Wearing two hats in the boardroom – shareholder and director

It is common in the commercial world to find board members wearing two hats in the boardroom, that of director and shareholder. Though common, it is important to remember that a board member can only wear one hat in the boardroom and that is the hat of a director. Even if a director has been appointed in this capacity as a representative of a shareholder, the interests of the company must always be at the forefront of his/her mind when making decisions.

To deal with the challenges that come with wearing two hats in the boardroom, a board member must clearly understand what their fiduciary duties are towards the company and this should shape their actions going forward. Section 76 of the Companies Act No. 71 of 2008 (“the Companies Act”) requires a director to act in good faith for a proper purpose and in the best interests of the company. Further to this, the director is required to act with the necessary care, skill and diligence required of a person in this capacity. These duties outline the behaviour expected of a director when deliberating and making decisions concerning the company.

Once a new director has been appointed, we recommend that they undergo a robust induction and training process to ensure that they are fully aware of what is expected of them and the standards against which they must abide. A failure by a director to act in the best interest of the company will amount to a breach of his/her fiduciary duties and may result in the director incurring personal liability.

In the event that a board member is conflicted because of their “two hats”, such conflict will need to be appropriately managed by the board and, in particular, the board chair. Section 75 of the Companies Act states that, where a conflict exists, the conflicted director must disclose their conflict to the board, must not participate in the deliberations of the matter, and may not vote on the matter. We recommend that, in addition to relying on this provision, boards should establish a formal conflict of interest policy to clearly outline the steps that it should take in the event that a conflict ever arises. This is particularly relevant where shareholders are represented on the board.

By accepting their appointment to the position, directors imply that they will perform their duties to a certain standard, and it is a reasonable assumption that every individual director will apply his or her particular skills, experience and intelligence to the advantage of the company. If the director is unable to do this due to their own personal interest, or that of the shareholder on whose behalf they have been appointed, the effective functioning of the board may be adversely affected.