Who Really Runs The Show? An Overview of Shadow Directors and Potential Liability

By Shivani Govender | Director

South African company law, governed primarily by the Companies Act 71 of 2008 (“the 2008 Act”), does not expressly define “shadow directors.” In contrast, many international jurisdictions provide a specific definition or at least conceptual clarity on this topic—an example being Section 251 of the United Kingdom’s Companies Act 2006, which defines a shadow director as a person “in accordance with whose directions or instructions the directors of the company are accustomed to act.”

Despite the absence of a clear definition in South African legislation, the concept of a shadow director has attracted growing interest. For good corporate governance, it is crucial to determine whether these “behind-the-scenes” influencers should face liability for the decisions they effectively shape.

A shadow director is typically someone who exerts significant influence on a company’s board of directors but does not hold a formally recognised position. Whereas de jure directors are legally appointed, and de facto directors fulfil the functions of a director despite defective appointment, a shadow director “lurks in the shadows,” instructing recognised directors on how to act.

For a person to be deemed a shadow director in the United Kingdom, for example, case law suggests it must be shown that:

1. There is a validly appointed board of directors.
2. Someone gives instructions or directions on how those directors should act.
3. The directors habitually act on those instructions.

This deprives the official board of true independent decision-making, since the directors often simply follow directives from the shadow director.

Prescribed Officers vs Shadow Directors

The 2008 Act does define “prescribed officers” as individuals who exercise or regularly participate in executive control over the company’s business. In principle, some might argue that a shadow director could fit into this category.

However, two key distinctions often prevent equating a shadow director with a prescribed officer:

• Extent of Powers: A prescribed officer typically participates across the broader operations of a company. By contrast, a shadow director focuses on influencing the board itself.
• Visibility: A prescribed officer’s role is known within the company. A shadow director, in contrast, often remains out of sight, giving instructions behind the scenes.

Why Recognise Shadow Directors?

a) Alignment with International Standards

Several countries recognise shadow directors in their legislation to promote accountability and clarity. In addition to the United Kingdom, examples include:

• Australia: Under the Corporations Act 2001 (Cth), the term “director” can include those who act in the position of a director or with whose instructions the directors are accustomed to act.
• New Zealand: Section 126 of the Companies Act 1993 covers “director” and “shadow director” by referencing persons in accordance with whose instructions the board may act.
• Hong Kong: The Companies Ordinance also explicitly refers to shadow directors in its definitions.

Recognising shadow directors in law allows stakeholders and regulators to hold the real decision-makers to account, which can encourage greater foreign investment, as rules around governance become more transparent and robust.

b) Ensuring Good Corporate Governance

Directors have fiduciary duties under Section 76 of the 2008 Act and can be held personally liable for breaches per Section 77. If a person essentially directs a board’s decisions, should they not be held to the same standards? Failing to recognize shadow directors creates a loophole: individuals can dominate a board without bearing any of the statutory duties or liabilities actual directors carry.

c) Combating White-Collar Crime and Fraud

South Africa has contended with significant corruption and fraud in both public and private sectors. Where influential individuals effectively control decisions but do not disclose their involvement, holding them to account becomes difficult. If the 2008 Act explicitly recognised shadow directors, it would close an avenue for evading responsibility.

Public Sector Governance

Recent South African cases highlight how vital decision-making can be directed from behind the scenes. Courts have declared certain directors “delinquent” under Section 162 of the 2008 Act for grossly abusing their position, but no parallel mechanism exists for influential outsiders who instruct those directors. Thus, a non-director who regularly issues orders might escape liability under the Act – even if their directions result in substantial harm to a company or state-owned entity.

By defining and regulating shadow directors, the law could ensure that every key decision-maker – whether wearing the formal title or not – bears accountability for their actions. This becomes especially important in environments where politically connected or influential individuals may otherwise operate in secrecy.

Shadow directors remain an important yet underexplored issue in South Africa’s corporate governance landscape. Clear legislative recognition would ensure that all individuals who significantly influence a company’s direction are held to the same standards of loyalty and care as formally appointed directors. Not only would this align South Africa with global best practices in jurisdictions like the UK, Australia, and New Zealand, but it would also close potential governance gaps that enable unethical or unlawful conduct.

As corporate governance and ethical business operations continue to gain prominence, recognizing shadow directors and subjecting them to statutory duties may be a prudent move to protect stakeholders and maintain integrity in South African business.

Ready to strengthen your corporate governance and reduce the risks posed by hidden decision-makers? Contact our team at Fairbridges Wertheim Becker. We’ll guide you through the legal complexities surrounding shadow directors, ensuring your business is protected and ethically sound. Let’s work together to uphold the highest standard of corporate accountability.