Reckless Conduct: Disregarding standards of care (2014-11-21)

February 20, 2015  10429  10429   

Article by Terrance M. Booysen

While this is not only a phenomenon attached to certain brazen directors in South Africa, this irresponsible conduct is also seen across the world.  Giving weight to the damage caused through director’s reckless conduct, a notable overseas example is BP’s Deepwater Horizon oil spill disaster in 2010 off the Gulf of Mexico.  BP PLC were ordered by the courts to pay billions of dollars in penalties for the horrific incident.  The negligence – mostly on the part of BP – destroyed large areas of wildlife, stained large stretches of beaches and polluted fresh water marshes after approximately 666* million litres of crude oil gushed into the Mexican Gulf.  Indeed, whilst the company suffered massive financial losses, estimated at USD42bn*, one must not forget the eleven rig-workers who died at the scene of this deadly blowout, including the immeasurable environmental damages.

There are many examples of reckless conduct in business, and perhaps they are not all as monumental as the case of BP.  Notwithstanding the size of each case, most of them are generally underpinned by individual greed and selfish, business profit-driven motivation.  In their quest to maximise their company’s return on investments over the shortest possible time, directors who make these reckless decisions flagrantly disregard their standards of care and their fiduciary duties owed to the company and its stakeholders.

Then we have South Africa’s most recent case of African Bank who were placed under curatorship by the South African Reserve Bank when it collapsed in August this year.   Whilst a 5-month investigation against the African Bank board is currently underway for alleged reckless and negligent trading, there is no doubt that each director will be scrutinised to determine their part in any questionable management practices, or material non-disclosures with the intent of defrauding depositors or other creditors.  The holding company of the bank, African Bank Investments Limited (ABIL), announced that it was expecting a loss of R6.4bn** and that it needed to raise a further R8.5bn** to keep the bank afloat.  Spectacularly, after this announcement was made, the bank’s share price crashed by ninety-eight percent to a thirty-one cent low before it was suspended.  As all the facts regarding the extent of the director’s conduct is not known at this stage of the investigations, it is reported that at least R10bn has already been written off by the bank’s shareholders.  Considering the fact that the investigations are still far from complete, there is speculation that the bank may no longer be a viable concern as the bank’s estimated debt is calculated at R26bn***.  Understandably, the consequences of the board’s alleged reckless actions (or inactions) may lead to grave circumstances for not only its shareholders and the economy, but also upon the lives of thousands of people.

Whilst these are only two examples where the boards of BP PLC and African Bank stand accused of not showing proper concern for the entire well-being of their companies (and their respective stakeholders), there are usually legal consequences that await any company and its directors where it can be proved that reckless conduct has indeed occurred.  It is important to note that reckless conduct in business may manifest essentially in two ways; namely the actual act itself or the failure to act in an appropriate manner in order to protect the company and where harm is brought to the company and its stakeholders.

Notwithstanding the provisions of Section 22 of the Companies Act, 71 of 2008 -- which deals specifically with reckless conduct and must be read with Section 77 -- it is becoming increasingly important for directors and prescribed officers to be vigilant in the performance of their duties.  Company officers (this includes similar governmental authorities) are expected to exercise their powers and perform their functions with a standard of care, skill and diligence, also having taken reasonable steps to be fully informed of the matters at hand.  As the consequences for reckless conduct can be extremely harsh, it is imperative that companies ensure there are various preventative mechanisms in place to prevent such behaviour.  Companies should amongst other; have a proper Corporate Governance Framework® and system of internal controls, ensure that the company’s internal policies and practices are adhered to and kept updated, as well as ensure there is proper oversight across all facets of the business.
  

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