Company secretaries: gatekeepers or doormen? February 2018

By ANDREW JOHNSTON, Published in Company Law

This past year will be characterised and remembered as one of two distinct halves. During the first six months, South Africans were captivated by the ongoing "Zupta" shenanigans and increasing revelations around state capture of State Owned Entities. The second six months predominantly focused on alleged corporate governance failures in the private sector – Steinhoff, KPMG, McKinsey and MultiChoice, to name but a few.

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While the noose may be tightening around the president and certain of his acolytes' necks following the Gupta e-mail leaks, several scathing Constitutional Court rulings and, more recently, the outcome of the ANC elective conference in December, serious questions have also been raised around what seem like material lapses in corporate governance and possible corruption in the private sector.

Aside from the resignations of CEOs at both Steinhoff and KPMG, significant reputational damage to these organisations, loss of clients and business opportunities and the refund of millions of rand, a very real possibility exists that several of these directors may face civil and criminal charges if convicted in courts of law. This may ultimately lead to lengthy prison terms and possible disqualification from serving as directors of companies ever again.

This leads me to the question: where were the company secretaries and what were their expected roles and responsibilities while these corporate governance indiscretions were taking place? Furthermore, what are the potential repercussions for these company secretaries in terms of the law, should the courts determine that the boards (and possibly the company secretaries) were found wanting in terms of both their statutory and common law fiduciary duties towards these companies?

In Ramani Naidoo's recently published book entitled "Corporate Governance – An Essential Guide for South African Companies" third edition, she makes reference to Lord Denning's reported judgement in Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd (1971) 2 QB 711 (CA) when he stated:

"... Our courts have held that the Company Secretary is an officer of the company with extensive duties and responsibilities. Far from being a mere scribe, he regularly makes representations and enters into contracts on behalf of the company. Company Secretaries are an integral part of an organisation's management structure and play a pivotal role in the proper governance of the company. The Company Secretary, in effect, acts as the company's Chief Governance Officer".

This statement was backed up in King III, principle 2.21, which recorded that the company secretary has a pivotal role to play in the corporate governance of the company and should be empowered by the board to fulfil those duties properly (see paragraphs 95 and 97 of King III). King IV likewise recognises that the board of a company should ensure that it has access to professional and independent guidance on corporate governance and that where a company secretary is appointed, he or she should provide such professional corporate governance services to the governing body (see paragraph 90 – Principle 10). Similar to King III, King IV makes it incumbent on the board to ensure that the company secretary is empowered to fulfil these corporate governance services and that the position carries the necessary authority (paragraph 93 – Principle 10).

The appointment of a company secretary in South Africa is regulated by s86 of the Companies Act, 2008, read in conjunction with paragraph 3.84 (h) of the JSE Listings Requirements (for public listed companies).

Essentially, a public company or state owned company in South Africa must, in terms of the Companies Act, appoint a Company Secretary (s86 (1)). He or she must have the requisite knowledge of or experience in relevant laws and be a permanent resident of the Republic and remain so while serving in that capacity (s86 (2)).

A juristic person or partnership may also be appointed as a company secretary (s87). For public listed companies, the board should annually
consider and satisfy itself on the competence, qualifications and experience of the company secretary and report to shareholders in this regard (JSE Listings Requirements – paragraph 3.84 (h)). King IV confirms that the appointment of a company secretary to an organisation should be appropriate to that organisation (paragraph 91 – Principle 10). Furthermore, the appointment or removal of a company secretary should be a matter for the board as a whole (paragraphs 91 and 95 – King IV).

The company secretary's duties are codified in terms of the Companies Act (s88) and include, but are not restricted to, providing the directors of the company collectively and individually, with guidance as to their duties, responsibilities and powers, making the directors aware of any law relevant to or affecting the company and reporting to the board any failure on the part of the company or a director to comply with the Memorandum of Incorporation or the Companies Act. Section 88(2)(e) also requires the company secretary to certify, in the company's annual financial statements, whether the company has complied with its reporting obligations in terms of the Companies Act.

While several commentators will be quick to remind company secretaries that their role and function is restricted to advising and guiding the board on procedural matters only, and that they should not engage in board discussions unless it is in respect of a matter of form or procedure, there can be little doubt that the role (especially in larger corporations) has and continues to evolve beyond mere administrative and routine responsibilities and is increasingly becoming more strategic and compliance focused in nature.

In her article entitled "The Company Secretary as Polymath" IFC, 2014, Loren Wulfsohn remarks that company secretaries are expected to be polymaths – one who is very learned in several fields of study – as they need to have a wide knowledge on several aspects and should perform the following roles concurrently: trusted board adviser on all legislative, regulatory and governance requirements; communication and liaison officer to all stakeholders; overall governance professional to ensure that the company is complying in all respects; and watchdog – to point out any issue or short-comings with respect to any non-compliance with laws or regulations.

Accordingly, the historical and traditional role of a company secretary is far removed from current more contemporary expectations.

In determining the attributes and understanding the role of the modern day company secretary post the Global Financial Crisis, it has been widely recognised that he or she needs, and is expected to be dynamic. This is not to diminish the value of effective and efficient administration; exceptional administrative skills are simply no longer the core aspect by which they should be measured or valued within an organisation. As discussed in "The Dynamic Company Secretary in the Post – GFC Landscape" by T Hartin, S Dabski and R Saffron (Boardroom publication, 2015), these should now merely be a baseline.

In order to contribute the most value, a company secretary must be organisationally aware – and in this sense be acutely cognisant of not just organisational structures but also of key strategic objectives and priorities – as well as have multi-disciplinary skills and capabilities to assess implications, potential threats and opportunities, in order to assist the organisation (and the board) with the delivery of those core objectives.

In further developing the concept of the modern day role of the company secretary, it should be asked whether the Company Secretary can or should be regarded as a prescribed officer of the company. Prescribed officers are persons who, despite not being directors of the company, "exercise" or regularly participate, to a material degree, in general executive control over and management of the whole or a significant portion of the business and activities of the company (Regulation 38 of the Companies Act).

The category of persons who can be deemed to be "prescribed officers" is extremely broad and will usually include all members of executive and senior management who are not board directors (for example company secretaries, chief technology and strategic officers, general counsel, and the head of Group Human Resources, etc.). Several sections in the Companies Act treat those classified as prescribed officers as the equals of directors. In particular, sections 75 – 77 of the Companies Act, which deal with conflicts of interest, directors duties and liabilities of directors, are also extended to prescribed officers, as is s162 which provides for directors and prescribed officers to be declared delinquent or under probation in certain circumstances (Motale v Abahlobo Transport Services (Pty) Ltd and Others (2015) JOL 34696 (WCC)).

Allied to these sections of the Companies Act, and which would also apply to a company secretary (whether classified as a prescribed officer or not) are sections 214 (false statements, reckless conduct and non-compliance – ASIC v Healey and Others (2011) FCA 717)), 216 (penalties) and 218 (civil actions). Frequently, company secretaries also double up as the general counsel, chief financial officer and treasurer of the organisation. In this respect company secretaries would be well advised to consider the James Hardie decision in the high court of Australia (Shafron v Australian Securities and Investments Commission (2012) HCA 18), which found that the role of company secretary and general counsel was indistinguishable when held by one person:

"... it is not possible to sever responsibilities into watertight compartments, one marked 'company secretary' and the other marked 'general counsel'. The expression 'company secretary' is not a term of art. The responsibilities of company secretaries can vary from company to company, within companies and over time. They have tended gradually to wax over many decades".

In the James Hardie case, the high court concurred with the Australian Federal Court of Appeal, finding that where a company secretary has legal skills, he or she is expected to use them and could be expected to raise issues such as potential misleading statements or disclosure obligations with the board.

Consequently, company secretaries can no longer afford to take a passive stance in the companies and on the boards they serve. They are expected to behave as pro-active and professional gatekeepers to the board (and even other stakeholders) on all governance related matters and to discharge, among others, those statutory duties set out in s88 of the Companies Act and elsewhere. Simply acting as a doorman at board meetings is no longer adequate, nor is it a defence, and company secretaries lulled into a false sense of security do so at their own risk and peril, should they subsequently be found to have been wanting, and on the wrong end of the law.

Accordingly, in many respects, a parallel can be drawn between the modern day company secretary and the White House Chief of Staff. The White House Chief of Staff controls access to the leader of the free world and is the president's main adviser and closest confidante. The same could be said of the company secretary vis-à-vis the chairman of the board. The Chief of Staff determines the administration's legislative agenda and communicates with Congress and the Cabinet. He is the gatekeeper and "spear catcher" who protects the president from all incoming flak, much as is expected from the company secretary.

A doorman on the other hand is, in its most simplistic form, merely someone whose job it is to stand by the door of a hotel or public building and allow people to go in or out and to open their car doors. Given the onerous role and potential liabilities of a company secretary in the 21st century, it is clear to see why they need to become and be seen at all times to be gatekeepers as opposed to simply doormen of their organisations.

In conclusion Andrew Kakabadse, Professor of Governance and Leadership at Henley highlights:

"While the Non-Executive Director has been the focus of much attention in the post financial crisis period, it is now time for the Company Secretary role to come to the fore. Company Secretaries are the only ones with access to all relevant information, know the culture of an organisation inside out and are attuned to the reality of what is happening on the board and in the organisation. They have only one agenda–what is best for the company and the board".

Johnston is Director: Corporate Services at Sun International. The views expressed in this article are those of the author only and are not representative of the views of Sun International, its board members or employees.