Introduction
Corporate Governance plays a fundamental role in impacting the success and sustainability of any company and at the heart of a company's governance structure is its Directors. The Directors are the decision-makers with fiduciary responsibilities to the company, its shareholders and other stakeholders including, employees, creditors, and regulators. Understanding the duties and responsibilities of directors is therefore crucial. In this newsletter we examine some of these responsibilities and their importance.
Who is a Director?
A director is an individual appointed to oversee and manage the affairs and operations of a company. The Board of a company may comprise executive directors who are responsible for the day-to-day operations, non-executive and independent directors who provide external oversight. Under the Companies and Allied Matters Act (CAMA) 2020, directors owe fiduciary duties to the company, requiring them to act in good faith, and in the best interests of the company and its shareholders. These fiduciary duties include:
1. Duty to Promote the Business of the Company
Under the CAMA and the Nigerian Code of Corporate Governance, directors must act in a way that promotes the business of the company. In fulfilling this duty, directors must consider the impact of the company's operations on the environment and society and the impact of their decisions on the company's stakeholders, shareholders and employees. To fulfill this obligation, directors must ensure that the company operates in a manner that maximizes its profitability. This includes making strategic decisions, managing risks effectively, and ensuring compliance with legal and regulatory requirements
2. Duty to exercise Care and Diligence
A director is obligated to exercise reasonable care, skill, and diligence in performing his duties. This duty requires directors to act in good faith and in the best interest of the company, its members and stakeholders in the course of operations. A director's obligation to exercise care implies that his actions must be conducted in a manner in which a reasonable man would conduct themselves in dealing with the company's affairs.
3. Duty to Avoid Conflicts of Interest
Directors have a fiduciary duty to ensure that their personal interests do not conflict with those of the company. They are obligated to disclose any actual or potential conflicts and, where necessary, recuse themselves from related decision-making processes. Additionally, directors are prohibited from using their position for personal gain or deriving undisclosed financial benefits from the company, while discharging their duties.
4. Duty to Exercise Independent Judgment
Directors are required to exercise independent judgment when making decisions on behalf of the company. In essence, a director must make decisions based on his personal opinion and skills, without any bias or undue influence by a third party. A director must not fetter his discretion by committing in advance to vote in a particular way, as doing so may compromise their ability to act in the best interests of the company.
5. Duty to Act Within Authorized Powers
A director's powers are defined by the company's articles of association and the board charter. Directors must act within the scope of these powers and cannot make decisions that exceed their authority or contradict the provisions of the articles or board charter.
What Happens When Directors Breach Their Duty?
When directors fail to exercise the duties stated above, the consequences may range from regulatory sanctions and civil liability to criminal prosecution. Some of these consequences include:
Loss of Investment: While the directors are responsible for the day to day operation of the company, they are also responsible to the shareholders and investors of the company. Where the directors are in breach of their duties, it may affect investor confidence, and such an occurrence may lead to withdrawal of investment.
Civil Liability: Legal action may be filed against the director for breaching his fiduciary duty. Directors may also face removal from the board of the company or other personal liability for financial mismanagement, fraud etc.
Criminal Liability: A director can also be held criminally liable for offences such as insider trading or fraud committed during the course of operation of the company. Under the Investments and Securities Act, for example, a person convicted of insider trading may be fined ₦500,000 or an amount equivalent to twice the profit gained, or face imprisonment of up to seven years. In the event that a director is convicted, the director will be disqualified from holding office as a director in any company for a period of 10 years.
Regulatory Sanction: The impact of breach of directors' duties often extends beyond the personal liability of the director. Failure to manage the affairs of a company in accordance with regulatory requirements may lead to sanctions against the company by regulators. A notable example is the recent withdrawal of the banking license of a Nigerian commercial bank by the Central Bank of Nigeria (CBN), demonstrating that regulatory bodies can take decisive actions in response to corporate governance failure.
Conclusion
The obligations and duties of directors are crucial in ensuring adherence to corporate governance framework. Therefore, directors must continue to discharge their fiduciary duties to the company while balancing multiple responsibilities, from strategic decision-making to financial management and compliance and risk management.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
