Directors constitute a very key element to the success or failure of a business. A great business idea, business model and adequate resources may amount to nothing without a competent board of directors.
There is no single answer to the make-up of a competent directors. The needs and stage of growth of a business can influence what one should look out for in choosing director for the business.
Regardless of the unique circumstances and needs of a business, there are certain basic expertise and concepts that a director ought to appreciate at a minimum.
This article seeks to provide certain common concepts and expertise which every director should appreciate at a minimum. They are:
- Laws and policies governing corporate bodies
- Corporate governance and the relationship between directors, owners/shareholders and the company
- Function of directors
- Liabilities of directors
- Legal compliance
- Business management
- Financial management
- Risk management
- Business objectives of the company
- Current trends in the industry and the actions of competitors
Consider the story of a young and growing technology company that had great potential but struggled with financial stability and growth.
The company was founded by a group of passionate and talented individuals who had a vision for creating cutting-edge technology solutions in the financial industry. During the formation of the company, they all agreed to become directors on the understanding that they owned the company together.
However, despite their technical expertise, they lacked an understanding of corporate governance, financial management, company, and the business ethics in relation to the company. This caused several instances of mismanagement of funds leading to a loss of investor confidence and difficulty in attracting new investments into the business.
As the company struggled, the founders were advised by a potential investor to get people with expertise in managing and directing the company to act as directors. They found two new directors, one with expertise in finance and business management, and the other with a background in corporate law.
The new directors quickly got to work. They developed a strong financial plan, reviewed past budgets, and improved internal controls. The directors implemented an efficient corporate governance framework, financial reporting systems and provided training for all the other directors on the legal and fiduciary obligations of directors.
They advised certain directors to step down from directorship to focus on other leadership roles in the company. They advised certain directors to also step down from active management and focus on exercising oversight responsibility on the board of directors.
Their efforts paid off. The company experienced a remarkable turnaround and saw an improvement in productivity. With improved finances and corporate governance system, the company was able to attract new investment and expand its operations.
In just a few years, the company has become a leading technology company in Ghana, with a thriving culture and a reputation for excellence.
Lessons
Without a strong corporate governance structure and a leadership with good understanding of business management, a company with the most talented and passionate individuals can struggle to achieve their goals.
A company thrives when its board of directors constitutes a blend of technical, legal and business management expertise. The mixture and balance of such expertise in the management of a company facilitates its growth and development. Although, it may be impossible to have each director possess all the relevant expertise, it is essential that the board of directors running a company collectively possesses these skills. Professionals, such as lawyers or financial consultants, may also be contracted to support with the provision of such expertise.
The following are the expertise and key concepts that the directors of a company need to appreciate in managing a business.
- Laws and policies governing corporate bodies
A director ought to have a great understanding of the laws and directives governing the administration and management of corporate bodies.
The main governing law in Ghana is the Companies Act, 2019 (Act 992) which generally provides the rules and regulations on the formation, incorporation, management and administration of companies. The Office of Registrar of Companies, as the main regulator of corporate bodies, also issues notices, directives and guidelines relevant to those matters.
It is important for the board of directors to possess a general understanding and appreciation of this law and the directives as it relates to the operations of the company. By having a good understanding of company law, directors are able to make informed decisions that are in line with the law and best practices.
- Corporate governance and the relationship between directors, owners/shareholders and the company
A director ought to appreciate the concept of corporate governance and the relationship between directors, owners/shareholders and the company.
In simple terms, corporate governance is the system of rules, practices and processes which govern how a company is administered. It governs the relationship and balance between the powers and interests of the stakeholders of a company, such as shareholders and directors in the management of the company. In recent time, modern business practice requires that the interests of the state, the community, the staff and the environment should be considered in discussing the stakeholders of the business. Although the extent of such considerations depends on the nature of the company’s operations.
The shareholders are the owners of the company. They own shares in the company. Generally, they appoint directors for the company, unless they delegate that power to another person. Hence, the directors of a company have a fiduciary duty to the company and its shareholders. This fiduciary duty requires the directors to act at all times with the utmost good faith in relation to the company and its shareholders.
On the other hand, the directors are the managers and administrators of the company. A director is required to generally act in what he/she believes is the best interest of the company as a whole and in the manner that a faithful, diligent, careful and ordinarily skilful director would act in any circumstance so as to preserve the assets and promote the purposes of the business. This is the least standard of diligence required by the law. They must prioritise the interest of the company and shareholders, and act in a manner that brings returns on the investment of the shareholders and position the company for growth.
Thus, directors ought to have a good grasp of all their roles, and the implications of these roles on the company, its shareholders and employees, customers, the state and the communities within which the business operates. Having a good knowledge of corporate governance enables the director to balance the various interests of all the stakeholders of the company while aiming to achieve the objectives of the business.
- Functions of directors
A director ought to know the roles and function of the office under the law and in the business.
As indicated earlier, the directors are the managers and administrators of the company. The directors may also appoint separate personnel as managers of the company. In such instances, the directors oversee the actions and decisions of the management body or personnel of the company.
The directors mostly act together as a board, however, there are instances where individual directors may be delegated certain responsibilities or appointed individually as managing directors.
There are generally two types of directors: executive directors and non-executive directors. Executive directors occupy other roles in the business in addition to acting as directors. They mostly play managerial roles in the business and are involved in the day-to-day running of the business. Non-executive directors exercise only oversight responsibility through the board and do not occupy any other role in the day-to-day running of the business.
The following are a number of functions that the directors have under the law and in line with business practice.
- The directors appoint the management of the company. In some instances, the directors appoint the managing director or the chief executive officer who is charged with recruiting the rest of the management.
Unlike directors, managers generally control the work and performance of particular divisions or departments assigned to them in the company on a day-to-day basis. These managers may be appointed to roles such as managing director, production manager, sales manager, marketing manager, human resource manager, accounts manager, and customer relationship manager. The managing director (chief executive officer), unlike other departmental managers, manages the business as a whole and oversees all the other managers in charge of the various departments in the business.
The directors may appoint a manager who may or may not be a director.
- The directors are required to promote the business of the company and protect the assets of the company.
The directors must at all times promote the best interests of the company and not do anything that hurts the interests of the shareholders. In seeking to achieve this objective, a director must exercise his/her best and independent judgment in all situations, and ensure that his/her independent judgment is in accordance with the law and overall duties to the company and its stakeholders.
A director of a company who has an interest that is likely to create a conflict of interest between that director and the company is obliged to disclose that conflict of interest to the company. A conflict-of-interest situation may arise when the director’s personal interests – family, friendships, financial, or social factors – could compromise his or her judgment, decisions, or actions toward the company.
- Directors oversee and, where necessary, approve the actions of the management in the operations of the company.
They perform these oversight roles through the meetings as a board, where they have the opportunity to review the operations of the company and the officers and also approve the decisions and actions of the various officers. In the oversight role, the directors may request for documentation and clarifications from the management to approve the decisions of the management during their board meetings. Where the director is an executive director, the director performs the oversight responsibility with the management functions.
In performing the oversight role, the directors need to consider the following three (3) key areas in the management of the company.
- Financing: The directors have to approve and decide the most suitable avenues to raise capital for the company after considering the pros and cons of the various modes of financing. The financing options that management may propose for the consideration of the directors include loans, ploughing-back of profits of the company, accessing the capital markets, share issuance, and stock market listing.
- Investment: It is the duty of directors to approve the recommendations of the management on where to invest the company’s funds and resources. Although the board of directors approve these investment decisions, it is mostly in consultation with the shareholders. The shareholders also usually indicate the general business objectives or scope of operations of the business.
Ultimately, the decision of the directors must be in accordance with objectives of the business and the best interest of the shareholders of companies, which is to earn returns on their equity investments. The implementation of the business process and plans to achieve those objectives will fall to the directors and the management. Hence, the director must ensure that the option chosen is in the best interest of the business and its shareholders in line with those objectives.
- Returns on investments for shareholders: It is the responsibility of the directors to ensure that the shareholders obtain returns on their investments since that is the aim and purpose of a shareholders’ participation in a business. The returns to shareholders are mostly provided through dividends. It is mostly the responsibility of directors to recommend and declare dividends for the year for the shareholders to approve.
There are instances where the shareholders gain returns on their investments through the purchase of the shares of shareholders by the company at a premium through transactions, such as share-buy backs and put options. These transactions mostly require the approval of the directors as well.
It is the duty of the director to ensure that the shareholders get the most possible return on their investments by investing the resources of the business efficiently.
- Liabilities of directors
The directors must have an appreciation of the penalties and civil liabilities to the company for wrongful acts done in the course of managing the company.
Where a director breaches their legal or fiduciary duty, the director and any other person who knowingly participated in the breach are liable to compensate the company for the loss the company suffers.
A director is also required to account to the company for a profit made by the director as a result of the breach of a contract or any other transaction entered into between the director and the company in breach of that duty may be rescinded by the company.
- Legal compliance
The directors must be aware of a range of legal requirements and regulatory compliance that apply to the company.
These compliance requirements are found in various laws and directives from the various regulatory bodies. The laws include the company law, labour laws, tax laws, environmental laws, among others.
Although the directors may delegate the role of legal compliance to a compliance officer or a legal officer, it is necessary for them to also appreciate the compliance requirement of the business. By staying informed and complying with relevant legal requirements, directors can minimise legal risks and protect the company’s reputation and financial assets.
- Business management
The directors ought to have a good understanding of business management. This enables the director to appreciate the management of the company as it oversees the work of the managers.
Business management is about the science and strategy of running and managing a business and its resources to achieve the objectives of the business. An appreciation of business management involves the appreciation of the following subject areas: financial management, marketing, sales management, human resource management, strategic management, production management, service management and information technology management.
It is always necessary that there should be at least an individual, either at the level of the board of directors or management, who has knowledge in business management. The management of a business typically includes establishing plans and policies, directing business activities, marketing and sale of products and services, and overseeing staff. To effectively supervise or manage the business as a director, there is a need to possess some knowledge in the various areas of business management.
- Financial management
It is important for directors to have a good appreciation of financial management.
Financial management is a critical component of running a successful company. Financial management generally include planning, organising, directing and controlling the financial activities, such as the procurement and utilisation of funds of a company.
Directors ought to be familiar with budgeting techniques, various modes of raising finance, and risk management practices to ensure that the company has adequate financial resources to meet its obligations and grow over time.
The directors ought to have knowledge in financial reporting, budgeting, and risk management to ensure the financial stability of the company. A good appreciation of financial statements and their contents enables directors to provide stakeholders with a clear picture of the company’s financial performance.
- Risk management
It is important for directors to have a good appreciation of risk management.
Risk management is an ongoing process that involves anticipating, assessing and mitigating risks that may affect the company. This includes identifying potential risks, assessing their impact, and taking appropriate actions to reduce or eliminate those risks. Business operations and investments generally come with risks. It is therefore important that the directors ensure that at all times, managements have assessed the legal, financial, technical, technological, political and economic risks associated with the business operations.
By proactively managing risks, directors can help to ensure the long-term success and stability of the company. An example of proactively managing risk can include conducting market research, launching a pilot programme, or adjusting the product design in order to manage and mitigate the risk involved in launching a new product. The directors may also need to ensure that a company has undertaken all the relevant due diligence if they are to undertake any merger or acquisition.
- Business objectives of the company
A director of a company must understand and appreciate the objectives of the company.
The objectives of a company are the purposes for which the company has been incorporated. The directors are appointed by the shareholders to oversee their assets and investments and provide them with returns on the investment.
The shareholders would generally dictate the general business objectives or scope of operations of the business. The directors, through the management they appoint, would need to appreciate the nature of those business objectives in order to undertake those operations efficiently to provide the return on investment of the investment of the shareholders.
The figurative language “putting a square peg in a round hole” will not be any truer than a company in which the directors and the management do not have a basic understanding of the objects of the company.
- Current trends in the industry and the actions of competitors
The directors ought to follow the news, political and industry trends and keep an eye on competitors to have up-to-date information on the occurrences within the industry in which the company operates.
This responsibility can be performed effectively through the management of the company. By staying informed of the happenings within the industry, directors can assist management to make informed decisions that drive the success and growth of their company and meet the needs of all stakeholders.
In conclusion, being a director on the board of directors of a company requires a broad range of knowledge and expertise, including an understanding of company law and corporate governance, financial management, legal compliance, risk management, market trends and a clear understanding of the objectives of the business.
The writer is with Benchmark Lawyers and Consultants, a network of lawyers and finance consultants advising both Ghanaian and foreign businesses operating in Ghana on wide range of transactions, investments, and issues such as regulatory, compliance, tax, employment, and debt recovery.
Benchmark Lawyers and Consultants also advises individuals on estate planning, legal protection and risk management for investments and assets.
