Skip to content

South Africa: Directors’ duties (6 of 8) – Ethical breaches, response to reputational and regulatory issues

13 May 2024
– 7 Minute Read

DOWNLOAD ARTICLE

Overview

  • Misconduct on the part of senior executives could have a material detrimental impact on a company’s reputation as well as regulatory consequences.
  • In most instances the board will need to undertake a fact-finding investigation to establish the facts. If the facts are known and the allegations are not true, the board can adopt a defensive approach. If the allegations are true, the board will need to take appropriate disciplinary steps.
  • Where there are allegations regarding the conduct of the CEO, it may be necessary to suspend the CEO, which can have serious negative consequences for both the CEO and the company.
  • This article outlines considerations that should be taken into account by the board in relation to ethical breaches and its response to reputational and regulatory issues.

This is the sixth article in a series of articles on the duties of directors in relation to employment, employment law and employee benefits.

In the first five articles we have dealt with what the board would need to know about employment law and employment generally in the ordinary course of their duties.  We identified the six themes that emerge from the King Code of Corporate Governance and dealt with those themes.  In the next three articles we will deal with what the board needs to know and do when things go wrong.

One of the identified themes was for the board to set the ethical direction of the company and to approve the codes and policies that support that direction.  However, even with the best codes and policies, employees still behave badly and that behaviour can give rise to regulatory and reputational risk to the company as well as expose the company to losses.  This is particularly so when the conduct is that of the chief executive officer.

In the next three articles we will focus on how boards react to instances of ethical breaches that are brought to its attention.  In the event that the CEO is found to have been involved in misconduct, we will explore what the boards should do.  In the event that performance is found to be wanting, again we will deal with the employment law considerations that need to be taken into account.

Finally, most CEO departures are dealt with by way of mutual separation agreements.  We will explore why this is so and what are the considerations that apply in weighing up whether to conclude a mutual separation agreement or not.

There are times in the life of a company when it may be faced with an incident that could have a material detrimental impact on its reputation, and potentially, additional regulatory consequences. These incidents are usually the result of misconduct on the part of senior executives in the company. In some instances – such as involvement in corrupt activities with a well-known personality or politician – serious misconduct by more junior employees can have the same impact.

In these instances, every response by the board will be scrutinised and can either assist in ameliorating or aggravating the potential reputational harm. In most instances the board will not have all the facts pertaining to the incident and, in many instances, a fact-finding investigation will need to be done to establish the facts. In this event, the board should not adopt a defensive approach, but rather one where they undertake to conduct a fact-finding investigation and to take the appropriate action. This can be done with the assistance of outside independent experts if the demonstration of independence is important.

If the facts are known, then the board can either adopt a defensive approach (if the allegations are not true) or an approach that appropriate disciplinary steps are being taken (if the allegations are true).

There may be a need to involve public relations experts. There could also be a requirement for stakeholder engagement and/ or engagement with regulatory authorities.

Where there are allegations regarding the conduct of the CEO, it may be necessary to suspend the CEO pending the outcome of an investigation. The suspension of a CEO can have serious negative consequences for both the CEO (as it implies that there is at least prima facie merit to the allegations) and the company as it undermines the CEO’s authority and leaves the company vulnerable during a period of suspension.

There are instances where anonymous complaints are made to the board regarding alleged CEO conduct which are designed to unseat a CEO, and which are made for ulterior motives. These may include allegations of nepotism, favouritism, bullying, harassment, or sexual harassment. Anonymous complaints of this nature are difficult to deal with, either because there is no merit to the complaint, or because a complainant does not want to include sufficient detail that would reveal their identity. The complaint usually lacks sufficient detail to establish if there is even a prima facie case to support the allegations. In these circumstances, the board should not suspend the CEO until it can be established that there is at least prima facie evidence of the misconduct complained of.

In order to establish if there is a prima facie case, the board would usually appoint an independent person to conduct an investigation. At the initial phase the scope would be limited to establishing whether there is any evidence available. This would usually be done by interviewing those people who would have proximity to the area of the business where the allegations arise.

If there is prima facie evidence of serious misconduct, suspension may be warranted. In these circumstances a CEO may be persuaded to take special leave pending the outcome of an investigation. This is less damaging where it is recorded that the CEO has asked to take leave of absence until the investigation is complete rather than announcing that the CEO has been suspended.

If the CEO refuses, or if the messaging requires a suspension, then suspension is warranted where the conduct complained of is so serious that it is not possible to retain the CEO in the business because of the risk that it poses. It would also be warranted where there is a possibility that evidence or witnesses may be interfered with.

There was previously an obligation in law to give an employee an opportunity to state why they should not be suspended prior to suspension, but the Constitutional Court has ruled that this is not necessary. It is nevertheless advisable to do so given the importance of the position of CEO and the implications of suspension for both the CEO and the business.

If the investigation exonerates the CEO, then this should be communicated to all stakeholders. If the investigation reveals that there is merit to the allegations, the next step would be to proceed to a disciplinary enquiry.

A disciplinary enquiry can be damaging to the company. It may result in a company’s affairs being aired in public. It can be damaging to staff morale, particularly where staff members are required to give evidence. It can result in protracted and expensive litigation. In this event, the board may want to consider the conclusion of a mutual separation agreement.

Again, a decision whether to conclude a mutual separation agreement requires careful consideration. Most such agreements contain confidentiality provisions that preclude the parties from disclosing the events that led to the conclusion of the agreement.

In these circumstances, the board can be accused of covering up the misconduct. Such agreements also usually involve payments of additional remuneration over and above notice pay. Again, the board can be accused of rewarding misconduct. There are some cases where a mutual separation is going to be more damaging than running the enquiry. This needs to be carefully weighed up by the board. [This will be considered separately in an article that follows.]

All articles in the series: