Insights into Directorships and the Boardroom: Director accountability, duties of care, loyalty and independence

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Directors of a board are entrusted with responsibilities and powers that are deemed essential to the overall success of the company. Hence the need as expressed by amongst others, Kaler J and King M for accountability, responsibility and governance to be linked.

Accountability as succinctly pointed out by Fisher E, Kaler J, the Cadbury Dodd-Frank, and Sarbane-Oxley Reports are a must in any governance regime. A company’s board and its directors according to Keay A, has the authority and power over and control of the affairs of the organisation and hence its funds.  “For medium to large companies, the shareholders are limited in the monitoring that they can exert over the board activity. Hence the need for accountability” affirmed Keay.

After accepting their appointment, directors are expected to perform their duties to a certain standard and accept various responsibilities.  Each member must be prepared to be present and fully participate in organisational related deliberations to ensure effective governance.  

To be prepared as rightly pointed out by Light, D, King M, and Shultz S, is for directors

to be fully aware of the issues directly and indirectly affecting the company and ready to exercise their legal duties- the duty of loyalty, the duty of care and duty of independence.

Today, directors are expected to be fully abreast with existing laws, regulations and rulings that have implications for decision making. Being well informed will assist a director to act out of loyalty to the shareholders and stakeholders that they represent and more importantly as emphasised by Hurt C, Higgs D, Stiles P, Tricker R act with care independent of their personal interests.

Duty of loyalty simply means exercising sound independent judgement that is in the best interests of the organisational shareholders and the broader stakeholders which include amongst others, employees, suppliers, customers and various communities.  Over time, a director may have developed relationships with the executive, other non-executives and in particular, the managing director/chief executive officer. It is important that sound judgement is still maintained to ensure fiduciary responsibilities to act out of loyalty are not compromised through such associations.

Duty of care is expected from each director at all times. This means acting in good faith and using reasonable judgement in performing duties. To do this, directors are expected to use common sense, practical wisdom and well informed judgement that protects shareholder and stakeholder interests.

Full participation in meetings based on prior preparations is a must. The preparedness of a director for a meeting has an impact on board proceedings and decisions

Directors are expected to remain independent and impartial in the execution of their duties. This means not using company information, resources or networks for personal gain. Put simply a director as expressed by King M, Thompson S, Solomon S, is not expected to use private and confidential information, and company resources for own benefit.

Director duties may change slightly from organisation to organisation, but some of the more company accepted duties include: to promote the success of the company, exercise independent judgement, reasonable care and skill, and to avoid conflict of interest.

Directors are generally responsible for deciding the organisation’s goals and priorities, communicating with stakeholders around company growth and sustainability, and reporting back the activities of the board to shareholders and stakeholder at the AGM.

Directors are also responsible for keeping up to date with external market factors impacting an organisation and ensuring that the company is heading in the right direction; setting budgets and monitoring profits; keeping track of employee performance and developing policies and regulations to be followed by company employees, among other things.

When it comes to powers related to approving financial statements, diversifying business activities, investing, borrowing and loaning monies, approving mergers, authoring buybacks on shares and making decisions related to shareholders, directors are required to pass resolutions during the meetings of the board.

According to Deloitte, the board of directors “bears the ultimate responsibility for the actions and performance of the company.” Although the board has the power to make certain decisions pertaining to the running of the organisation, the board does not have full decision making powers in all areas.

In some instances, directors require the approval of the shareholders prior to decisions being finalised. Deloitte notes the following expels of decisions that directors do not have full decision-making power on:

  • amendment of the company’s Memorandum of Incorporation;
  • approval for the voluntary winding-up of the company;
  • approval of any proposed fundamental transaction (including the disposal of all or greater part of assets or undertaking, amalgamation, merger or scheme of arrangement);
  • ratification of any action by the company or the directors that is inconsistent with a limit, restriction or qualification in the Memorandum of Incorporation;
  • approval of an issue of shares or securities to a director, future director, prescribed officer, or any person related or inter-related to the company, or to a director or prescribed officer of the company;
  • approval of financial assistance for subscription of securities;
  • approval of loans or other financial assistance to directors as well as related and inter-related companies, and
  • approval of the policy or parameters for director remuneration.

Although directors are expected to take responsibility for their decisions and actions, provisions related to liability are often put in place to ensure that they have the freedom to act in the interest of the organisation without constant fear of personal exposure to liability claims.

Under certain circumstances directors can be indemnified and will not be held responsible for their actions. This is however usually dependant on the director being able to demonstrate that they acted in good faith, in the best interests of the company and with the skill and care that can be deemed reasonable of any other person in the director’s position.

Since directors have a fiduciary duty to act in the best interest of a company, they are expected to act in good faith and ensure that any actions taken are for the benefit of the company as a whole.

If a director is found to have used their powers to advantage themselves personally or someone outside of the company or they are found to have knowingly caused harm they can be held personally liable for any loss or harm suffered as a result.

In some instances, a director of a company may also be found liable for any loss, costs or damage incurred as a result of the director acting in the name of a company without due authority; signing false financial documentation, and making untrue statements related to the company.

In order to prevent personal liability directors should comply with the following guidelines:

Directors must accept all fiduciary duties

Once a director has accepted their position on a board they must accept all of the responsibilities that come along with that position. When these responsibilities are not taken seriously it can have a negative impact on the company and directors may be held responsible.

Promote the success of the company

A director is required to act in the best interest of the company. This means that directors need to make decisions based the desired successful outcome for the company’s members, its employees, its reputation and position in society as a whole.

Practice oversight

Oversight is an important function for any board director. Although specific tasks and responsibilities should be delegated to committees, management, etc. it is still essential that directors follow specified policy and procedures when it comes to overseeing the outcomes of these activities.

Avoid conflict of interest

Directors should avoid conflict of interests at all costs.

According to Deloitte, “where a director somehow acts in competition with the company, a fundamental conflict of interest is inevitable.”

They explain that “there are a number of ways in which such a situation could occur. One is where a director takes an opportunity that could have been taken by the company, in his or her personal capacity. Another is where the director holds directorships on rival companies.”

Pursing personal benefits from the information or opportunities that are available to you as a director can be seen as a breach of fiduciary duty.

Exercise power independently

Directors are expected to have sound judgement and are required to exercise their own judgement when making decisions. While directors may require advice from time to time, they should ensure that any decisions are made independently.

Act with care

Directors are appointed for their knowledge, skills and experience that they bring to the board. This knowledge and experience should be demonstrated in the care that the director takes to facilitate the overall success of the company.

While these guidelines are helpful, at the end of the day, it is effective corporate governance that is key to ensuring the sustainability and success of any organisation and to preventing or minimising any company or personal liability should things go wrong.

In conclusion, director responsibilities now come with significant duties of care, loyalty and commitment. Each director on a board is expected to have the integrity, intelligence, vision, and commitment to look after the interests of shareholders and stakeholders through effective governance.

>>the writer is an international chartered director and Africa’s first-ever appointed Professor Extraordinaire for Industrialisation and Supply Chain Governance. Independently recognised as one of the vertical specific global strategic thinkers on industrialization, supply and value chain governance and development, he continues to play leading academic and industrial roles in sectorial reforms both in Africa, and around the world. He is the CEO of PanAvest International and the founding non-executive chairman of MY-future YOUR-Future and OUR-Future (MYO) and the highly popular daily Nyansa Kasa series. For more information on COVID-19 updates and Nyansakasa visit www.myoglobal.org.

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