companies bill a worry for governance guru
19 July 2007

Mervyn King, author of SA's first two corporate governance codes and currently working on the third installment, is concerned by the proposed new set of laws governing company directors.

King has warned the new code (King 3) is necessary in light of the proposed amendments to the Companies Act, which in their latest form, include a chapter on governance, transforming a code that has been voluntary until now into compulsory practice. King believes this is a dangerous path to tread.

King 2 is a guide and it's a comply-or-explain regime, and if you don't comply but you explain why, that is in fact compliance... but once you put in place an inflexible structure, you've got a problem, and that's the problem they have run into in America with (the) Sarbanes-Oxley (Act), where you comply or you go to jail,’ he says.

The current draft of amendments to the Companies Act includes 24 sections detailing directors' liabilities, ranging from how to punish lies in a company prospectus to ethereal requirements on ‘shareholders' rights’. King believes efforts to ‘codify’ directors' duties and to try to define ‘independence’ are the wrong way to go. King Committee member Nigel Payne says that given the new liabilities heaped on directors in the draft, ‘anyone would be a fool to be a non-executive director’ under the regime in the new Bill.

For a start, directors can be sued in their personal capacity for virtually any loss that is suffered due to a company's actions. Also, ‘the current draft, for example, could result in many companies finding that large chunks of their board and audit committees won't comply with the law because these directors won't be considered independent’.

For example, the draft Act says a director cannot be considered independent if any of his family has any shares in that company – even if this is unbeknown to him.

Full article in Financial Mail report.