We discussed two common law duties in the last post, today we cover the remaining duties.
The next key duty of directors is that they should exercise unfettered and independent discretion and judgement.
Directors should exercise objective and unbiased judgement on the affairs of the company independently from management and any shareholders, but with sufficient information to enable a proper and objective assessment to be made. The director should not be influenced by any other party interested in the outcome of the decision. Put another way the director should be making his own decisions rather than simply implementing the instructions/commands from stakeholders. This flows from the concept that it is the director who is both personally and criminally liable for performance of the duty of care and good faith to the company. I have seen many fall foul of this common law duty in Board rooms. Some directors try to flow with anything that the Group CEO or the most powerful principle wants. This may be due to the fact that they want to stay on the Board and fear jeopardizing their income or they derive some social value form regarded as a compliant director.
A corollary of this is that even when directors depend on information from experts, consultants and other members of the company for information, they still need to exercise their minds and make unfettered decisions. The directors have to be very familiar with the governing documents and business model of the organization
The other common law duty is that directors should avoid having their persona interests conflict with those of the organization. A related duty is the disclosure and management of any potential conflicts. The personal interests of a director; or of people closely associated with that director, should not take precedence over the interests of the company.
This implies that in their responsibilities to the company they should not put their own interests before the organization. This can happen, for example, in State Owned Entities where directors can vote to pay themselves very high board sitting fees when the entity is loss making. Similarly directors should not in any way misappropriate corporate opportunities due to the company as well as improperly competing with the company.
Similarly a director should not make any secret profits or possible incidental profits at the expense of the company or accept profit from third parties using their position as directors.
These common law duties are quite onerous and should be carefully considered before and during Board services. They can be detrimental to your wealth creation if you are found liable personally for violating them. Many people in NGO voluntary corporate Boards usually take these casually not realizing that they are still responsible legally even if they are not paid.
I hope this discussion has been enlightening and helps you in your fiduciary duties.
In a previous blog we discussed the legal duties of Corporate Directors. In the next few blogs we dig deeper into Common Law duties of directors. Common law duties are separate from statutory duties as codified by the Law although some common law duties may have been included into the Code. Where some duties in common law have been codified into law, then the law takes precedence. Where there has been no codification of the common law duties, these common law duties are still legally expected to be complied with. It is therefore important for any director to be aware of these duties.
1. A director should act only in the best interests of the company. This means that they should act in a manner that benefits the company as a whole and bona fides towards the company interests. This common law duty normally entails three key aspects namely:
- must make all decisions and act solely for the benefit of the organization. The primary principal for directors is the company itself. Not the appointing authority or any other party. This duty is owed to the company as a legal persona.
- may not use or disclose any confidential information for their own personal benefit or for anyone other than the organization
- must promote the success of the company for the benefit of the members whereby success is viewed as long term increase in value. In doing so a director must consider holistically a multiplicity of factors including the likely long-term consequences of any decision on all stakeholders. This is also captured in the King IV as the stakeholder inclusivity concept. In some jurisdictions e.g. in the UK, the law also specifies the need for protecting the corporate reputation and the need for acting fairly towards all shareholders.
2. A director should not act beyond the limitations of powers and should act for a proper purpose which means a director should always act within the ambit of their authority. This directors’ duty may be distilled into two aspects namely:
- may not exercise the powers granted to them for any unauthorized and improper purpose and for any ulterior motive. These powers are exercised for the good of the company and not for the benefit of the director himself. This speaks to the intended purposes by both law and the memoranda of incorporation.
- may not exceed their powers and may only use them for the purposes for which they were granted. This is a way for controlling power of directors. This power is generally granted by law and or by the corporate constitutional documents and agreements. A director has to be familiar with these as they outline and detail any limits to a director’s decision-making powers. Directors must act in accordance with this, and only exercise their powers for the purposes for which they were given. If these powers are exceeded, then decisions may be reversed, transactions may be voided, and may leave the directors liable to pay for any financial losses to the company. In the South African context, the directors powers derive from the Company Act 2008 and not from the company’s Memorandum of Incorporation.
This duty is distinct from the duty of good faith, although they operate cumulatively implying that a director who may have acted in good faith can be found to have not exercised his powers for a proper purpose.
In the next blog post we take a look at the next two common law duties.