A properly functioning board of directors
Much has been written on the subject of corporate governance. It is my experience that independence is a state of mind, not a check list. An independent thinker, who takes his/her fiduciary duties seriously, is an asset whether or not the director has a shareholding. There is little, if any, evidence that board independence enhances board effectiveness. Social and personal relationships play a large part in the conduct of directors, and this hidden facet has the potential to compromise independence.

Corporate governance codes seek to regulate appointments, and this often leads to the appointment of persons who appear to have “impeccable credentials.” However, outside directors cannot escape liability for breaching their duty of care simply because they can boast a resume of impressive credentials or vast experience with the company on whose board they have served. No matter their vast experience and sophistication, these presumably talented and experienced directors can be held personally liable if they fail to become adequately informed before making decisions. In short, a good resume is simply an inadequate substitute for doing the required homework before each board decision.

I have observed that board leadership has the single greatest impact on the effectiveness and process of the board. What matters is who the person is, the integrity and independence of mind, skills, and especially the way in which the person behaves. In the case of Corpcapital the chairman, Eric Ellerine, could have and should have taken proper steps to remedy the situation which Liebesman had taken the company into. The evidence at his disposal was overwhelming. He chose not to, and instead backed Liebesman and the executives. The consequences were massive for all concerned, effects which will be felt for many years to come.

It has been said that no law can stop dishonesty and that it is even more difficult to legislate intellectual honesty. Presumably, therefore the alternative put forward by such voices is masses of corporate governance codes. With respect I disagree. The law is there to deal with dishonesty and criminal activities, and to ensure that there are consequences for actions. Codes cannot do so. If the CEO is dishonest no amount of red tape or preventative codes will prevent a catastrophe. It is fear of the consequences in a society which vigorously enforces the rule of law which acts as a deterrent. On the other hand, for the majority who are honest, their personal integrity ensures the safeguarding of shareholder interests. Sir Paul Nicholson made some interesting observations in an article he wrote in the Financial Times headed “We need honour in the boardroom”:
“Reaction to abuses, exacerbated by spin, has now created another virtual industry called corporate governance. I believe that many of the aspects of corporate governance, far from improving the behaviour of those running companies, may actually make things worse.
Corporate governance means regulation and regulation breads more regulation, feeding the culture that all behaviour is acceptable provided it is within the rules. I believe that people have lost sight of what is right and what is wrong. Instead we have spin and perception.
There does not appear to be anywhere a clear code emerging of “personal governance” where personal integrity becomes the ultimate safeguard.”

The schemes of Liebesman and the Corpcapital executives did not take place because of a suborned board of directors, that was an effect not the cause. The true reasons have been outlined on this website. However, the board could have and should have brought the matters to a proper conclusion at a very early stage. For this reason it is appropriate to set out some of the important ways in which a board should function, because had some of these principles been observed the saga would have taken a different course.
A properly functioning board is comprised of directors each of who fulfil their fiduciary duties of care, loyalty and good faith. Shareholder trust in this context requires a board that is both free of personal financial conflicts and which is fully informed. Shareholders are entitled to expect informed, neutral and independent decision makers on the board, capable of making a decision objectively and on the merits, without any corrupting influences peculiar to personal financial interests.

Directors, especially non-executive directors, cannot, in keeping with their fiduciary responsibilities, become casual about their role and just “bless” all of management’s recommendations or its conduct. The directors must first investigate the facts, become fully informed, assess that information with “a critical eye” and then make their decision. What constitutes becoming “fully informed” turns in each case, as a matter of common sense, on the magnitude of the issue being considered, with important issues, such as allegations of misconduct, demanding greater information gathering and deliberation. The more significant the subject matter of the decision the greater will be the need to probe and consider alternatives. With little or no board oversight, the board materially contributes to the unprincipled conduct of those upon who it looked with a blind eye.

Properly functioning boards, when making decisions in which their executive colleagues have personal conflicts, recognize and satisfy their responsibility to ensure that advancing the interests of the company and its shareholders remains the first priority.

An efficient legal process is the best method to address governance issues
In the United States the response to the wave of corporate scandals was the Sarbanes Oxley Act of 2002. The Act has come in for much criticism from certain circles, and many feel that it was an over-reaction. Those who are critical of the Act ignore an important facet. The great strength of the United States is that it is a self-correcting system. A negative event occurs, such as a corporate scandal, and there is a reaction, often an equal and opposite self-correcting counter-action. Enron is an example, and Sarbanes Oxley the response, amongst many others. It is characteristic of a society which believes in playing by the rules. The equilibrium will almost certainly rectify itself in time. One thing, however, is clear. It is only the law which has the capability of dealing when corporate crime has been committed. Non-statutory corporate governance, which works on the theory that prevention is better than cure, is helpless when faced with ethical lapses.

When societies do take firm action, a line is drawn in the sand. It becomes a society of consequences, there is confidence in the rule of law, and the investment climate thrives.

Fortune reported;
“Steve Cutler, the SEC’s top cop has created an elite police force to patrol the board rooms of America Inc. Cutler is using hardball tactics and stiffer penalties to put CEO’s, directors, lawyers, bankers, and accountants on notice that they will be held personally responsible for shoddy finances and hidden conflicts of interest. We are trying to change behaviour,” says Cutler. “People have to get used to the new way of thinking”. The language is telling. It is zero-tolerance strategy, and predictably it has incensed many financial and legal mavens. The SEC has had almost instant success. It has won eight out of nine trials recently in the US District Court, and all nine heard by administrative judges. Cutler is reshaping enforcement. Here’s how:

  • Sky-high fines. And, to add sting, the SEC bars offenders from seeking re-imbursement for fines from insurers.
  • New tools. Sarbanes-Oxley is a veritable hardware store for Cutler’s troops. Before, the SEC had to show that accountants or executives were “substantially unfit” to bar them from practicing or serving as public-company officers or directors. Now the hurdle is simply “unfit”. In 2003 the SEC booted 170 executives, quadruple the 38 it barred in 2000. The law boosted the SEC’s leverage by overhauling guidelines for prison terms for criminal securities fraud. Now defendants can get 20 years instead of 10 for wilfully making bogus financial disclosures.
  • Policy-setting. In his zeal to clean up the markets, Cutler is stretching the SEC’s jurisdiction and using case law to set new rules for the financial industry.
  • Pre-emptive strikes. The campaign is to detect abuses before they explode into scandals. Cutler is recruiting specialists in trading, fund management, accounting, and experts in financial fraud. Enforcement is also launching industry-wide probes to see if questionable practices by some companies are part of a broader problem.

The key is that Cutler and his staff don’t stop at whether an arcane securities law has been broken – they ask whether companies have met their burden of honesty and transparency.
Larry Thompson, the Deputy Attorney General said “Our strategy is straightforward. We aim to put the bad guys in prison and take away their money”.

In their book Absolute Honesty, Larry Johnson and Bob Phillips say; “We believe that when lying, dishonesty, and unethical behaviour are accepted in one part of a company’s culture, those standards of behaviour will migrate throughout the entire organization. Nothing occurs in a vacuum. When the culture authorizes aberrant behaviour, aberrant behaviour becomes the norm, and a culture of integrity ceases to exist.”

The definition of fraud
A basic understanding of the concept of fraud from a legal perspective is fundamental to an appreciation and assessment of the conduct of executives where there are allegations of irregularities.

“Fraud is the unlawful and intentional making of a misrepresentation which causes actual prejudice or which is potentially prejudicial to another”. (Snyman Criminal Law 1995 3rd edition).

The first requirement for the presence of fraud is that there must be a misrepresentation or “a perversion or distortion of the truth”. The fraudster must represent to the person to be gulled that a fact or set of facts exists, but which in truth do not exist. Misrepresentation can also occur by means of non-disclosure of material facts. A misrepresentation can be committed by means of an omission, where someone fails to disclose material facts which, unless revealed, can induce others to act to their prejudice. Further, where a person makes a misrepresentation which is honestly believed to be correct at the time but later that person comes to know that the representation was false, that person will commit fraud if he/she does not disclose the changed circumstances. Generally, failure to disclose a certain fact will amount to a misrepresentation if there was a legal duty to disclose.

No actual prejudice is required to constitute fraud. It is sufficient that the misrepresentation is of such a nature that it may cause harm or prejudice. The test is whether the misrepresentation is such that a reasonable person might (or could), in the ordinary course of events, be deceived.

Because a fraudulent misrepresentation it is, by definition, unlawful, the element of unlawfulness is not of practical importance. Fraud is per se unlawful.

There must be an intention to defraud. This implies that the person perpetrating the fraud must be aware that the representation is false.
Another important element in establishing fraud is justifiable or actual reliance on the expertise of the accused. The CEO is in a position of expertise, and shareholders and the investing public are entitled to rely on the information provided from this source. See Accounting fraud, opinion by WWB .

The ethical challenge
For those interested in ethics a useful definition of integrity is contained in an excellent book titled “Integrity” by Stephen L. Carter, Professor of Law at Yale University;

“When I refer to integrity, I have something very simple and very specific in mind. Integrity, as will use the term, requires three steps: (1) discerning what is right and what is wrong; (2) acting on what you have discerned, even at a personal cost; and (3) saying openly that you are acting on your understanding of right from wrong.” Carter continues; “If integrity has an opposite, perhaps it is corruption – the getting away with things we know to be wrong.”

South Africa has many CEOs, past and present, with integrity. It shows in their companies. Alas, as everywhere, we also have those who wilfully do not play by the rules, who abuse the finest system yet invented, free enterprise. Those who say we should not let a few bad apples determine the law delude themselves. It is only the law and the threat of severe consequences that the bad apples understand. Non- statutory corporate governance certainly does not have this capability.

Integrity is something that one brings to the party. It cannot be learnt on the job. I used to believe in second chances. If I could bring one thought to others in business it would be, select your leaders carefully and wisely. There is no substitute for integrity. Not energy, charm, or a silken tongue.

Why is it that clever people do such stupid things? They are they at the pinnacle of success one minute and have destroyed themselves the next. Why do people, who have such apparent talent abuse it and apply it in the wrong way, always trying to find short cuts? Roderick M Kramer, a social psychologist at Stanford University, summed it up appropriately in his article titled “When rules are for fools”:
“So many meteoric risers display a dazzling ability to woo investors, enchant employees and charm the media with their charisma, grandiose visions and seemingly unlimited strategy acumen. Yet, just when they appear to have it all, they demonstrate lapses in professional judgment or personal conduct. Chiefs, like Kenneth Lay of Enron, Tyco’s Dennis Kozlowski, and Worldcom’s Bernard Ebbers graced the covers of business magazines and won awards. But like Icarus, they flew too high. Scandal set in and these once feted and envied leaders found themselves falling hard and fast. One moment they are masters of their domain, the next they are on the pavement looking up and wandering where it all went wrong. These stories illustrate the genius-to-folly syndrome.
There is something about the pursuit of power that often changes people in profound ways. The most ambitious and competitive players develop a dangerous aversion to moderation. Many players believe that breaking the rules is not only necessary for getting ahead, it is virtually an act of creativity. Unfortunately, this disdain for the rules puts the leaders on a very slippery slope. They consider themselves exempt from the rules that govern other people’s behaviour. Even more dangerous, leaders who want it all and who break the rules to get it often develop contempt for those who do play by the rules”.

Henry Kissinger put the same theme in a well-known phrase, “power is the ultimate aphrodisiac”. And money is what creates power. Frangos’s friend Harvey MacKay, a prodigious business author of best sellers studied this phenomenon, because he too was fascinated. His conclusion? Arrogance is the path to a slippery slope.

Telltale signals of possible irregularities

  • Continual changes to accounting presentation which make comparisons with the past difficult.
  • Earnings in a young company, or a difficult industry, which over a period are smooth.
  • Adjustments made to earnings, especially when they come to light after the fact.
  • Discontinued operations adjustments. Sometimes these are valid.
  • Significant fluctuations to the share price in a relatively short period. When share prices increase dramatically in a short period and then go into freefall it is a clear indication that the market has been fooled. This is often accompanied by some executives, particularly the CEO, cashing in at the peak, a surefire signal. There have been cases where the CEO and a few close associates walk away with more money than the reduced market capitalization of the entire company. When this happens there can be little doubt that the market has been fooled by false results and rosy promises of the future which the company had no chance of delivering.
  • Where a dramatic fall in the share price is accompanied by the resignation of some executives, and one senior executive remains to ensure that the doors remain closed to scrutiny.
  • Changes to accounting policies, especially when they are in the small print. This was an important signal both at Enron and at Corpcapital.
  • A Chief Executive Officer who has demonstrated lapses of integrity in the past. The same would apply to any board member.
  • Share dealing by wives and those close to the executives or other directors, especially at IPO’s or reverse listings of cash shells.
  • The presence of a high proportion of nominee companies, in the company itself or in a target company, which do not disclose who the beneficiaries are. Frangos remains amazed that this has never been prohibited. There may be legitimate purpose for such entities in the short term, but not over any period.
  • Undisclosed litigation which surfaces later.
  • Signals on board operation which can be picked up by individual directors;

o Discussions at the board level are superficial. External directors are not able to offer strategic advice.
o The board has little control over its own agenda. The CEO dominates the agenda.
o Directors who do not do their homework and are inadequately informed on the issues.
o The board never meets without the CEO present.
o The board shuns any operational and or legal audit or review.
o Directors have relationships with the organization besides their board positions. Conflicts of interest should be identified and minuted up front.
o On any crucial issues, the board members are pressured to support a position of a single person.
o When questions are raised, the board relies on the expertise of a single individual. There are no checks and balances.
o Board members are reluctant to ask probing questions. The culture prohibits probing.
o The board, directors or board committee cannot access separate outside legal counsel or consultants.
o There is little turnover in board positions and the board members have a close relationship with a dominant board chair and/or CEO.
o Audit and compensation committees headed by insiders or former insiders.
o The interests of the stakeholders are not debated.
o Some board members appear to be left out of the loop.

Conflicts of interest
From the outset it now appears that Liebesman and certain executives were conflicted because their personal agendas cut across their fiduciary duties to shareholders and the company. As matters progressed many other conflicts of interest emerged, at board level, during the investigation by Payne, by certain spokespersons associated with corporate governance who commented on the matter, and during the Myburgh investigation. This raises the question as to how such matters are dealt with?

A conflict of interest is a situation in which someone in a position of trust has a competing professional or personal interest. Such competing interests make it difficult to fulfil his or her duties impartially. This is particularly so where the end result is one of great material benefit, or protects friends, or covers complicity in misconduct. A conflict of interest can even undermine confidence in the person who is conflicted. Even the presence of a third party to evaluate the evidence on occasions does not assist if the third party is themselves in any way conflicted because they are able to influence the outcome.

I was astounded, as the Corpcapital saga progressed, at the proliferation of conflicts of interest. It is cold comfort to be assured that conflicts exist everywhere and that it is the nature of business and of investigations. I cannot accept that, even if it where were true, there are not ethical methods available to deal with such cases. For example, in a simple situation where there is a conflict of interest at board level it is obvious that a conflicted director must recuse himself/herself, and not participate or unduly influence the outcome of a decision. In the case of third party investigations, if it is held to the investing public that an investigator is independent and impartial, then the feet of the investigator must be held to the fire on this issue.


“The quality of a nation’s civilization can be largely determined by the methods it uses in the enforcement of its criminal law.” W.V.Schaefer, “Federalism and State Criminal procedure” Harvard Law Review 70 (1956), as cited by the United States Supreme Court in Miranda v. Arizona US 436 (1966), 481, note 50. This powerful and timeless passage also finds a place in Chief Rabbi Dr. Warren Goldstein’s outstanding book “Defending the human spirit”. Rabbi Goldstein observes “When society is functioning normally and peacefully, the vulnerable party is an accused or convicted criminal. When the civilized society is under threat from forces of criminality, the society itself is regarded as the vulnerable party. The legal system through its judges is duty-bound to protect the vulnerable.”

I was called on by a set of circumstances involving the legal relationships and obligations between directors, companies and shareholders which arose at Corpcapital to act. I did so, carefully and comprehensively, and would do the same again. My objectives have never changed, to do my duty as I perceive it, and to bring out the facts in order that others can take appropriate action in the public interest. It is this single objective from the start which has allowed me to focus on the task at hand and not be side-tracked, especially by the personalization of the issues by Lazarus and the executives.

Every effort to date, including the state’s investigation, has failed to highlight the full truth of what happened at Corpcapital. I acted cautiously and under advisement at all times, as one ought to in the circumstances, particularly given who the directors were and their known inclinations. It was not easy to report my suspicions of misconduct by Liebesman and the executives to an old friend of mine, Eric Ellerine, the chairman of the board. On many occasions I appealed to him not to place our friendship in contention with my duty, advising him that if this were to happen I would have no choice. It was difficult to have to swallow the aggressive and often insulting attacks by Lazarus. The lack of action by the board was disappointing, and Payne’s investigation a let down for investors. The Myburgh report was released to Corpcapital and me in November 2006. Since then and for the major part of 2007 forensic experts and my lawyers, WWB, have studied the report and the new evidence which we had not previously seen. My view, backed by the expert reports is that the Myburgh investigation was not conducted properly and its findings are flawed. In consequence a further submission was made to the Minister, which contained all the forensic reports and certain recommendations, in December 2007.

Directorships offer individuals huge benefits, access to social networks, insight and involvement to business opportunities, a great environment to learn and grow, and significant payment for the privilege. It is well to remember that a directorship is not a right but a privilege bestowed on few, a privilege that carries reciprocal responsibilities to shareholders. Companies and their shareholders are entitled to expect and even demand that directors understand and implement their fiduciary duties in return. That it is not a pleasant experience to do so on rare occasions, especially where old friends are involved, can never mitigate for failure to meet their duties.

I have met my obligations. They are not more complicated than getting the facts out. I can now terminate my involvement with this sorry and often sordid saga. Whatever happens, or not, from this point is out of my hands. Should there be further retaliation from the executives this website stands as a reference site to what actually happened at Corpcapital. It publishes the reports from both sides, nothing is excluded.
Throughout the text passages are quoted from eminent business thinkers that reflect my own beliefs and experiences, and put a message across in a way that I could never do.

I hope that this website will facilitate further scrutiny of how allegations of this nature are dealt with in South Africa, and the way in which the rule of law is applied in a way that it is never necessary again for anyone to go through the expense and emotional trauma to establish a roadmap. It is also a good reference site for interested parties, be they former or current shareholders, the investing public, the business and academic communities, and regulatory and enforcement agencies.

This website points out some serious inadequacies in regulatory functions and the legislation. I expect that it will help restore a proper balance between the law and corporate governance codes, which are not legally enforceable. It enables me to take a personal and public stand on the difference between right and wrong in a situation which matters to our society and to me personally.

It is appropriate and, in my view in the public interest, to place the facts about Corpcapital before readers who have followed the case. I have tried to avoid placing my own personal interpretations on the evidence and reports. That is why I have gone to the considerable expense of using the best independent experts the country has to offer. During the course of putting the website together I spent countless hours making notes and re-reading every one of the thousands of documents which have accumulated over many years. The process forced me and my advisors to challenge every conclusion, to re-visit every assumption, and to consider every view. The Corpcapital saga has broken new ground in many respects, and not just in South Africa. Readers are invited to make their own minds up about the merits of the various arguments advanced, and to comment if they so desire. I hope a public debate results and notice is taken by those who are able to influence the future course of the free enterprise system.

Finally. There is nothing new. Right from wrong has been taught for the past ten thousand years or more, and will continue to be the eternal and elusive principle. This story has been based on true life and personal experiences. For that reason, it may be that in the telling some will hear and be inspired to change things for others.

Nic Frangos
Johannesburg, South Africa, 11 August 2008