In
relation to company property, a Director’s position is similar to that of a
trustee in that a Director controls the company’s assets and exercises his
power for the company’s benefit, and not his own. Company property includes not
only money and physical assets, but also intangible assets and confidential
information such as trade secrets and details of business opportunities.
As
trustees, Directors must account for all such property over which they exercise
control, refund any money improperly paid away, and exercise their powers in
the interest of the company and not in their own sectional interests.
A
Director is also an agent for the company. The company, not being a natural
person can only act through other persons. He acts on its behalf and owes the
core of his duties to the company as a whole, and not just to its shareholders.
More
importantly, a Director stands in a fiduciary relationship towards the company
and must observe utmost good faith towards the company in any transaction with
or for the company. A Director must at all times act in what he believes to be
the best interest of the company as a whole so as to preserve its assets,
further its business, and promote the purposes for which it was formed. He must
do this in such manner as “a faithful, diligent, careful and ordinarily
skillful director” would act in the circumstance. This duty of care is owed
towards shareholders, creditors, and employees.
Fiduciary
duties include the exercise of power for proper purpose, not to make secret
profit, not to fetter his discretion, to act in accordance with the company’s
Memorandum and Articles of Association and the avoidance of conflict of
interest. Questions have been asked as to the practicality of requiring a
Director who is representing a significant shareholder on the Board not to
fetter his discretion.
Such
a Director would typically vote as directed by his principal. However, the
rationale of this legal requirement is to ensure that decision making in the
Boardroom is based on objective reasoning and not influenced by narrow
considerations. The ability to “not fetter his discretion” is the hallmark of a
Director able to exercise independent judgment.
A
Director should not allow personal interests to conflict with his duties and
responsibilities as a Director. A conflict of interest occurs when an
individual is involved in multiple interests, one of which could possibly
corrupt the motivation for an act in the other and it typically manifests when
an individual’s private interest interferes in any way or appears to interfere
with the interest of an entity to which he owes a duty. It is inevitable that
Directors will occasionally face situations of potential conflict of interest
whether directly or indirectly.
Directors
should promptly disclose any real or potential conflict of interest that they
may have regarding any matters that may come before the Board or its
Committees. The disclosure by a Director of a real, potential or perceived
conflict of interest or a decision by the Board as to whether a conflict of
interest exists should be clearly recorded in the minutes of the meeting at
which the notice of interest was made.
A
Director should abstain from discussions and voting on any matter in which he
has or may have a conflict of interest. Some Boards expect that such a Director
to leave the Boardroom when the matter is being discussed. This is not necessarily
best practice to the extent that Directors should be sufficiently objective to
discuss a matter in which one of them is interested – even with him in the
room.
The
consequences of breach of a Director’s duties include, imprisonment, fines, removal
from office by shareholders and disqualification from holding the office of a
director in a publicly quoted company. A Director will be personally liable
where he receives money by way of a loan for specific purpose on behalf of the
company and with intent to defraud, fails to apply the money for the purpose
for which it was received.
Directors
will also be personally liable where individually or collectively, they have
acted beyond the authority conferred upon them by the company’s Articles of
Association; acted in breach of the Companies and Allied Matters Act or other
legislation; acquiesce in the company carrying on business recklessly; sign or
authorize the publication of false or misleading financial statements.
Directors can also be sued for losses suffered by the company as a consequence
of breach of their fiduciary duties.
Directors
and Officers Liability Insurance (D&O) is yet to catch on in Nigeria. D & O is provided to attract
competent professionals to take up Board appointments without fear of personal
financial loss. However, insuring against losses suffered by Directors as a
direct consequence of negligence in performing their oversight functions or
wrongful acts and misrepresentation in financial statements is not in
consonance with the key corporate governance principle of accountability.
(businessday)
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