquired by ABIL in 2008. This created a conflict of interest, as the boards of ABIL and African Bank were identical and held board meetings for both entities simultaneously. Myburgh notes that an independent bank board would have, for instance, asked simple questions relating to why aggregate unsecured loans of R1.4bn were being made to a struggling furniture retailer.
While the Commission did not make a finding that all the board members were responsible for such conduct, it notes that, under Section 66 of the Companies Act, a company must be managed by and under the direction of the board. Despite these findings, two directors that served on the ABIL board for the entire period from 2012 to 2014, when key breaches took place, continue to serve or have been appointed to serve on the boards of other JSE-listed companies, including PPC, Mpact, Kumba and Redefine Properties. Two other directors that served for part of this period also sit on various other boards.
Transnet’s procurement of locomotives from China South Rail (CSR) has been embroiled in allegations of corruption relating to the Gupta family. In June 2017, amaBhungane reported on kickback agreements totalling R5.3bn over several contracts. Three years later amaBhungane showed that the total value of the kickback agreements actually reached R9bn. These kickback agreements usually saw the Guptas receive a 21% cut of whatever Transnet paid.
A 2018 Treasury-commissioned forensic investigation into allegations at Transnet details how Transnet officials compromised the locomotive tender procurement processes to benefit CSR. While the findings against individuals such as former CEO Brian Molefe and former CFO Anoj Singh are now common knowledge, the findings against the board are not, despite their serious nature.
Some of the findings relate to the procurement of 1,064 locomotives, which received board approval in April 2012 with an initial estimated total cost (ETC) of R38.1bn. Although the tender was issued in July 2012, the business case was only presented to the board in April 2013, just five days before the tender closed.
In May 2014, Transnet executives misled the board’s acquisitions and disposals committee (BADC) into believing that the initial ETC excluded forex hedging, forex escalation and other price escalations even though these had in fact been included. This misrepresentation continued with the board subsequently increasing the ETC to R54.5bn to account for, among other things, forex escalations and other contingencies.
The forensic report found that:
- Board members failed to act in the best interest of Transnet when they ratified the increase of ETC to R54.5 billion;
- The board contravened the Public Finance Management Act by failing to ensure that the procurement system was “fair, equitable; transparent, competitive, and cost effective”
It recommends that board members should be investigated for “possible dereliction of their duties in terms section 76(3) of the Companies Act and section 86 of the PFMA for failing to act in the best interest of Transnet.”
An earlier report by law firm Werksmans made similar findings, including that “The board of directors failed to exercise objective judgment of the business enterprise and on its corporate affairs, independent from management. It would appear that the [board] was supine in its deliberations at best” and that “there was a lack of appreciation of and application of mind (at the very least) by the executives and the Board to the actual 1064 Business Plan and to the interest of Transnet.”
Transnet has begun a process to recover billions from executives such as former CEO Brian Molefe and former CFO Anoj Singh, and has instituted civil action against Gupta-linked companies. However, one member of the board that approved the increase of ETC to R54.5 billion continues to serve on the boards of JSE-listed companies and other state-owned enterprises, while another was even appointed as a Transnet executive, although he has subsequently resigned.
Several of these former Transnet board members serve in other leadership positions. One, who ironically was appointed to President Ramaphosa’s State-Owned Enterprises Council in June 2020, is the head of South African investments for a major asset manager, which could raise questions over its commitment to address governance issues within its portfolio companies.
Declaring directors to be delinquent sends an important message, but it is unlikely to result in the shift in corporate accountability many have hoped for following the numerous corporate scandals and a decade of “state capture”. This will require a far stronger stance against all those found to have contributed to corporate governance failures.
As the Myeni judgement notes, while the board of directors has collective responsibility for a company, collective responsibility does not exclude individual responsibility. Directors are required to act in good faith, in the best interests of a company, and with care, skill and diligence.
While it can be difficult for investors to consider the often conflicting reports that follow a corporate governance failure, this should not be used as an excuse to act. This will be especially important as the Commission of Inquiry into Allegations of State Capture concludes its work ahead of its March 2021 deadline. The Inquiry is unlikely to make specific findings against the various board members of the companies involved, but this should not mean that directors are not held accountable.
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