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Sunday Times STLive By Matthew Lester , 2011-11-20

Beware the pitfalls of a non-executive directorship

Matthew Lester
Image: Business Times

Not every company has the financial resources to pay a big-hitter to be on hand as a non-executive director for special occasions only.

The same goes for external trustees of family trusts. It is a great concept to have a family referee for when in-laws try a reverse takeover of the family trust. But does it save the day? Maybe not.

I have resigned every non-executive directorship and external trusteeship I ever held - not that they weren't good ready money, or that I didn't enjoy the status and boozy lunches that followed directors' meetings.

But I'd rather wash the company cars than take on the risks of being a non-executive director or external trustee.

The problems associated with being the external trustee have been around for some time.

All trustees must at all times act in the best interest of the beneficiaries.

However, since the beneficiaries and the donors who formed the trust are generally not the same people, this creates family friction of the worst form.

Dad thinks the external trustee will always agree with him. After all, it was his money that formed the trust and paid the external trustee. And the kids, and their legal team, generally think they are being hard done by.

But this is all insignificant compared to the duties of a director in terms of the new Companies Act. Get it wrong and an aggrieved group of shareholders, creditors or even a trade union could skin you alive.

Yes, there are all those caveats and escape hatches regarding reasonableness.

But go and tell that to the judge, if you ever get to court, that is.

The Companies Act isn't the only minefield. The new Tax Administration Bill now proposes a string of provisions that could result in a director or shareholder taking the hit when it all goes wrong and SARS takes a loss.

Then one hears stories of quarterly directors' meetings scheduled for 11am with cocktails and lunch from 12.30pm at a smart venue across town. And of non-executive directors who open the envelope containing their directors' packs with one hand while signing the attendance register with the other. It won't be long before some external directors will be caught out - with creditors and others trying class actions, seeking to recover fortunes and charging handsome contingency fees.

Some comfort can be obtained from implementing professional indemnity insurance for directors' actions. But that won't necessarily help if the directors' actions were illegal.

  • Lester is a professor at the Rhodes Business School. For more see www.criticalthought.co.za