A director is a member of a company’s board of directors who assumes the shared responsibility of the board to determine and implement company policies. Directors act as trustees for the company and are not under any obligation to the shareholders, although they may be held accountable and personally liable by the shareholders for actions taken.
In Nigeria, there is a common assumption that Company Directors exercise an unquestionable amount of power. We have seen quite a number of them prosecuted for abusing their powers and generally, running a company’s affairs in an arbitrary manner. As a company is not a natural entity, a director is the brain of the company and he is entrusted with the company’s moneys, properties and powers but these are to be used within the scope of the law.
So what exactly are the limits of a director’s powers? Whose interest does such a person serve? And what does he do?
A director has certain obligations and duties to his company, one of which is a fiduciary duty. A fiduciary duty is basically a duty to protect the interests of another with whom you are in a position of trust. In this scenario, it specifically refers to the director’s duty to protect the interests of his company in any of its transactions and do what he believes to be in the best interest of the company. It includes not taking any action for personal gains that would be harmful to the company.
The powers and duties of a director place him in a relationship of trust with the company and there are consequences when this trust is broken; thus these powers and duties have to be exercised with a certain degree of care and diligence. In connection to this, another duty of a director is the duty of skill and care. In carrying out his duties, every director must ensure that they are performed honestly, with caution and care in order to avoid taking decisions that can put the company’s interests at risk. A director should act with sincere intentions, without deception and with common sense. A breach of this duty would make such director liable for negligence.
A company director has a duty to avoid a situation where his personal interest conflicts with that of the company’s. A director should not use his position in the company nor any of the company’s property to give himself undue advantage. When a company enters into a transaction and any of its directors has a personal interest in such transaction, this will be viewed as a conflict of interest situation. Here are some of the ways a director can avoid conflict of interest:
- disclose a direct interest (of himself) or indirect interest (of his or her family/friends or any connected person); any interest he has in a transaction involving the company before hand;
- reveal whether any secret profit or benefits of any kind are to gained from that transaction; and
- avoid disclosing information that would compromise the company’s interests in any way.
A conflict of interest could also arise in a case of multiple directorships. This happens when a person who is a director in more than one company (Company A, B, C) uses the property, opportunity or information he acquires from company A in the course of carrying out his duties to the benefit or disadvantage of company B or even himself.
Where there is a possible conflict of interest within or outside the scope of the above scenarios, the director would be held accountable for such conflict in accordance with the law. Even after his resignation, the director’s duty to avoid conflict of interest goes on as he can be held accountable for misusing information he obtained during his tenure as director at the company.
Another duty of a director is the duty not to act for any collateral purpose. This simply means that a director is to use the powers conferred on him for the purpose for which they were conferred and not any other purpose. It also means that no director should go beyond the powers allocated to him.
Some of the other obligations directors have include: the preparation of the annual financial statements of the company during the first 18 months of the company’s existence and subsequently, once every year; exercising independent and sound judgment; acting with integrity; compliance with the terms of employment and company policies.
A director is required to exercise his duties freely, fully and without limitations/restrictions of any sort. This includes a duty not to fetter his discretion to vote. This means that a director must not agree to exercise his right to vote in a particular way with other directors/members of the company. He must not deny himself the right of voting in the direction he wants regardless of the fact that any such pre-agreement/arrangement is in the company’s best interest.
A director would be jointly and personally responsible for any decision taken by the company’s directors even in his absence except where such absence is justified. It is advisable therefore, that a director in the exercise of his powers should maintain a high sense of integrity and keep track of all meetings & financial dealings of the company although he may not have little or nothing to do with company finance.
From the above, it is clear that a director is not one who can decide to go out of line by doing whatever he wants. He is guided by both law and the terms of his employment, where he is an executive director.