A business looking to set up and incorporate in any jurisdiction is usually concerned about who to appoint as the Directors. Identifying the shareholders of a company is straightforward and very clear to any entrepreneur looking to start a business. It becomes a bit dicey when it comes to the selection of directors.
Directors are in simple terms the business managers of a company. Although the nomenclature may differ depending on the jurisdiction, the concept of directors and their attendant responsibilities remains the same globally. Business owners are usually burdened with a lot of questions at the point of incorporation.
Who are Directors? What do they do? Are the shareholders also meant to be Directors? Can I be a shareholder and a director? In most instances, business owners just appoint their family members or close associates and friends as directors of the company. In countries where sole Directors are allowed, it is easy for a business owner to appoint himself as a sole director and sole shareholder of a company. This is not the case in countries where sole directors are not allowed.
Let’s examine the concept of directors, what they represent and their functions in relation to the company.
Who are Directors?
Directors can simply be defined as corporate managers. What this means is that they are responsible for making decisions that affect the activities of the company. They are the “directing will and mind” of the company. Thus, any person appointed as a director, has the capability to make decisions for the company and can bind the company to such decisions.
This is why corporate law generally prohibits certain types of persons from being directors of companies such as; persons who are insane or are insolvent or have been convicted of a crime relating to fraud in the past.
Although a company is conferred with a legal personality and is deemed to be a person in law, the directors are the persons who give life to the company. However, this does not directly imply that the directors can do as they please with the company. This just means the decisions they make can either make or mar the company.
In today’s world where technology has enabled companies to be able to operate in countries where they are not physically present, as well as attract investors (who sometimes become shareholders), it is important that directors are selected with caution.
This is not to say that the powers of the directors are absolute. The corporate documents of the company, usually called the memorandum and articles of association of the company can be used to limit the powers of directors.
For example, it is possible to include a provision in the articles of association of a company that states that the directors of the company cannot approve beyond a certain amount of money, albeit for business purposes without the approval of the shareholders. However, a quick survey among business owners will show that most shareholders and even directors do not know the contents of the memorandum and articles of association of their respective companies.
If you do not know the contents of your corporate documents, this is not to make you panic. Generally, by the mere appointment of a director, there are certain duties which are imposed on the directors which govern how they manage the affairs of the company. Corporate law generally understands that power corrupts and there is a need to limit the extent of the powers of directors. The duties of a director/ company manager/ business manager are as follows;
Duty to act in good faith and for proper purpose
Directors owe a fiduciary duty to the company. This means that they are to exercise their powers for the benefit of the company as a whole. A director can become liable for his actions if it shows that the action was not for the benefit of the company.
In practical terms, this explains why a director cannot award a contract to another company where he is a director or a company that he is affiliated with unless he complies with the disclosure requirements of that company. If the company prohibits such kind of transactions, the director will have breached his fiduciary duty to the company, and can be prosecuted for it alongside removal from the board.
Good faith and proper purpose require a director to make decisions that they deem to be in the best interest of the company. The test of their actions is not in the business accuracy of their decision but whether a reasonable businessman in the circumstances will take that decision for his company.
Duty of care and diligence
Directors owe a duty to the company to exercise some degree of care, skill and diligence in taking business decisions on behalf of the company. It will be difficult for a director of a construction company, for example, to claim that he has exercised his duty properly by buying a property that is the subject of litigation in the courts or by buying land in a location prone to flooding. The level of skill required here is not professional, but what can be reasonably seen and inferred in the circumstances.
Duty not to make secret profit
A director is not to make secret profit from the company in any form. In simple terms, a director is not to use the business of the company to line his pockets. For example, taking a commission from contractors that offer services to the company or using a company owned by the director to provide a service to the company. Although, this is not a complete prohibition, there are disclosure requirements to the board and such transactions may be subject to board approval.
These duties generally guide the actions and inactions of a director and protect the business interests of the company. It is important to note that some of these duties are further codified in the various company laws of the different countries.
Aside from the statutory duties, the company can also put in some internal measures to ensure that the directors act in the best interests of the company. They include;
- Including oversight provisions in the articles of association/ constitution of the company to regulate and monitor the activities of the directors of the company.
- The use of board committees to manage different aspects of the company’s business. For example, most companies in recent times, create audit and governance committees to approve and/or review the actions of directors.
- The appointment of independent non-executive directors who are independent persons appointed as company directors to provide professional expertise to the executive directors and to ensure that there is no bias in the decisions taken on behalf of the company.
- In some jurisdictions like Germany, it is possible to make use of a tiered board system whereby there is an actual board and supervisory board to review and check the actions of the directors on the board.
- The use of board evaluators to check the activities of the directors to ensure that they are acting in the interests of the company. This can be done quarterly or yearly.
The directors of any business are the governing will and mind of the company. They decide the trajectory of the company and also have the power to mar the progress of the company if not monitored. If you are an entrepreneur looking to register your business, it is important to pay attention to those to be appointed as your corporate managers/ directors. So, before you appoint that family member or associate or friend, remember to read this article again. Directors can also not be corporate entities because of the sensitive nature of their duties.
Please note that the duties highlighted above do not relate to the appointment of nominee directors. Nominee directors are usually appointed for business convenience and to fulfill regulatory requirements. This is because a nominee agreement, excludes the nominee director from the activities of the company and such directors do not have any powers and cannot bind the company with their actions.
At Norebase, we are here to help you to start, scale and expand into any jurisdiction of your choice. We care about your business operations and also provide advisory services on the appropriate corporate structuring necessary for you to ensure that your business is protected.
We go a step further with Autocomply and help you meet your compliance needs.