Guidance on Responsible Leadership by directors during COVID-19 September 2020

By KENDALL KEANLY AND BELINDA SCRIBA, Published in COVID-19 Company Law

In the July 2020 issue of without prejudice, we published an article titled "Decisions by companies during COVID-19 Lockdown: Oppressive or prejudicial?". That article served to highlight the potential liability which may befall directors as a result of decisions made by them as a consequence of the COVID-19 pandemic and the ensuing lockdown in South Africa.

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Decisions taken by directors during the COVID-19 lockdown have also been highlighted by the Institute of Directors of South Africa, in a guidance paper co-published by them: "Responsible Leadership in Responding to COVID-19". This guidance paper serves to draw attention to specific areas which, in the view of the Institute, should be the focal points of directors' and managements' attention in navigating the current environment. These focus areas range from corporate governance to human capital, and even include organisational performance. This article serves to highlight those areas which relate to the conduct of directors in their day-to-day management of an organisation.

The Institute of Directors highlights that directors need to consider the organisation's current culture and values to determine whether they are still appropriate. Consideration should be given to the changes in the market's values and priorities. The priority is that directors ensure that the separation between the board and management is maintained during the COVID-19 lockdown and beyond. While directors should put the relevant measures in place to assist the organisation in addressing the COVID-19 pandemic, they must continue to ensure that employees are supported throughout these unprecedented and unpredictable times.

During this time, directors face the potential threat of scrutiny and liability under s163 of the Companies Act, 2008 for difficult decisions taken by them which may be viewed as oppressive, unfairly prejudicial and/or unfairly disregarding the interests of an individual. In attempting to avoid this, however, directors are cautioned against choosing to take a passive role in an organisation for fear of falling foul of the Companies Act and being exposed to personal liability. A director's role will always be to conduct the day-to-day management of an organisation in all circumstances. This is even more important during this time, when organisations face an uncertain future. Employees and stakeholders will look for strong leadership from directors, who must ensure that their management team has the necessary skills, competency and experience to assist them in making decisions, which may be difficult but necessary for the survival of the organisation. It must always be borne in mind that directors' conduct will be judged on the circumstances at the time. Directors avoiding difficult decisions may be found more wanting than those who take bold, decisive and necessary decisions to protect the organisation and its stakeholders.

Another area of focus relates to legal considerations which must be made by directors in order to ensure that the organisation does not fall foul of any legislation, which is constantly changing during these COVID-19 times. Directors are urged to obtain external legal advice where there are areas of particular concern. This is to gain clarity as to what the organisations' legal positions may be at particular points in time. Specific legal considerations highlighted by the Institute of Directors include:

  • Directors should have due regard to the solvency and liquidity of an organisation as contemplated in the Companies Act. They should ensure that an organisation does not trade recklessly. Failure to do so may result in liability for the directors. Legal advice should be obtained where a director is concerned that their organisation may be trading recklessly.
  • Directors should ensure that an organisation complies with all applicable laws, rules and regulations, especially legislation pertaining to the COVID-19 pandemic. Failing to adhere to changing regulations may not only have severe legal implications for the organisation, but may also result in reputational harm and directors' personal liability.
  • Directors should assess and understand the consequences of COVID-19 on the various contractual arrangements which have been concluded between the organisation and third parties (such as its suppliers and landlord/tenants). An assessment should be done as to the consequences (if any) which may result from any non-compliance of the provisions of such contractual arrangements.
  • Directors must assess the organisation's compliance with the King IV Code and/or any internal policies which the organisation may have in order to ensure compliance and ethical behaviour by the organisation. In the case of a listed company, compliance with the listings requirements of the Johannesburg Stock Exchange should be reassessed.

From the considerations mentioned, it is evident that in their day-to-day management of an organisation, directors are required to act more diligently in these turbulent, economically unstable times.

Accordingly, it is important for directors to understand the current circumstances under which their organisations are trading and the (constantly changing) governing legislation. Only once directors understand the framework in which their organisation is trading are they best placed to make the strategic, difficult and necessary decisions required for the organisation's survival post-COVID-19.

In cases of uncertainty, directors and management are advised to seek advice to safeguard not only the organisation and its stakeholders, but also themselves.

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Keanly and Scriba are Directors of Cliffe Dekker Hofmeyr.