For many South Africans, it is a privilege to employ and to lead a group of people with a common purpose in any company regardless of size. But with this authority also comes a great deal of responsibility and accountability.
The leaders of privately owned companies have duties thrust upon them by the Companies Act of 2008. In particular, directors have a duty to exercise their powers in good faith and for a proper purpose, in the best interests of the company, and with a high degree of care, skill and diligence. If directors fail in these duties, the Act allows for them to be held personally liable by any stakeholder who has suffered a loss.
The liability relates to the management of the business rather than the performance of specific business activities. Directors & Officers (D&O) insurance deals with the losses that flow specifically from the negligence, error or omission flowing from the directorial duties previously mentioned.
SME’s and D&O Claims
One often sees claims against directors and officers in the SME space being brought by the company, employees, and creditors. In a recent claim, we noted that the financial director failed to submit accurate documentation to SARS on behalf of the company. This led to a fine being imposed by the tax authority against the business. The company held the financial director liable.
Creditors will also often seek recourse from the directors in their personal capacity where the business has defaulted on a loan or credit facility. The creditor can establish that their loss arose out of a failure of the directors in carrying out their duties and a door is opened to personal liability.
Even though this exposure has the potential to financially cripple a company director, the 2020 SHA Annual Risk Review revealed that only 20% of SME’s in South Africa have D&O cover. This points to the notion that many SME owners and directors don’t fully understand their risks.
The impact of Lockdown
Consider this; the COVID-19 pandemic has had a devastating impact on businesses of all sizes across sectors. One could hardly blame business leaders for the inevitable financial woes brought about by the global pandemic, right? However, if the business subsequently collapsed and employees lost their jobs, an argument for personal liability could conceivably be made if it could be established that the directors failed to put in place contingency plans as the lockdowns were extended.
Digital Risk
Cybercrime is possibly the largest threat to directors and officers across the spectrum of business entities regardless of size. In the 2020 SHA Annual Risk Review, 37% of SME’s revealed that they had already suffered a cyber-attack in the preceding 12 months.
Granted, most executives and directors are not cyber security specialists, but they can’t plead ignorance either. Section 76 of the Companies Act states that when dealing with any issue as a director, they must take reasonably diligent steps to become informed about the matter. A lack of awareness of cyber risk coupled with a failure to implement proper security measures and processes will almost inevitably put the board in the crosshairs of stakeholders who suffer losses. The Information Regulator – POPIA – will also investigate the culpability of the newly appointed information officer in the business who could not only face a significant fine but also jail time following a breach.
Given the current risk landscape, there is no doubt that every business should have both D&O and cyber insurance in place. With the relatively low cost of SME cyber coverage, there are very few barriers to entry for first-time buyers of the cover. While comprehensive cyber coverage has been proven to protect the interests of the business, D&O policies offer the best solution to protect business leaders in their personal capacity and should be one of the first considerations for business liability cover.
Simon Colman
Business Head: Digital and Financial Lines at SHA Risk Specialists
