The Companies Act recently celebrated 15 years since coming into effect on May 1 2011. One of its objectives is to promote the development of the South African economy by encouraging transparency and high standards of corporate governance given the big role of enterprises in the social and economic life of the nation. A significant reform introduced by the act is the codification of directors’ duties. The rationale behind the codification is mainly to make the law more accessible to directors to assist them in discharging their fiduciary duties. The act provides that the business affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all the powers and perform any of the functions of the company except to the extent that the act or the company’s memorandum of incorporation provide otherwise. Directors are required to act in good faith and in the best interests of the company, and to exercise the care, skill and diligence reasonably expected of persons carrying out their functions. Failure to comply with these duties may expose directors to liability under the act and the common law. The act allows for restrictive conditions to be imposed in the memorandum of incorporation of a company. These create problems in some companies. On the face of it, directors appear to have unfettered powers in managing the affairs of a company, but on close scrutiny this scenario is not always the case. The primary duty of directors individually and collectively is to exercise their powers bona fide in the best interest of a company. Reserving the appointment or removal of a CEO or CFO of a company to a shareholder renders this duty a nullity and corporate governance and accountability an illusion. It undermines the board’s power to rein in the conduct of these key individuals, especially in instances where a shareholder who appointed them or consented to their appointment is required to consent to their removals. A shareholder does not owe any fiduciary duty or duty of care and skill to a company in his/her capacity as a shareholder. Legally, a director’s discretion cannot be fettered in any form. However, the limitation on the appointments or removals of a CEO or CFO significantly erodes the directors’ powers provided for in the act. How can the board be called to account for their actions if a company’s inability to meet their expectations is directly linked to officials appointed by a shareholder who refuses to have them removed? The board cannot meaningfully discharge its statutory and fiduciary responsibilities if its ability to control the very persons responsible for the day-to-day management and financial affairs of the company is subject to the veto of a shareholder. This limitation on the appointment of the CEO and CFO has, in some companies, created a ceremonious board or puppet board that is controlled by the two executives and a shareholder who does not participate in the day-to-day management of the company. It is important to point out that the CEO and CFO exercise substantial authority in the conduct of the business affairs of a company. The CEO controls the general administration aspect of the company, and the CFO controls the finances, including procurement and risk management. By reserving the power to consent to the appointment or removal of these two key executives, a shareholder makes himself or herself a shadow director. This has the likelihood to expose the shareholder to breach of fiduciary duties.The limitations placed on the board in so far as it relates to the board’s power to remove the CEO and/or CFO create a mockery of the accountability required of the board. They render the board ineffective and undermine proper governance and accountability. The most insidious consequence, however, lies in the effect that such an arrangement may have upon the independence of the CEO and CFO. The fiduciary duties of these office-bearers are owed to the company, and not to the shareholder who happens to have secured their appointment. Yet, where the power to appoint or remove them resides solely in the hands of a shareholder the practical incentives of those individuals may become misaligned with their statutory obligations they owe to the company. Furthermore, controlling the CEO and CFO by a shareholder is problematic insofar as the law recognises the concept of a “shadow director”. A shadow director is a person who is not formally appointed as a director and who does not directly participate in management but directs the management of a company through controlling the appointed directors, who are simply puppets and who act in accordance with the instructions of the shadow director. By reserving the power to consent to the appointment or removal of these two key executives, a shareholder makes himself or herself a shadow director. This has the likelihood to expose the shareholder to breach of fiduciary duties. The English high court has explained that a shadow director may be held liable for breach of fiduciary duties linked to a specific instruction or direction given by the shadow director. Thus, where the instructions are pervasive and extend across the range of the directors’ decision-making, the potential scope of those obligations correspondingly increases. In our country a shareholder is yet to be held liable for losses sustained due to instructions given to the board as a shadow director. Therefore, boards of directors must be free to appoint and remove all executives. Such an approach will help in holding directors accountable for their failures. Shareholders must appoint boards made up of people with the requisite skills and proven track record in managing the kind of business the shareholders require. The boards must have the power to appoint all the executives the board believe have the skills to run the affairs of a company and, where necessary, replace them without seeking consent of a shareholder. Such an approach will significantly encourage high standards of corporate governance by boards and increase accountability. • Tshisevhe is a director of TGR Attorneys Inc. He writes in his personal capacity.Business Day