Johannesburg, 12 Jul 2011
The new Companies Act, an amendment to the Companies Act of 2008, officially came into effect on 1 May 2011. While this Act makes some positive changes to the requirements for the way in which businesses are run in the country, and reception for the most part has been positive, as with any new piece of legislation, it requires organisations to gear themselves towards compliance, something which can be a costly and complicated process if not addressed correctly.
The King III report and its predecessors were used as the basis for the new Act, which means that the emphasis now is on sound business practice and sustainability, which can only benefit the South African economy in the long-term.
The most important aspect of the Act is the way in which it aims to regulate the behaviour and conduct of senior members of companies. In the past, the description of fiduciary duty and good faith, among other terms, was very vague, which created loopholes and led to the collapse of a number of organisations. The new Companies Act codifies these and other principles, governing the standards of conduct for company directors and regulating the process that should be taken if these standards are not met.
This particular amendment to the Act was designed to address a very specific problem experienced in recent years in South Africa, where company directors have defrauded the assets of their companies, effectively stealing the company's assets and finances for themselves and then declaring themselves insolvent, walking away from the business without consequence, and going on to do the same thing again with another company.
The net result of this was that investors lost millions through fraud and dummy corporations, and many people lost their jobs when companies folded, and nobody was held accountable for the losses because the law did not specify a responsible person. The amended Act now defines acceptable behaviour for companies and directors and also places responsibility on managers as prescribed officers of the company. Directors can now be held personally liable for wrongdoings and misconduct, and specific stakeholders, including employees, can hold the company and the directors accountable for their actions.
For example, if there has been gross negligence with regard to finances, where directors have enriched themselves to the detriment of the company, the directors will be personally liable for the damage this causes and the loss of income that may result. There is now a firm obligation for company directors and officials to act in good faith and take strong, positive action against corruption, misappropriation of funds, fraud, embezzlement and the absence of good corporate governance forsaken by the fiduciary duties.
While the Companies Act itself places requirements on business in terms of compliance, it is important to view the new Act in the context of two other Bills as well, namely the Intellectual Property Act and the new Competition Act. These, together with new labour laws, are all playing a role in contributing towards the governance and compliance challenges facing directors in a new legal environment. In order to remain in business and to continue securing contracts, it is vital that all of these laws and regulations are complied with.
When it comes to dealing with the challenges posed by various Acts and legislation, the process of ensuring compliance can become quite daunting. However, technology can be of assistance here, as there is software available to monitor compliance and governance. Where organisations have gone wrong in the past is by using ad hoc implementations in an attempt to deal with various compliance issues, which leads to increased cost and complexity.
A better solution is to implement a single, integrated system that deals with compliance end-to-end, which not only reduces capital outlay and operational costs in terms of support and maintenance, it also ensures that all compliance issues can be handled in a centralised solution, which decreases the risk of having multiple disparate systems. This integrated system will provide a single snapshot view of compliance status across the organisation, and enables issues to be immediately flagged for correction.
Such software can be used to link the compliance framework of the organisation with information from existing data sources or third-party sources to ensure that all legislation and regulations are being complied with at any given time. Added to this, technology allows for these types of solutions to be automated with built-in logic that provides recommended actions and questions within processes, allowing the solution to default an action and provide corrective measures to remediate.
The ever increasing number of laws and regulations governing business can prove challenging to deal with, and in order to successfully integrate compliance to the Companies Act and other laws, it is vital to have a sound compliance framework and the right technology in place to support compliance initiatives.
Compliance is, however, not just something that companies are obliged to do, and it can also be of enormous benefit to organisations. By creating a culture of responsibility and accountability, promoting ethical behaviour and strengthening the moral fibre of people within organisations, Acts like the new Companies Act promote greater sustainability. This helps the economic growth not only of organisations, but of the country as a whole, improving financial stability and creating more secure working environments for employees.
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