Verification of fit and proper assessments for director appointments

The Institute of Directors South Africa (IODSA) and the Johannesburg Stock Exchange (JSE) have released a guide, available here, on fit and proper due diligence, which advises on how to apply fit and proper assessments prior to the appointment of directors.

The document is an IODSA guidance paper, endorsed by the JSE, on applying fit and proper assessments before appointing directors or putting directors forward to shareholders for election. It responds to increased governance and regulatory expectations, such as the JSE requirement that boards perform a fit and proper assessment before a person is nominated or appointed as a director, including investigation of the person’s background and independent verification of qualifications.

The paper emphasises that boards cannot rely only on CVs, interviews, references, reputation or head-hunter confirmations. Those sources may be useful, but key information, especially identity, criminal record, insolvency status, credit history, director disqualification status, qualifications and professional designations should be independently verified through appropriate third-party checks.

A ‘fit and proper’ assessment should consider four broad areas:

• legal eligibility and integrity;

• financial soundness;

• reputation and conduct; and

• authenticity of qualifications and professional standing.

The guidance recommends that the process be independent, consistent, documented, proportionate, and lawful, and comply with the Protection Of Personal Information Act (POPIA). The nomination committee - or the board where there is no nomination committee - should oversee the process. A standard checklist should be used for all candidates, and due diligence should be completed before first-time nomination. Relevant checks should also be refreshed when directors stand for re-election. For executive directors, boards should consider whether due diligence already performed during employment is sufficient for board appointment and address any gaps.

Recommended checks

The paper divides recommended checks into two categories.

First, certain checks should always be independently verified because reliable mechanisms exist. These include identity verification, criminal record checks, insolvency or sequestration status, credit checks, delinquent director status, qualification verification, and professional designation verification.

Secondly, other checks should still be considered, but the method of verification may vary depending on the circumstances. These include whether the person has been: prohibited by a court or regulator; removed from an office of trust for dishonesty; placed under probation as a director; exposed to adverse media or social media issues; involved in relevant litigation; subject to professional disciplinary action; or exposed to sanctions, financial crime, politically exposed person or prominent influential person risks.

The paper also identifies common pitfalls, including relying only on CVs or search firms, assuming that well-known individuals or existing directors of other listed companies do not need vetting, failing to vet internal executive candidates, over-relying on interviews and references, and failing to perform appropriate due diligence on directors standing for re-election.

Annexures

• Annexure A: Candidate self-declaration template. This annexure asks candidates to provide identity details, qualifications, professional memberships, board experience and references, and to answer questions covering criminal conduct, insolvency, adverse credit history, delinquent director status, qualifications, regulatory sanctions, court or regulator prohibitions, reputational matters, litigation, professional discipline, sanctions and PEP-related matters. It also requires the candidate to declare that the information is true and to consent to independent verification.

• Annexure B: Common due diligence providers in South Africa. This annexure includes a list of providers that, together with our own corporate investigations team, offer verification related services. It explains that no single provider usually covers all aspects of due diligence. Managed Integrity Evaluation (MIE) is described as a broad background screening provider; the South African Qualifications Authority (SAQA) and National Validation Services (NVS) are named as qualification verification providers; TransUnion, Experian and Xpert Decision Systems (XDS) are included as credit and identity verification providers; Nexis Diligence as an recommended as an enhanced due diligence and reputational risk platform; and LSEG World-Check is identified as a sanctions, PEP and adverse media screening tool.

Conclusion

The guidance concludes that formal, reliable and consistently applied director vetting now has more direction for listed and non-listed entities. Boards should be able to demonstrate that director appointments are based on objective and defensible processes.

Charles Young is a partner and Head of Mining for Bowmans, based in Johannesburg. He specialises in M&A, capital markets transactions, and general corporate and commercial law in the mining and resources sector. Mili Soni is a consultant in the Johannesburg office with over 15 years of experience who has a particular interest in corporate governance, corporate reorganisations and restructurings and has experience in both domestic and cross-border transactions.