The Board of directors as rightly pointed out by Charan R. Holcomb J.M. Useem M. are supposed to monitor and not manage. The role can be rewarding, challenging and also risky. Today, the relationship between board-level risks and rewards especially in publicly quoted companies and state-owned entities are ever-changing and under intense public scrutiny.
Despite the rewards, it is certainly not a role that anyone these days should enter into lightly, or without all of the relevant information relating to the legal ramifications of such a supervisory job. Haigh J. justifiably proclaims that it is all too easy to be seduced by the prestige and emoluments that comes with the position. However, before accepting an offer of a directorship, it is important to consider the legal frameworks which you are about to enter into and the responsibilities that these legal implications require”.
It is for these reasons why in addition to understanding the legal implications and meeting people face to face to solicit for information, it is important to do some desk research before deciding to take the leap to be a director. Sources of data and other information include company reports and accounts, media updates, company website information, cautionary notices etc.
Legalities and liabilities
To begin with, directors are responsible for ensuring that the company abides by the laws, regulations and legal requirements that govern it. In addition to company laws, directors are also subject to the duties imposed by the laws of the country within which they operate. Failure to comply with these statutory requirements can result in personal liability for a director.
The Institute of Directors Ghana Best Practice Guide(2017 pp31-32) categorizes director liabilities under civil and criminal. Civil action as rightly pointed out by them includes amongst others, damages where the director’s actions were negligent, return of profits and many more. Criminal consequences include a jail sentence, fines etc.
For South Africa, Deloitte expounds that the Companies Act states that “a director of a company may be held liable for any loss, damages or costs sustained by the company as a consequence of any breach by him or her of a duty contemplated in the standard of directors conduct, failure to disclose a personal financial interest in a particular matter or any breach by the director or prescribed officer of a provision of the Companies Act or the company’s Memorandum of Incorporation.”
Directors in the United Kingdom are subjected to the UK Companies Act 2006 (and as amended). The Act provides a set of statutory guidelines that must be adhered to by all directors, by the executive or non-executive. Any breach will result in punitive actions against the individual.
Ghana’ Companies Act 992 (section 199) specifically states that a director who knowingly commits a breach of duty shall be liable to compensate the company for the loss the company suffers as a result of the breach. Section 200 of the same act affirms that legal proceedings may be instituted by the company or by a member of the company to enforce liabilities plus recover from the director of the company property of the company.
Actions against delinquent directors in Ghana according to Botchway N.A and Quaye E. are in line with the United Kingdom and South African Companies Act. They stress that “a director is liable to compensate the company for any loss that it suffers as a result of a breach of the director’s duties to the company”. Directors according to them “must also account to the company for any profits they make from transactions involving a breach of their duties to the company.”
In South Africa, a company may recover any losses from a director if they are found to have:
- breached fiduciary duty;
- acted on behalf of or signed on the behalf of the company without the authority to do so;
- acted in a fraudulent manner either through an act or omission;
- signed or consented to financial statements that were false or misleading;
- signed, consented to or authorised written statements that contained untrue, misleading or false information;
- been present at a meeting or making decisions at a meeting that was found to be non-compliant in terms of the Companies Act.
These losses may not only be covered in terms of recovering financial damages but if a director is found to be negligent or incompetent, they are also at risk of being disqualified as a director, being declared a delinquent and even facing criminal charges. In Ghana, the law courts and statutory institutions are increasingly being used to disqualify negligent directors plus recover assets from those who are seen to have been irresponsible.
According to Werksmans Attorneys, “if a director acts in any manner that amounts to gross negligence, wilful misconduct or breach of trust in relation to the performance of his or her director’s duties, a court may declare him or her to be delinquent. Any declaration of delinquency will subsist for the lifetime of the person concerned and may be made subject to any conditions that the court considers appropriate.”
Separation and conflict of interest
If a director is also a shareholder, significant care needs to be taken to ensure that there is a strict separation of interest. Since shareholders are permitted to act in their own self-interest, it can sometimes become quite tricky when they are required to place their own self-interest aside and uphold their legal duties by placing the best interests of the company before their own. This type of conflict of interest should be seriously considered by anyone deciding on accepting a directorship role within their own company.
Directors also need to be aware of other forms of conflicts of interest and the legal implications and risks associated with these.
The Institute of Directors Southern Africa (IoDSA) explains that a “conflict of interest arises where a director is in a situation where he or she has a personal interest which competes against that of the company at which he or she is a director.”
Institute of Directors United Kingdom, Southern Africa and Ghana are all in agreement and recommend that “conflicts of interest should be avoided, and that certain conflicts of interest which are fundamental should be averted. Other conflicts (whether real or perceived) could be managed through the proper process and involves disclosure in good time and in full detail to the board and then appropriately managed.”
While liabilities do exist, and provisions are often made to prevent the relief of a director of any duty or liability, or negate, limit or restrict any legal consequences arising from an act or omission that constitutes willful misconduct or wilful breach of trust, there are situations in which directors can be indemnified from legal liability.
According to Werkmans Attorneys in South Africa, this indemnity from legal liability cannot however include liabilities arising from: “wilful misconduct or wilful breach of trust on the part of the director; or where a fine has been imposed as a consequence of a director having been convicted of an offence; or where a director acted recklessly, or despite knowing he or she lacked authority, or with the intent to defraud creditors, or with any other fraudulent purpose”. The same imperatives apply to directorships in Ghana.
In a number of countries, including amongst others, Ghana, Kenya, South Africa, Bhutan, India, and Zambia, corporatized state-owned entities for now also operate under normal company laws. It is just a matter of time that these countries revamp and modernise their relevant frameworks to ensure thought-leading sectorial governance and performance. Key to this according to the World Bank Group (for Reconstruction & Development) is the harmonisation of public sector guidelines with that of the private sector and improving or developing a clearly state ownership model that will enable directors to face both civil and criminal actions for negligence. Doing some research and taking precautionary steps will thus certainly help to protect a director from potential unintended civil and criminal consequences.
To sum up, becoming a director as frequently underscored by King M, Kral R, Leblanc, R Judge B, is a big responsibility. In the UK and United States, the risks and liabilities equally apply whether you are an executive or non-executive director, and all subsequent liabilities are the same. For organisations operating under the Companies Act in Ghana and South Africa, the situation is not different. Today, personal liability can be costly for an individual, both in terms of finances and reputation. It is therefore essential that potential directors familiarise themselves with the legalities and governance guidelines around the profession and role. This will allow them to embrace their responsibilities and duties and work towards the growth and success of both the company and themselves plus fulfil their corporate citizenry duties.
To conclude, decisions around the risks and rewards associated with being a director is an individual matter. Whilst there are substantial rewards, there are equal risks that mirror the upsides associated with a directorship role. Ignorance of the law is certainly not an excuse anymore. All factors must thus be carefully considered before arriving at the final decision to take on such a responsibility.
“Forewarned” as succinctly highlighted by Haigh J. King M. Brown G, Moran S. amongst others is “forearmed”.