This is the first in a series of articles on the duties of directors in relation to employment, employment law and employee benefits. Senior consultant Graham Damant, has discussed these issues at length with Bowmans’ partner Chris Todd in two ‘Value of Knowing’ podcasts. The first (on our website here) covers what boards in South Africa need to know about employment, employment law and employee benefits to meet their fiduciary duties avoid liability. The second (on our website here here) highlights the obligations and duties of boards in South Africa in relation to CEOs. Subscribe to’ The value of Knowing’ podcast on Apple Podcasts or Spotify.

The duties of directors in an increasingly regulated environment are onerous. Over and above the fiduciary duties that are owed to the company, the directors need to navigate a minefield of legislation and regulations in order to properly discharge their duties and, in the worst case, avoid personal liability.

Boards of directors usually seek employment advice in circumstances where there has been a major issue involving either the chief executive or other senior executives and where there is a reputational or regulatory risk as a consequence of that conduct. However, there are a number of employment issues that need to be considered by a board in the ordinary course of its duties.

A company is made up of the people who are employed by it. Their conduct in relation to outsiders and in relation to each other can have serious consequences for the company. There are numerous examples where the behaviour of a chief executive or other senior executives have damaged a company – sometimes irreparably.

The more obvious examples are the allegations of sexual harassment made against Harvey Weinstein and the impact on his company; the allegations of sexual misconduct on the part of the previous chief executive of Abercrombie & Fitch with substantial claims being made against the company as well as investigations by the authorities. 

In South Africa there have been a number of instances of conduct on the part of executives that has seriously impacted the company. The cases of Steinhoff, VBS Bank, Fidentia and all of the various companies implicated in the State Capture project, are examples.

In some instances, the conduct of executives has impacted employees such as in the cases of sexual harassment and bullying type behaviour.  Sometimes it impacts outsiders such as creditors and suppliers. Shareholders can also be affected by a loss in the value of their shareholdings. There are other instances where advice is sought and where the board is dealing with employment in the ordinary course and scope of its duties.

There are a number of steps that boards can take to mitigate the harm that can be caused by the conduct of the chief executive and other senior executives. This raises the question of what directors need to know and do about employment law and employment generally.

The Companies Act provides little guidance. Fiduciary duties are broadly stated in section 76 of the Companies Act but are not specific in relation to employment. It does require directors to take reasonably diligent steps to become informed about matters affecting the company. This would include employment issues, but no further guidance is given.

More guidance can be found in the King IV Code on Corporate Governance (King IV Code).  The King IV Code articulates the various areas of director responsibility and duties in relation to employment. Although the code is not legally binding, it may well be referred to in determining whether directors have discharged their duty of care properly and in assessing whether directors could rely on the ‘business judgment rule’ in defending themselves in any personal liability claims.  

The major themes that emerge from the King IV Code are that the board of directors is responsible for the following duties:

• The directors need to identify and have knowledge of the key employment laws and regulations that are applicable to the company and need to continually monitor the regulatory environment and developments. The directors need to delegate responsibility to the appropriate executives for implementation, execution and compliance with the laws and regulations.
• The board needs to set the direction of how ethics should be approached and addressed by the company and its employees, ensure codes and policies are in place, ensure employees are familiarised with the policies, and delegate responsibility to management for the execution and implementation of the policies.
• The directors need to appoint the CEO and oversee the appointment of persons to key managerial functions, ensuring that they have the necessary competencies and that the functions are properly resourced. The board needs to ensure that there is a proper delegation of authority framework for the CEO that addresses their authority to appoint the executives.
• The board is responsible for formally evaluating the performance of the CEO against agreed performance measures and targets. The board is responsible for taking any remedial steps in the event that the CEO fails to perform, including termination of employment if need be. The board is also responsible for dealing with any misconduct on the part of the CEO.
• The board is required to set the direction of how remuneration should be approached and approve a remuneration policy that gives effect to that direction. Given that a significant component of remuneration will be variable incentive-based pay, the board is responsible for determining performance measures that support the remuneration policy.
• The board is responsible for ensuring that the delegation of authority to management contributes to role clarity and the effective exercise of authority and responsibility.

This series of articles deals firstly with what boards can and should do in relation to employment law and employment issues in the ordinary scope of their duties. The following topics are covered:

• Knowledge of employment laws and regulations applicable to the company – we will deal with what directors need to know about the employment laws and regulations that apply to the company. This will encompass an overview of the legislation that is applicable to employment and employees and the appropriate delegations of authority for monitoring developments and for compliance with labour legislation.
• Ethics and ethical standards –The board is required to set the direction for ethical standards and to ensure policies are implemented that would support the direction. We deal with what constitutes the ethical direction of the company and what policies would support it. We deal with appropriate delegations of authority and what the board is required to do in respect of monitoring compliance.
• Appointment of the CEO – we will deal with the board’s obligation to appoint a CEO. More specifically we will deal with the contractual terms that would be appropriate to the appointment of a CEO and specific provisions that should be considered for incorporation into the CEO contract. We will also cover the delegation of authority to the CEO and the issue of role clarity.
• Remuneration – the board is obliged to determine the direction of remuneration and approve a remuneration policy. As the implementation of policies and change of policies includes the exercise of a discretion and as many of the incentive policies themselves contain discretions that need to be exercised by the board, we will deal with the requirements applicable to the exercise of such discretion.

We will then turn to deal with what directors need to do when things go wrong. This arises where there has been a breach of the ethical direction and codes by the CEO or other senior executives that could have a reputational or regulatory consequence for the company.  Issues that will be covered are:

• The board’s response to issues that may have a reputational or regulatory consequence for the company – we will deal with how a board should respond when faced with allegations of misconduct by the CEO. We will cover when it is appropriate to suspend the CEO and when not.
• Misconduct and poor performance by the CEO – we will deal with the board’s obligation to deal with misconduct committed by the CEO, the appropriate process to be followed and the steps to be taken. The board has an obligation to assess the performance of the CEO. We will deal with the need to take remedial steps for poor performance, including termination of employment.
• Mutual separation agreements – in many instances the board will decide to conclude a mutual separation agreement rather than go through the processes required to terminate a CEO’s contract for poor performance or misconduct. The board has various duties in regard to the conclusion of such agreements and there are clauses that such agreements typically contain. We will cover when it is appropriate to conclude such agreements and when it is not.

All articles in the series:

• Introduction: directors’ duties in relation to employment, employment law and employee benefits
• Knowledge of the key employment legislation and regulations affecting the company
• Employee ethics in relation to director duties
• CEO employment agreements
• Remuneration, long-term and short-term incentives
• Ethical breaches, response to reputational and regulatory issues
• Dealing with CEO misconduct and poor performance
• CEO mutual separation agreements