Legal Question:

  1. The term “best interest of the Company” does that only refer to the shareholders of the Company as a collective group or does it include the other stakeholders such as employees, creditors and the community in which the Company operates?
  2. If the term “best interest of the Company” does include all stakeholders of the Company, to what extent are directors required to take into account the interests of the stakeholders, other than shareholders, when making decisions?

While both the King II and King III consider stakeholder interests, they however advocated two different ways of approaching it:

  • King II [enlightened shareholder approach] requires a board to consider only legitimate interests of stakeholders as long as it would be in the interests of shareholders to do so.
  • King III [stakeholder inclusive approach] requires a board to consider all legitimate interests of stakeholders as it would be in the best interest of the company. The Board should weigh up interests of various stakeholders on case-by-case basis to arrive at a decision which serves the company’s best interests.

choice

The point of the Company’s best interests being emphasised, is to ensure a sustainable entity as opposed to a vehicle for quick gain.

It’s suggested that the Companies Act, 2008 (”the Companies Act”) wishes to take into account the interests of all stakeholders; this may be deduced by the following:

  • s5(1) read with s7(b)(iii) of the Companies Act states that that the Companies Act must be interpreted and applied in a manner that represents high standards of corporate governance. This suggests that all types of companies (whether listed or not on the JSE) should apply King III’s recommendations regarding the stakeholder inclusive approach on an ‘apply or explain’ basis.
  • Listed companies must apply King III on an ‘apply or explain’ basis.
  • s72(4) of the Companies Act further requires state-owned companies, listed companies and companies that obtained a public interest score above 500 points in any two of the previous five years, to appoint a social and ethics committee. The committee after monitoring various activities of the Company pertaining to social and economic development will then report its findings to the Board which is aimed at assisting the Board in considering stakeholders interests when making decisions.

Conclusion

Both the Companies Act and King III require directors to take the interest of stakeholders (other than just shareholders) into account however with regard to the degree to which the “stakeholder inclusive approach” should be applied is still open to interpretation by our courts.