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A director stands individually, from the date of
his appointment or from the time he begins to act
as director, in a fiduciary relationship to the
company
A fiduciary is a person who acts on behalf of and
in the interests of another person in the exercise
of certain powers which affect the legal, financial
or other interest of that person
The hallmark of a fiduciary relationship is that it
is a relationship of trust and confidence
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The fiduciary relationship requires that the
fiduciary act in good faith and in the interests of
the beneficiary. A number of duties apply to the
fiduciary relationship that are aimed at ensuring
that a fiduciary does not abuse the fiduciary
relationship of trust and confidence
Each member of the board owes his fiduciary duty
individually and directly to the company as a
separate entity, and may be held personally liable
for the breach of these duties
The board of directors as a group, however, cannot
owe a fiduciary duty as the board is not
incorporated as a legal entity and has no
independent legal persona – it remains a collective
of individual directors
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Even if directors act as a collective their fiduciary
duties are incumbent upon them and vest in them
individually the directors can never divest
themselves of their fiduciary duties to the company
while they are still sitting as directors
All directors carry equal fiduciary responsibilities
and accountability and should have equal say and
influence in the decisions of the board
The executives are additionally accountable to their
non-executive colleagues for the day-to-day
implementation of the strategy as defined by the
board
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By accepting an appointment as a director, a
person individually assumes duties of care, skill
and judgement which cannot be avoided simply
by relying on the expertise of other members of
the board
Directors, though they are not required by law to
posses special skills, abilities, acumen or
experience of the business of the company, they
cannot be regarded as merely ornamental and
cannot escape culpability merely on the basis that
they did not fully appreciate the company’s affairs
or that they relied on the judgement of their fellow
directors or that they acted under the instructions
of a 3rd party
S v Shaban (1965) (4) SA 646 (W)
“ I want to destroy any idea that puppets can be lawfully
employed in our company system. By that I mean persons
placed on boards who pretend to have taken part in
resolutions of which they no nothing …[T]hese are still
lawfully elected directors whose functions as such are not a
hollow pretence. Our law does not know the puppet who
pretends to take part in the management of the company
whilst having no idea what it is to which he puts his
signature. It is utterly foreign to the basic concepts of our
law and the court will punish it as fraud.”
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Whilst boards may be constituted by persons with
diverse backgrounds, the individual director has a
broader duty than merely representing a
particular field of expertise or a particular
interests group
Every director therefore has a duty acquire
sufficient knowledge about the company to
enable him to discharge the individual director
responsibilities
Every director is bound to the company by a
separate and distinct fiduciary duty which is owed
independently to every company of which he is a
director, regardless of whether one or more of
these may be subsidiaries or related group of
companies
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The duties of directors are imposed primarily by
the Companies Act, the constitution of the
company and the common law
There is no distinction drawn between executive
and non-executive directors and the duties and
penalties attaching to directors do so regardless of
whether the company is a public profit or private
company
The highest legal duty of the board of directors is
to act honestly, in good faith and in the best
interests of the company
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The courts have described fiduciary duties as being
essentially being that of good faith
In Re Smith & Fawcett [1942] Ch 304 Lord Greene
MR said that directors should exercise their powers
“bona fide in what they consider –not what the court
may consider- is in the best interest of the company and
not for any collateral purpose”
The duty of good faith is the core duty of directors
because it applies to very decision which the
directors take
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This test is subjective so that if the directors
honestly believe that they are acting in the best
interests of the company there can be no breach of
duty, whether the court thinks that it was in the
company’s best interests or not
This position was succinctly captured in the words
of Jonathan Parker J in the case of Regentcrest Ltd
v Cohen [2001] 1 B.C.L.C 598;
“ The duty imposed on directors to act bona fide
in the interests of the company is a subjective
one…the question is not whether the court, had it
been in the position of the director at the relevant
time, might have acted differently.
Rather, the question is whether the director honestly
believed that his act or omission was in the interests
of the company. The issue is as to the director’s state
of mind. No doubt, where it is clear that the act or
omission under challenge resulted in substantial
detriment to the company, the director will have a
harder task persuading the court that he honestly
believed it to be in the company’s best interest; but
that does not detract from the subjective nature of the
test”
 The ruling in this case essentially introduced a
reasonableness element in the sense that honest
belief must be credible
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Directors have a duty to act within the confines of
the powers conferred upon them
The powers of directors may be limited by a wide of
range of rules, the constitution of the company may
impose limitations on the power of directors and
reserve some decisions for the general meeting, of
the general law may limit what directors may do or
the common law contains some limitations on the
power of directors
The company’s constitution is the main source of
the power of directors and also the main source of
any constraints against the power of director
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The articles can give the directors unlimited power
but it is more likely for the articles to set some
parameters within which the powers are to be
exercised
Directors have a duty to act within the confines of
the company’s constitution and to obey decisions
properly taken by shareholders in general meeting
It is not necessary that a director is subjectively
aware of the unconstitutional nature of his/her
actions, directors have a positive duty to acquaint
him/herself with the provisions of the company’s
constitution and to abide by them
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The common law principle is clear that the
directors in their exercise of their powers and in
deciding what is in the best interests of the
company, the directors must exercise an
independent and unfettered discretion
Directors must consider the affairs of he company
in an unbiased and objective manner
It follows that directors cannot validly contract
(either with one another or with 3rd parties) as to
how they shall vote at future board meetings or
otherwise conduct themselves in future
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Where a director is appointed to the board asa
representative of a major shareholder or substantial
creditor, he should recognise the inherent potential
for a conflict of interests and accept that his
primary duty is to always act in the best interests of
the company
This highly, theoretical concept may, of course, be
difficult to apply in practise, as directors who are
not strongly independent are likely to fall prey to
the human failing of putting the interests of the of
the party who appointed them before those of the
company
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the principles under this duty were heavily
influenced by the law pertaining to trusts
particularly the case of Keech v Sanford (1726) Sel.
Cas. Ch 61
As fiduciaries, directors are under a duty to avoid
placing themselves in a position in which their
duties to the company conflict with their personal
interests
Directors cannot , without the informed consent of
the company make a profit or retain a profit made
by them in the course of and means of their
directorship
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This duty ensures that the profit made by
directors that derives from their position as
directors are disgorged by them
Aberdeen Railway Co v Blaikie Bros (1854) 1
Macq 461 @ 471 –
“it is a rule of universal application that no one
having such duties to discharge, shall be allowed
to enter into engagements, in which he has or can
have, a personal interests conflicting or which may
possibly conflict with the interests of those who he
is bound to protect. So strictly is this principle
adhered to, that no question is allowed to be
raised as to the fairness or unfairness of the
contract so entered into.”
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(a)
(b)
This was also proclaimed in the case of Robinson v
Randfontein Estates Gold Mining Ltd 1921AD 168
at 178-9 were the court held that no one who has a
duty to perform shall place himself in a situation
where their interests conflict with their duty
A director must be precluded fr4om being swayed
by his or her personal interests
There are two separate and independent but
closely related legal principles that apply here:
A duty to avoid a conflict of personal interests (
the no conflict rule)
A duty not to make a profit from the fiduciary
position
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According to the no-profit rule directors may not
retain any profit made by them in the in capacity
as directors while performing their duties as a
director
Profits made by reason of and in the course of
their office as a director must be disgorged, unless
the shareholders acting in a general meeting have
consent to this
This rule is best illustrated by the case of Regal
(Hastings) Ltd v Gulliver [1942] 1 All ER 378 (HL);
[1967] AC 134
This is targeted at preventing directors from usurping
any contract, information or other opportunity that
properly belongs to the company and that came as to
the attention of the director because of his/her
directorship
 Since the opportunity belongs to the company, it is a
breach of fiduciary duty for a director to divert the
opportunity to him or herself
 See the case of Cook v Deeks[1916] 1 AC 554 (PC);
Robinson v Randfontein Estates Gold Mining Co Ltd
1926 AD 168; Da Silva v CH Chemicals (Pty) Ltd 2008 (6)
SA 620 (SCA)
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The broad principle is clear: directors are liable for
negligence in the performance of their duties
The duty of care, skill and diligence is not a
fiduciary duty but is based on the aquilian liability
for negligence
The elements of this duty were aptly captured in
the case of Re City Equitable Fire Insurance Co
Ltd [1925] Ch. 407 at p428;
(1)
(2)
(3)
A director need not exhibit, in the performance of
his duties, a greater degree of skill than may
reasonably be expected from a person of his
knowledge and experience and not that of a
reasonable man. He must take such care, however,
in the performance of his own duties as an
ordinary man might be expected to take on his
own behalf
A director is bound to give continuous attention to
the affairs of the company. his duties are of an
intermittent nature to be performed at periodical
board meetings
In respect of his all duties, that, having regard to
the exigencies of business, and the articles of
association …
…, may properly be left to some other official, a
director is, in the absence of grounds for suspicion,
justified in trusting that official to perform such
duties honestly “
 In a striking contrast to fiduciary duties which the
courts have enforced vigorously, the courts have
adopted a lenient attitude to the duty of a
directors to act with care, skill and diligence with
the consequence that there is generally a low
standard of care
 However, this approach is fast changing in other
jurisdictions
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Unlike a professional person, a director is not
required by law to have any special qualifications
for his or her office
Directors are not members of a professional body,
and there are no objective standards of skill that is
applicable to directors
It is very difficult to formulate a single objective
standard of skill that will apply to all directors of all
companies, ranging from small owner-managed
companies to large multinational ones
Not only are there different types of companies
there are different types of directors
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An executive director is, naturally, expected to
know more than a non-executive director about the
internal affairs of the company
Consequently the duty of care, skill and diligence
must depend on the company, the type of director
and his or her particular skills set ands knowledge,
Whilst there are obvious practical difficulties in
prescribing an appropriate standard of care and
skill for all directors across the board a director
must ensure that he has sufficient time to devote to
the company and that he is fully informed about
the financial, social and political environment
specific to the company in which he sits as a
director
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Whilst there are limits in law to the number of
directorships any one individual may hold, a
director owes a specific duty to each company of
which he is a director
A director should equip himself/herself on an on
going basis with sufficient understanding of the
company’s business and of the possible effect of
local and global developments of the company’s
business
Directors are entitled to all necessary information
about the company to enable them to properly
discharge their role; if necessary, management
should be asked to arrange periodic presentations
to ensure that directors remain fully briefed
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In discharging his role, a director must exercise the
care and skill than can be reasonably be expected of a
person of his actual knowledge and expertise in
looking after his own affairs. The test is a mixture of
both subjective and objective elements in that the
minimum standard is that of a reasonably prudent
person; however, a director who possesses greater
skills than usual is expected to give the company the
benefit of those skills, knowledge and experience.
Thus a director who practises as a forensic auditor or a
lawyer will be expected to exercise his actual degree of
skill and knowledge in the examination of company
affairs , even though that level of skill may be far
higher than would normally be exercised by other
directors who may no similar backgrounds or
experience