ISSUES IN CORPORATE

GOVERNANCE

Company Directors – Their Duties According to the

Company Law & Corporate Governance

UNIVERSITY OF BALLARAT Master of Business Administration

Company Directors – Their Duties According to the Company Law &

Corporate Governance

prepared by: Ismail Ahmed Managing Director Language Explore April 2007

Directors: Persons constituting the board of directors who supervise the policy and management of the company. Agents for the company - have the powers and duties of carrying on the whole of its business, subject to the restrictions imposed by the memorandum or articles and any statutory provisions contained in the Corporations Law. Are under a fiduciary duty towards the company and improper actions may entail liability either through a breach of

- Corporations Law - the company's memorandum (charter) - the general law.

Responsibilities. . .

Must act bona fide in the interests of the company; exercise their powers for the purposes for which they have been conferred; not place themselves in a position in which there is a conflict between their duties to the company and their personal interests; and must not make a secret profit.

Responsibilities. . .

Must at all times act honestly in the exercise of powers and the discharge of the duties of her or his office In the exercise powers and the discharge of duties, must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances.

Legally….

The rules are largely common law and equitable rather than statutory Articles/Charter fully state the powers and duties of the director In law directors are neither agents nor trustees for the individual shareholders but - are their appointees - it is the individual members who will benefit or suffer from the fortunes or misfortunes of the company

Overall Legal Obligations of Directors:

Legally, in Conclusion: The fiduciary duty The duty of loyalty and the duty of fair dealing The duty of care The duty not to entrench The duty of supervision

Percival v Wright (1902) Directors owe their duties to the company - interpreted as meaning the providers of capital, i.e., the company's shareholders. This means the shareholders as a body rather than individual shareholders. Thus, in Percival v Wright (1902), certain shareholders approached directors and asked if the directors would purchase their shares. Negotiations took place but the directors failed to mention that a takeover bid had been made for the company. This materially affected the value of the shares. Held - there had been no breach of duty by the directors. The directors owed their duties to the body of shareholders rather than individual shareholders and premature disclosure of the takeover negotiations could well have amounted to a breach of duty.

Accountability

Directors act on behalf of the company's owners: - first level of accountability for the company's performance and results is to the shareholders - second and third level accountabilities - the wider stakeholder community & to the environment at large. Prime responsibility - maximising returns - but - in doing so, must ensure that all kinds of other interests have to be taken into account

Corporate Governance Principles 1. Lay solid foundations for management and oversight – this requires companies to recognise and publish the respective roles and responsibilities of the board and management. 2. Structure the board to add value - to ensure the board has an

effective composition, size and commitment to adequately discharge its responsibilities and duties. Eg: that the chairperson

should be an independent director, the role of the chairperson and CEO should be performed by separate individuals, a majority of

the board should be independent and the board should establish a nominations committee.

3. Promote ethical and responsible decision-making – through formal and transparent codes of conduct

Corporate Governance Principles

4. Safeguard integrity in financial reporting - this requires the company to have a structure to independently verify and safeguard the integrity of the company’s financial reporting. 5. Make timely and balanced disclosure - this requires the

company to make timely and balanced disclosure of all material matters regarding the company.

6. Respect the rights of shareholders - this seeks to ensure that the company respects the rights of shareholders

and facilitates the effective exercise of those rights. The recommendations outline requirements for the company’s

communication strategy.

Corporate Governance Principles 7. Recognise and manage risk - this requires the company to establish a sound system of risk oversight and management of

internal control. 8. Encourage enhanced performance - this requires the company to fairly review and actively encourage enhanced

board and management effectiveness, the recommendations outline requirements for directors’ induction, education and

performance evaluation. 9. Remunerate fairly and responsibly –

10. Recognise the legitimate interests of stakeholders - this requires the company to recognise legal and other obligations

to all legitimate stakeholders.

Governance & Management Distinguished

• responsibility of the board is to govern the company, while the managers' task is to run its business.

• managers operate within the hierarchy of delegated responsibility and authority.

• all board members are jointly and individually responsible. all members have equal rights and duties.

• decisions must be reached by consensus • in practice some members may have charismatic power

to influence their fellow directors • others may be allowed to dominate, but there is no

official hierarchy.

the board and management differentiated

GOVERNANCE

MANAGEMENT ORGANISATION MANAGEMENT

BOARD

Figure 1: The Board and Management Differentiated (Adapted from Tricker, Robert. I. International Corporate Governance: Text, Readings and Cases, Singapore: Prentice Hall, 1994. pg. 44)

CGP 2: Director Independence

2. Structure the board to add value – Eg: that the chairperson should be an independent director, the role of the

chairperson and CEO should be performed by separate individuals, a majority of the board

should be independent and the board should establish a nominations committee.

Examples

Singapore Code, in calling for a strong and independent element of the Board, defines an independent director as "... one who has no relationship with the company, its related companies or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the directors independent business judgement with a view to the best interests of the company".

Examples

The Malaysian Code clarifies independence as meaning: "...independence from any controlling shareholders and independence from management... ".

(Brountas, 2004) Directors must be aware of the CEO's need for attentive and committed directors who are willing to devote the time necessary to acquire and maintain solid knowledge about the company's business, finances, competitors, and risks. Directors need to concentrate during board meetings and remember what the CEO and management tells them about achievements, problems, plans, and future strategies. There is nothing more frustrating to a CEO than a director who asks for a discussion or explanation of a matter, a future strategy, or a compensation program that was exhaustively presented and discussed at a recent prior meeting.

(Brountas, 2004) Directors need to assist the CEO in planning the agendas for the board meetings, thereby allowing the CEO to conduct meetings that are relevant, informative, productive, and beneficial to both management and the directors. The CEO wants and needs honest feedback from the directors, including advice designed to improve board meetings and enhance director knowledge, as well as frank and helpful criticism when required and encouragement and praise when earned.

Values & Qualities Directors Should Possess

Integrity Independence Informed Involved Initiative

CONCLUSION

Directors are fiduciaries, i.e. empowered to oversee the management - to ensure that it is effective, honest, and dedicated to managing the company for the benefit of its shareholders and to enhance shareholder value. Rules are largely common law and equitable rather than statutory As overseers, directors should serve as advisers, monitors, counselors, protagonists, and critics but not as bulldogs.

Acknowledgement of Sources: Brountas P.P. Boardroom Excellence: A Commonsense Perspective on Corporate Governanace. San Fransisco: Jossey Bass, 2004. Colley J.L.Jr, Doyle J.L, Logan G.L, Stettinius W. What Is Corporate Governanace?. New York: McGraw Hill, 2005. Cowan, Neil. Corporate Governance that Works. Singapore: Pearson Prentice Hall, 2004. Garrat B. Thin on Top: Why Corporate Governance Matters and How to Measure and Improve Board Performance. London: Nicholas Brealey Publishing, 2003. Routledge-Cavendish Lawcards. Company Law, 5th Edition, 2006. Tricker, Robert. I. International Corporate Governance: Text, Readings and Cases, Singapore: Prentice Hall, 1994. Yorston, Fortescue and Turner. Australian Commercial Law. The Law Book Company Limited, 1994.