GOVERNANCE AND ETHICS
Learning Unit 3 : Stakeholders in Corporate Governance
Theme 1: The role of shareholders
LO1: Explain the role of shareholders in governance.
Shareholder behaviour has remained fundamentally unchanged
Shareholder behaviour is generally dictated by li9le more than the “wall street rule”
Shareholders buy a company’s shares when they are happy with its performance and quickly
offload those shares when there is no longer alignment between their needs and the
company’s returns.
Although the board of directors, together with execuFve management, is responsible for the
acFve running of the company, the ulFmate control of the company's affairs rests in the
hands of the general body of shareholders as the de facto owners of the company.
It is widely recognized that shareholders can play an important limited role - in the
governance of the company.
The shareholders role in the governance is to appoint the directors and auditors and then
having put the right people in place, to hold the border accountable for the proper
governance of the company.
Two main structures in the governance of a company are:
1. general meeFngs
2. the board of directors
At common law, shareholders in general meeFng are enFtled to exercise all powers which
are not expressly or impliedly conferred on the directors of the Companies Act, the
company's memorandum, in the case of a private company the shareholders agreements.
It is something of a legal anomaly that whilst the directors are appointed by the
shareholders to run the business of a company on their behalf and they carry onerous
responsibiliFes in doing so, there are relaFvely few restricFons placed on the powers that
shareholders may reserve to themselves in the company's memorandum of incorporaFon or
the shareholders agreement.
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,The statutory presumpFon in the act, in the absence of a contrary Provision in the
memorandum of incorporaFon, is that the board has all the power and authority to manage
the business affairs of the company.
Power put to management of the business are to be exercised by the board of directors
while the powers reserved to shareholders are those which affect exercises of their
proprietary rights.
The powers of shareholders in general meeFngs have accordingly been interpreted
restricFvely but the courts and has been accepted in our law that ma9ers assigned to the
board of directors usually exclude the authority or general meeFngs of shareholders.
Therefore, unless the memorandum or the shareholders agreement specifically reserves the
authority for certain decisions to the general body of shareholders, as a ma9er of law,
shareholders rights are strictly limited.
Shareholders may vote to elect and remove directors,
- They have no right to choose the CEO.
- They cannot insist on the payment of a dividend.
- They cannot vote to change the company's line of business.
- They are powerless to prevent directors from squandering money on employee
benefits, political or charitable contributions, or executive jets.
LO2: Explain how the balance between power and accountability is achieved between the
board of directors and shareholders.
• Central challenge in effective corporate governance = optimal balance between
power & accountability.
• Management must have necessary authority + sufficient accountability.
• Balance of power determined by the Act, the memo, shareholders agreement, or
common law. ▪Authority is exclusively conferred on the shareholders, or on the
board – cannot be exercise collaterally (John Shaw & Sons – the company is an entity
distinct from its shareholders and investors).
• Where it is unclear whether authority is conferred on shareholders or board, power
relating to management usually exclusively to directors; constitutional powers may
be conferred concurrently with the authority of the general meeting, in respect of an
issue.
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,LO3: Advise on all aspects of shareholder’s meeNng.
The board of directors of a company, or any other person specified in the MOI or rules of
the company, may call a shareholders’ meeting at any time. A company must hold a
shareholders’ meeting in the following circumstances:
• At any time, the board is required by the Act or MOI of the company to refer a matter to
shareholders for a decision.
• Whenever required to fill a vacancy on the board.
• When one or more written and signed demands for a shareholders’ meeting are delivered
to a company.
• When an AGM of shareholders is required to be convened; or
• In terms of a court order obtained by a shareholder.
If a company fails to convene a shareholder meeting because it has no directors or all the
directors have been incapacitated, any other person authorized in the MOI of the company
may convene the meeting. If no such person has been authorized in the MOI, the
Companies Tribunal may convene such a meeting on request by any shareholder
Power to call a shareholders meeNng
- The memorandum of incorporaFon will usually authorize the directors to call a
general meeFng
- Unless determined otherwise, this power must normally be exercised by way of a
resoluFon at a properly consFtuted board meeFng
- the courts have held that the power of directors to call a general meeFng is a
fiduciary power a discreFonary nature which must be exercised in good faith in the
interest of a company as a whole
- A single direct or company secretary may not validly call a general meeFng unless
such acFon is properly authorized or subsequently raFfied by the board, although
there is a rebu9able presumpFon, in the absence of a country evidence, that any
meeFng that is called has been called on proper authority
- The power of members to demand or themselves call general meeFngs of
shareholders is becoming more important in the lights of increased shareholder
acFvism, occasioned by the governance scandals of recent years
- Unless otherwise provided by the memorandum, any shareholder or shareholders
who together hold at least 10% of the voFng rights enFtled to be exercised in respect
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, of ma9er, may wri9en noFce delivered to the company, request that a shareholder
meeFng is convened S61(3)
- Provided that the objects for which the meeFng is requested is lawful in terms of the
act, general meeFng of shareholders must be called by the company in response to
the request
- At general meeFng is called on 15 business days’ noFce in wriFng, in case of a public
or nonprofit company, or 10 days in wriFng, in any other case
- RequesFng shareholders require a meeFng to be convened for any purpose other
than the exercise rights which are enFtled to exercise as shareholders, they act ultra
vires their powers in terms of S61(3) and the company can refuse to comply with
such request.
- Every shareholder meeFng of a public company must be reasonably accessible for
electronic parFcipaFon by shareholders within the Republic of South Africa, and the
noFce of the meeFng must state that shareholders must parFcipate electronically
- The directors may be prevented from deliberately fixing a venue, date or Fme for a
meeFng that will make it difficult for shareholders to a9end
- Where the directors fail to convene a meeFng as requested, the shareholders
requesFng the meeFng may themselves proceed to convene a meeFng in terms of
the procedures set out in the act, alternaFvely they may apply to the court for an
order direcFng the company to do so
- A disFncFon must be drawn between the right to request a general meeFng and the
right of the members requesFng a meeFng to themselves convene a meeFng in the
event that the directors fail to do so
- There is no obligaFon on the requesters, acFng as shareholders, to have regard to
the best interest of the company, provided their request was made in good faith
- In absence of clear authority in the memorandum, the directors have no power to
postpone or cancel a properly convened general meeFng
- A shareholders meeFng may be adjourned under certain circumstances, for example
where no quorum is present or with the a9endees agree to an adjournment.
- The meeFng must be cancelled if, at any Fme before it is due to start comment any
shareholder who requested that the meeFng be called withdrawals his request and
the voFng rights of the shareholders conFnuing to demand the meeFng falls below
the required 10% or other percentage specified in the memorandum
Authority of a shareholders meeNng
- Shareholders meeFngs may be called as oien as necessary in the interests of the
company
- However the authority of a general meeFng may not be exercised indiscriminately
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