the dissenting director

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					the dissenting director
                position paper 1
position paper 1 - page 1                                                                              the dissenting director

                                          not be regarded as professional
contents                                  advice or the official opinion of PwC,     Issues such as
1 Introduction                            the IoD or individual members. No         the strategic
                                          action should be taken on the strength    path that the
2 The essence of dissent                  of the information without obtaining      company takes
                                          professional advice. Although PwC         into the future are
3 Characteristics of constructive
                                          and the IoD take all reasonable steps     more likely than
                                          to ensure the quality and accuracy        others to result in disagreement. We
                                          of the information, accuracy is not       set out guidelines and considerations
4 Sensitive issues that may
                                          guaranteed. PwC, the IoD or its           for the director when faced with these
  provoke dissent
                                          members shall not be liable for           issues in our sections on “Sensitive
5 Formalities of dissent                  any damage, loss or liability of any      issues that may provoke dissent” and
                                          nature incurred directly or indirectly    “Guidelines for dissenting directors”.
6 Guidelines for dissenting directors     by whomever and resulting from
                                          any cause in connection with the          Companies with boards that do not
7 Possible reasons for an absence         information contained herein.             entertain disagreement nor engage
  of healthy debate
                                                                                    with management, or challenge their
                                          EXECUTIVE SUMMARY                         decisions, need to consider whether
8 The role of the chairman
                                          Healthy and robust debate and             the board culture is conducive to

9 Conclusion                              discussion between directors is           healthy debate. They also need to
                                          an integral component of board            consider whether directors with the
10 References                             functioning. The beginning point          appropriate levels of expertise and
                                          of deliberations may involve robust       experience have been appointed.
The information contained in this paper   discussion and debate around the
published by PricewaterhouseCoopers       issue at hand. This may be reflected       The role of the chairman is also a
(PwC) and the Institute of Directors      by differing views or disagreement on     pivotal one in this area. We discuss
(IoD) is provided for discussion          the matter.                               this in more detail in our sections
purposes only and is intended to                                                    dealing with “Possible reasons for an
provide the reader or his/her entity      The word “dissent” is used for the        absence of healthy debate” and “The
with general information of interest.     purposes of this paper to describe        role of the chairman”.
The information is supplied on an “as     the situation after these two stages
is” basis and has not been compiled       have passed and the director cannot       1. Introduction
to meet the reader’s or his/her           reconcile himself to the direction        The concept of an effectively
entity’s individual requirements. It is   taken by the board as a whole. It is at   functioning board is one that brings
the reader’s responsibility to satisfy    the stage when disagreement turns         to mind optimal decision making in an
him or her that the content meets         to dissent that a director needs to       atmosphere of mutual respect, trust,
the individual or his/ her entity’s       carefully consider his position and the   candour and open debate. However,
requirements. The information should      available options.                        it is to be expected that within
the dissenting director                                                                               position paper 1 - page 2

this atmosphere, disagreements,            all times act honestly and in the best      of the company,
differences of view, and in some           interest of the company. Displaying         which should
instances, dissent will arise.             dissent when required, and acting           already have
                                           with unfettered discretion, forms part      been agreed
This paper seeks to highlight the          and parcel of this primary fiduciary         upon by the
importance of raising the dissenting       duty. The director therefore has a          board.
voice. It also provides practical          responsibility to make his voice heard
guidelines for doing so in the best        where he disagrees with a certain           Another possible cause of
interests of the various stakeholders.     course of action.                           disagreement may be the method of
                                                                                       implementation. This will often arise
The board of directors collectively        2. The essence of dissent                   from differences in the perceived risks
(and those individuals that constitute     The terms “disagreement” and                inherent in the proposed approach, as
it) is charged with making decisions       “dissent” as used in the paper are          compared to alternative options.
on behalf of the company. Directors’       not meant to be synonymous. As              Dissent on matters of ethics or
duties arise from the common law, the      illustrated below, disagreement does        principle are the most difficult to deal

Companies Act and other legislation.       not necessarily constitute dissent but      with. Personal and religious convictions

The company’s articles of association                                                  aside, there are various other ethical
                                           may lead to dissent.
                                                                                       considerations, such as fairness and
may impose further duties upon its
                                                                                       transparency that come into play when
directors.                                 Before directors can be in a position
                                                                                       business transactions are concluded
                                           to decide on a proposal put before
                                                                                       and the board must consider these.
A director acts in a ‘fiduciary’ capacity   the board, it is essential that they
in relation to the company. This           have a proper grasp of the facts and
                                                                                       Disagreement on fundamental issues
fiduciary duty entails that directors at    assumptions that underpin it. The first
                                                                                       such as fraudulent, reckless, grossly
                                           step when differences of opinion arise
                                                                                       negligent or unlawful conduct is most
                                           therefore is for directors to understand
                                                                                       likely to lead to formal dissent.
                                           these facts and assumptions.
                                                                                       It is important that the board debate
                                           Initial differences of opinion may
                                                                                       should be conducted in such a way
                                           arise over the underlying facts and
                                                                                       that the focus is on the issues involved
                                           assumptions and these need to be            and effect that they will have on the
                                           clarified at the outset in order to ensure   long-term benefit of the company.
                                           that the debate is conducted from the
                                           correct premise.                            The extent of disagreement may vary
                                                                                       from a minor difference of opinion over
                                           More serious disagreement may arise         an immaterial issue to a fundamental
                                           over the purpose or objectives sought       disagreement. The latter, if it is
                                           to be achieved by a proposed course         unresolved, may result in the formal
                                           of action. Such proposals should be         dissent from a board decision by one
                                           consistent with the strategic direction     or more directors.
position paper 1 - page 3                                                                                    the dissenting director

3. Characteristics of constructive           5. Formalities of dissent                    favour of his or
dissent                                      Board decisions are taken collectively       her view.
Dissent is not the same as disloyalty        and it is assumed that each director
but rather an honest expression of           was party to a decision, unless            • In raising a
a director’s responsibility to act in        indicated otherwise. Directors who           dissenting
the best interest of the company.            disagree with a decision may be              voice, the
The knowledge by each director that          deemed to have consented unless              director should
other members of the board take their        they formally dissent. In most               always ensure that he or she is
responsibilities seriously, creates a        jurisdictions abstaining from voting         doing so on an informed basis. To
stronger, more effective monitoring          does not constitute dissent.                 this end the use of an independent
unit.                                                                                     professional may be required.
                                             It is therefore important that corporate     King II states that directors “must,
Enterprise involves risk taking in order     minutes preserve an accurate and             if in doubt about any aspect of
to achieve its objectives. Effective         official record of the proceedings of a       their duties, obtain independent
decision making entails understanding        board or committee meeting. Well-            professional advice at the earliest
these risks and assessing whether            kept corporate minutes and directors         opportunity”. King II also requires that
the company is managing the risks            resolutions serve as a record of             the “board should have an agreed
appropriately. Dissent is inappropriate if   corporate decisions and reflect director      procedure whereby directors may,
aimed at avoiding risk in its totality.      dissent where appropriate.
Dissent should therefore not be used
to stifle innovation and business
initiative. It is the final expression        6. Guidelines for dissenting directors
of a director’s personal opinion in          Where a director is in disagreement
the process of exercising his or her         with a board decision, the following
fiduciary duty.                               guidelines are available to the
4. Sensitive issues that may provoke
dissent                                      • The director should raise
Dissent may arise in relation to major         his or her concerns at the
decisions that may include:                    board meeting and obtain all
• formulation of strategy;                     information necessary to make
• implementation of strategy;                  the decision.
• dividend policy;
• unlawful conduct;                          • If still in disagreement, the
• appointment, retention, retirement           director should thereafter
  and re-appointment of directors; and         engage in robust debate at
• issues relating to company culture,          the meeting and put forward
  ethics and value systems.                    facts and arguments in
the dissenting director                                                                                position paper 1 - page 4

  if necessary, take independent              convene a special meeting.                  to result, the
  professional advice at the company’s                                                    director may
  expense.”                                  • The above may include drafting and         have no option
                                              distributing a detailed memorandum          but to resign
• Upon having obtained this advice,           of concerns to the other directors          from the board.
  the director should arrange for further     and to request discussion of
  board discussion relating to the            this memorandum at the special            • A director
  matter.                                     meeting. If the chairman is not willing     intending to resign should obtain
                                              to convene a special meeting to             legal counsel on his or her course of
• If, after receipt of further information    discuss the issue, the articles of the      action.
  and the additional board discussion         company should be consulted to
  the director is still dissatisfied, he       determine if an individual director has   • At this stage the director should
                                                                                          consider issuing a statement to the
                                                                                          board explaining his or her position
                                                                                          together with his or her resignation.
                                                                                          In this instance the director should
                                                                                          seek legal counsel to ensure
                                                                                          fiduciary duties and responsibilities
                                                                                          are not breached.

                                                                                        • The director should discuss and
                                                                                          preferably agree with the board the
                                                                                          nature of the public communication
                                                                                          regarding the resignation bearing in
                                                                                          mind the fine line between the duty
                                                                                          of confidentiality to the company and
                                                                                          the duty to report to shareholders
                                                                                          in an open and transparent manner
                                                                                          so as to enable them to properly
                                                                                          exercise their powers of appointing
  or she may request the formal               the power to call a meeting.
  recording of the dissenting view in
  the resolution of the meeting where        • Having taken the steps above, if
                                                                                        • If the matter is one that will be
  the matter is discussed.                    the view of the dissenting director is      reported to shareholders in a circular
                                              then voted against or overruled on          or annual report, the chairman may
• For concerns arising between                a matter which he or she regards            allow the director the right to require
  scheduled meetings, the director            as one of fundamental principle,            that it be recorded in the circular or
  can approach the chairman or                and he or she is of the opinion that        annual report that the decision of the
  company secretary in order to               serious harm to the company is likely       board was not unanimous.
position paper 1 - page 5                                                                                the dissenting director

• A director is bound by the fiduciary       directors may result in boards being        board meeting
 duty to maintain confidentiality with       over-weighted with inexperienced            is inappropriate.
 respect to information acquired            members incapable of dealing with
 about the company’s operations             complex corporate issues.                 • Directors do
 and affairs in his or her capacity as                                                  not adequately
 director, as well as any provisions       • The chairman may not understand            prepare for
 contained in his or her service            how to manage the board                     complex issues
 contract. This duty continues after        deliberation process or lack the            discussed at board meetings.
 the director has left the board. It        necessary skills to do so.
 is only in rare circumstances that                                                   8. The role of the chairman
 the duty to maintain confidentiality       • Directors may lack the expertise,        The chairman of the board is primarily
 is overridden by the duty to report
                                            confidence and courage to analyse          responsible for the effective functioning
 to other authorities, for example a
                                            the company’s problems and                of the board. This includes inter alia
 requirement to report corruption
                                            opportunities.                            to preside over meetings of directors
 under the relevant statutes. Where
                                                                                      and to ensure the smooth operation
 there is a legal obligation on the
                                           • Directors may not be groomed in          of the board. The chairman therefore
 director to report, this would not
                                            board etiquette and may therefore be      has the key role in managing debate,
 result in a breach of fiduciary duty. In
                                            of the view that to ask a question in a   disagreement and ultimately dissent.
 all instances the director would be
 advised to seek legal counsel
                                                                                             It is the duty of the chairman to
 before disclosure.
                                                                                             encourage healthy and robust
                                                                                             debate over decisions and
7. Possible reasons for an
                                                                                             ultimately strike the correct
absence of healthy debate
A board culture which                                                                        balance between too little and

discourages robust debate is one                                                             too much debate.

of the possible reasons for a lack
of director involvement. Other                                                               9. Conclusion
reasons may be:                                                                              The role of critical and robust
• The view that directors                                                                    debate, disagreement and
 should be completely loyal                                                                  dissent at the appropriate
 to the chairman and support                                                                 levels and in the appropriate
 management demands creates                                                                  manner is undeniable in shaping
 a culture of conformity and                                                                 the future of a company and
 dampens or eliminates healthy                                                               maximising value. To this
 discussion and debate.                                                                      end, directors must act with
                                                                                             courage in the face of possible
• Shortcomings in the selection                                                              reprisals and stand firm in their
 process and the training of new                                                             conviction to do that which is
the dissenting director                                                                         position paper 1 - page 6

in the best interests of the company.        • Gardner, H.; Fryer, B. (2007). The
This is required not only as it is a legal    Ethical Mind. Harvard Business
responsibility of directors but more          Review, March 2007.
importantly because ethical standards        • King Report on Corporate
demand it.                                    Governance for South Africa, 2002
                                             • Leighton, D.; Thain, D (1994).
10. References                                Effective director dissent. Business
• Companies Act 61 of 1973, South             Quarterly, 22 June 1994.
  Africa.                                    • Sonnenfeld, J.A. (2002). What
• Crauford, N. (2006). Three Golden           Makes Great Boards Great. Harvard
  Rules Put Thinkers on Board.                Business Review, September 2002,
  Dominion Post, 16 May 2006.                 106-114.
• Crauford, N. (2008). Directors
  and Board Diversity. Independent
  Financial Review, 30 January 2008.

                          1st Floor, Block B, Grayston Ridge Office Park, 144 Katherine Ave, Sandown
                                   Contact Person: Ansie Ramalho; email:
                                          Tel: +27 11 430-9900 Fax: +27 11 444-7907
                                            GUIDELINE FOR DISSENTING DIRECTORS
Options                 Step 1:                    Step 2:                   Step 3a:                 Step 3b:                  Step 4a:                  Step 4b:
                        • Obtain all information   Obtain independent        Despite initial views,   If still do not support   Consider appropriate      Consider appropriate
                          necessary to make        professional advice       based on further facts   decision, request         further steps and         further steps and
                          decision.                and arrange for further   and debate, agree to     formal recording of       obtain professional       obtain professional
                        • Engage in robust         board discussion.         support decision.        dissenting view in        advice in this regard.    advice in this regard.
                          debate at meeting                                                           resolution.
                          and put forward facts                                                                                 Resignation and           Report to the relevant
                          and arguments in                                                                                      possible notice/          authorities where
                          favour of your view.                                                                                  communiqué to             required by law.
                                                                                                                                parties. Must still be
                                                                                                                                acting in the interest
                                                                                                                                of the company.
Dissent on a                   Obligatory          Optional depending              No action              Recommended            Optional depending           Not applicable
matter of business                                 on the importance of                                                          on the importance of
judgement eg.                                           the issue.                                                                    the issue.

Dissent on matter of           Obligatory              Recommended                 No action                 Obligatory         Recommended subject           Not applicable
perceived business                                                                                                                to legal advice, and
ethics or principle.                                                                                                                provided ethical
                                                                                                                                   issue is in relation
                                                                                                                                  to company and not
                                                                                                                                   personal view (for
                                                                                                                                 example on smoking,
                                                                                                                                     gambling, etc)*.

Dissent on                     Obligatory                Obligatory          Where a fundamental             Obligatory          Obligatory subject to          Obligatory
fundamental matter                                                           matter is concerned,                                    legal advice.
that may constitute                                                          action is necessary.
fraudulent, reckless,
grossly negligent or
unlawful conduct.

* Where the personal values and ethics of a director conflict with the business of the company but are not generally offensive to the values of that company (for example a
company has an investment in a casino but a director is religious and does not support gambling), this kind of personal conflict does not require the actions set out above.
The director should consider resignation if his/her fundamental values and ethics are not reconcilable with the business model of the company.