A DUTY TO PROTECT
Q: Is there a need to improve regulatory oversight and redress?
A: I don't think this will add anything. A person who becomes a director and doesn't know that his or her common law duties are good faith, loyalty, acting in the best interests of the company and so on ... the question for debate is whether it adds anything by putting it down in a piece of legislation.
Q: Even if directors do know their duties what redress do shareholders have if they ignore them?
A: If directors breach their common law duty the company could institute action for breach of his duty of care, let's say.
That's a common law duty which needs a causal connection between the breach, the wrongful act, and actual loss to the company. The one exception is the old section 424 of the existing companies act which is encapsulated in the new companies bill and that is where a director acts recklessly or in fraud of creditors.
Then section 424 takes over, which is a penal section where you do not have to prove causal connection between the recklessness of the director and loss to the company and or its creditors. The court can order the director to pay in full the loss to the company and its creditors.
So there is that penal section which has always been there and is incorporated again into the new companies bill.
Q: Is the new bill likely to scare would-be directors away?
A: No, I don't think so. What has happened for the first time is they've taken governance and made it a chapter in the companies bill. So what were recommendations in the King 2 code are now legislated. If a director was not aware of it then certainly now if he reads the companies act he is absolutely aware of what his duties are. If that frightens the director away so be it.
Q: If nothing is added why the pressure for this legislation?
A: It's something that is happening internationally. Suddenly there's a realisation that the great shareholders of the world are no longer the wealthy families, it's persons walking the street. The greatest shareholders are pension funds and that's your money and my money. Suddenly there's a realisation by politicians that their voters are the providers of capital. So when there's a corporate failure the politicians say we need to intervene to protect our voters.
Q: The fact is, surely, that there is a need to protect shareholders?
A: The question is whether the legislation adds to this protection. That's the bottom line. I don't believe it does. I don't believe you can legislate against dishonesty. If a person is going to be dishonest no legislation is going to stop him.
Q: So you believe nothing more can be done to protect shareholders and enforce accountability?
A: I think the accountability arises in the marketplace today. If you look at pension funds, the providers of capital are the persons in the street. They have another power. They have the election to buy goods from company A or company B.
And, certainly, the younger generation make conscious decisions about the purchasing of goods from companies that are adopting more sustainable business practices. I think the marketplace is much more effective than legislation.