Company Directors and Fiduciary Responsibility

Many business students and managers aspire to become company directors. They usually do so because of the perceived status or monetary rewards of being a director. The duties of a company director are vast and onerous. Directors have a special role to play in providing oversight of the management of the company they serve.

The duties of a director are to:

Represent the interests of the shareholders;
Oversee control and accountability;
Develop strategy and performance objectives;
Oversee risk management, internal compliance and control, ethical conduct and legal compliance;
Monitor management’s performance, and remuneration;
Oversee major capital expenditure, capital management and acquisitions and divestments;
Approve and monitor financial and other reporting; and
Oversee board and top management appointments and removals, and succession planning.

Collectively, these are referred to as fiduciary duties, or obligations of trust. A person in a fiduciary role acts on behalf of another person (a company is a juristic person), and puts the interests of that person (company) ahead of their own, and has a duty to preserve good faith and trust. A company director is bound, both legally and ethically, to act in the company’s best interests.

A director’s fiduciary duties underpin a relationship of trust and loyalty between the director, other directors, the company, its members, and stakeholders. Directors must act in good faith and in the best interests of the company.

In South Africa, the duties of a director are captured within the Companies Act 71 of 2008, as amended, and the King IV Code of Corporate Governance (The King IV Report on Corporate Governance for South Africa 2016 is owned by the Institute of Directors in Southern Africa NPC, with all rights reserved, and is available at https://www.iodsa. co.za)

A company director must consider the following when making decisions:

The potential long-term consequences of the decision for the company
The interests of the company’s employees
Maintaining the company’s good business reputation
The need to promote good relationships with suppliers and customers
The company’s impact on the environment and local community

Key fiduciary duties owed to a corporation and its stockholders

Duty of obedience

Directors must carry out their duties within the scope of their delegated authority under the law and the applicable corporate governance documents. These powers are specified in the company’s Articles of Association, or Memorandum of Incorporation.

These powers must be exercised for the purposes intended, i.e., for the good of the company rather than the director concerned.

Duty of loyalty

Company directors are expected to put the welfare and interests of the company above their interests. Conflicts of interest or making secret profits from the company’s business dealings are unacceptable.

A conflict of interest is a situation in which a person is in a position to derive personal benefit from actions or decisions made in their capacity as a director. The best way of dealing with conflicts of interest is to avoid them. If this is not possible, then the principle of ‘let the sunlight in’ applies.

The director should make his or her conflict of interest known to the board, and the board will then decide, using the guidelines of good practice, how to proceed. The conflicted director may be excluded from decisions where his or her interests could be served.

Duty of care

A company director must take all reasonable care and give their full attention when performing their duties. A director has a certain amount of skill and experience, which qualifies him or her to serve on the board.

A director is expected to exercise this skill in the best interests of the company. Directors must also not be half-hearted or superficial in the execution of their duties – they must be meticulous and thorough in their actions.

Duty of good faith and fair dealing

This fiduciary duty is closely aligned with the duties of care, loyalty, and obedience. Under this duty, officers and directors must act with honesty, good faith, and fairness when handling corporate obligations. This continuing duty runs through their daily tasks and operation of the corporation.

Duty of disclosure

A director may not accept benefits from third parties, especially if the third party is in a commercial relationship with the company. This can include gifts, holidays, tickets to events, or even cash payments.

Full and fair disclosure of material facts is essential before seeking board or stockholder approval of major corporate business transactions, such as mergers with or acquisitions of other companies.

As part of their duties of loyalty and care, officers and directors should also disclose any potential conflict of interest that may arise between their interests and those of the corporation. A director must declare their interest before the company enters into a transaction or arrangement. The rule of ‘let the sunlight in’ applies here, too.

As we have seen, the fiduciary duties of a company director are demanding. It is a role with profound legal and reputational consequences. And very different from the role of the CEO or a functional executive.

The following wise advice is given to company directors: “Stick your nose everywhere but keep your hands out!”

GLOSSARY:

Articles of Association refers to a document that specifies the regulations for a company’s operations and defines the company’s purpose.
Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance is how companies are governed and to what purpose. It identifies who has the power, who is accountable, and who can make what kind of decisions.
Good faith in human interactions is a sincere intention to be fair, open, and honest, regardless of the outcome of the interaction. Bona fides, the original Latin of good faith, is frequently used in business and law.
The Memorandum of Incorporation is a document that sets out the rights, duties, and responsibilities of shareholders, directors, and other persons involved in a company.