The horse meat scandal that first broke in Europe and more recently in South Africa, illustrates how bad news travels fast and when given air time, has the power to forever ruin reputations and devalue shares. Customers speculating if they are eating beef, horse, donkey, goat or water buffalo could be easily tempted to switch brands and go elsewhere for a meal that more readily suits their taste buds. This move has obvious consequences and may result in a drop of revenue, share price and a depreciated trademark for the companies in question. In the UK, the biggest vegetarian ready-meal brand reported sales growth of more than double in the second half of February. The meat brands having lost this business – a direct result of their implication in the horse meat scandal – would undoubtedly have felt the effects of this customer switch.
Section 77 of the Companies Act of 2008 (the Act) holds directors personally liable for any losses sustained by the company. Section 218 (2) goes even further, holding directors personally liable for third-party losses as a result of the directors breaching the Act. A loss in revenue and trademark will have repercussions for shareholders who will suffer a financial loss and may hold the directors liable for the lower revenues or a drop in share price. Directors are responsible and would be held accountable for the labelling of products for example; the company needs to be transparent in the way it conducts itself.
In the context of the South African horse meat scandal, studies by the Stellenbosch University Department of Animal Sciences, confirmed that up to 68 percent of the minced meats, burger patties, deli meats, sausages and dried meats that were tested contained horse, soya, goat or water buffalo. The study also confirms that the mislabelling of processed meats is commonplace in South Africa. This not only violates food labelling regulations but also has serious economic, religious, ethical and health implications. It violates a cultural taboo in some countries, although horse flesh is regularly consumed in France and Belgium and locally there is a small market for it and it is used in some pet food.
In South Africa we are no strangers to being sold products that do not meet branding requirements. In 2011 the South African National Halal Authority (SANHA) filed an interdict against a company claiming the products it was supplying may not have been Halaal.
Section 157 of the Act has introduced class actions, which makes it possible for consumer organisations to bring an action on behalf of the consumers, members and trade unions. One could see consumer organisations instituting class actions against the directors for the benefit of society in the future.
On examination, directors may defend their cause and claim they were unaware of what was happening in the company. The Act however has widened the definition of “knowledge” to include negligence and also holds directors personally liable for negligent actions. The company has a social responsibility towards its customers and should have ensured that there were checks and balances in place to prevent unethical actions, like ingredient substitution and mislabelling food products, from occurring within the organisation.
Even though a Directors’ and Officers’ policy does not cover bodily injury or property damage, the company still faces the risk of financial losses caused by reputational damage, which could leave the directors liable for losses sustained by shareholders.
Directors have a responsibility to make sure that the interest of society is protected from unethical behaviour as they are the custodians of the company.
For further information on Camargue or Directors and Officers Liability cover, contact Camargue on This email address is being protected from spambots. You need JavaScript enabled to view it. or visit www.camargueum.co.za or find us on Facebook.
