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Director Misconduct

DIRECTOR MISCONDUCT

Determining whether an action or behaviour of a director is “misconduct” is not always a straight forwad process, and if there is in fact misconduct the consequences will also depend on the type of director involved, the severity and impact of the misconduct, and the specific circumstances of the case. Not all misconduct will amount to or mean that the director should be declared delinquent. And there it becomes very important to understand how to deal with directors who do not fulfil their duties in terms of the law and/or or who do not adhere to the standard of conduct expected of a director.

Directors have fiduciary duties stemming from both the common law and the Companies Act 2015. We could break up misconduct in to 2 categories:

1. Misconduct in terms of performance as a director (for e.g. not attending meetings, not being involved in discussions, not being prepared for meetings etc.)

This may not be malicious, not for personal gain and/or does not break a law/rule/duty and may not have a significant negative impact on the company the director serves.

2. Misconduct in terms of a gross breach of a director’s fiduciary duties or standard of conduct expected (e.g. not acting in the best interests of the company)

A clear breach of a standard of conduct, law, duty or rule and/or where the action/behaviour (whether positive or negative) causes gross negative impact or failure of the company the director serves.

 

Some examples of director misconduct include, among others:

  • Disclosing confidential information (including information relating to boardroom discussions) without authorisation.
  • Acting or speaking on behalf of the company without appropriate authorisation.
  • Failing to disclose conflict of interests and acting upon such conflict.
  • Competing with the business of the company.
  • Taking any action which would be a breach of a fiduciary duty.
  • Violating a law.
  • Failing to abide by the rules of the company and board policies (such as code of conduct and ethics).
  • Engaging in disruptive or inappropriate behaviour in the boardroom or in interactions with management and employees.
  • Unduly interfering with the operations of the business.

Extracted and adapted from “The challenge of director misconduct” by Holly J Gregory, October 2013 on www.practicallaw.com

 

The Board should set clearly defined expectations for director behaviour and communicate such standards to directors.

Reference: Guidance for Boards: Director Misconduct, © Institute of Directors in South Africa 2020

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