Duties And Position Of Company Directors Under Nigerian Company Law

Project and Seminar Material for Law

Duties And Position Of Company Directors Under Nigerian Company Law


Abstract


The enormous and challenging responsibilities of managing incorporated companies are vested on directors by the Companies and Allied Matters Laws of the Federation, 2004.Consequently I am attracted into researching about these human agents, trustees and organs of the company whose acts within the purview of the Law could be said to be the acts of the company. Though “ownership” normally are vested on shareholders (it is not the objective of this project to discuss extensively on shareholding) for they bear the ultimate risk in the event of any mishap to the company. It is an established fact that directors stand in a fiduciary relationship to the company and also owe duty of care and skill.Generally directors owe certain obligations to the companies in the performance of their functions. It must be noted that the Act also provides for circumstances upon which a director could be removed. The responsibility of enforcing the duties of directors lies with the company, technically speaking therefore, it is the responsibility of the directors to enforce this duties. It is pertinent to note that the rule in Foss V Harbottle has been whittled down by certain exceptions, which are also statutorily provided. This project also highlights the liability of directors and when a shareholder could institute derivative action for and on behalf of the company.Finally, I shall proffer suggestions on the ways of improving corporate management through directors and where necessary, suggest for the amendment of certain provisions in the Act which does not reflect contemporary corporate management in Nigeria and the need for our courts to live up to their constitutional responsibilities in the interpretation of statutes as it affects company directors.


Chapter One


Introduction

1.1 Background to Study

A director is a person duly appointed by the company to direct and manage the business of the company. This definition goes a step further than the 1968 Act by adding due appointment as a condition precedent. Section 244 (2) provides a rebuttable presumption that all persons described by a company as directors, whether as executive or otherwise, have been duly appointed. This safeguards third parties dealing with the company. In Aberdeen Railway Co. V. Blaikie Bros , Lord. Cransworth defined directors to be somebody to whom is delegated the duty of managing the general affairs of the company. Section 245 (1) of the Act defines a shadow director as “any person on whose instructions and directions the directors are accustomed to act”. A shadow director is also deemed to be a director. Although this definition is not explicit, it is deemed to take care of the practice where recognized groups or corporations nominate directors on another company’s board to represent and protect their interests. This is usual with some banking institutions, which lend huge amounts of money to companies. Another good example of shadow director is where a government nominates some directors to represent its interest in a company where the government has substantial or controlling shares, for instance, the Nkalagu Cement Company Ltd has in its board some directors nominated by the government of Enugu, Anambra, Imo and Abia States. These four state governments could be described as shadow directors in relation to the Nkalagu Cement Company Ltd, because their nominee ‘directors’ are accustomed to act on their instructions. It should be noted that the above mentioned situation is a deviation and an exception to the rule that directors must only be appointed by shareholders at a general meeting of the company as provided by Section 248 of the Company and Allied Matters Act, CAP C20 LFN 2004.

However, it is pertinent to mention that persons who give advice to directors in their professional capacities are not included in the concept of shadow directors

Whilst the Companies and Allied Matters Act (CAMA) provides exhaustively for duties of directors from sections 279 to 283, the SEC Code of Corporate Governance for Public Companies (SEC Governance Code) stipulates salient principles that should guide directors of public companies in the discharge of their duties. For starters, there are established corporate governance structures setting out the hierarchy of decision making within corporations as gleaned from a combined reading of Sections 63 and 64 of CAMA. Section 63(1) CAMA specifically empowers a company to act through its board of directors, officers or agents, appointed by, or under authority derived from the members in general meeting or the board of directors. While a cursory reading of Section 63 CAMA leaves no one in doubt as to the ‘statutory recognition’ of the functions and/or duties of directors, Section 64 CAMA empowers the board of directors to: (a) exercise their powers through committees consisting of such members of the body as they think fit; or (b) from time to time, appoint one or more of their body to the office of managing director. The board of directors may also delegate all or any of their powers to such managing director. It goes without saying, therefore, that directors play a very major role in the continued existence of a company. Indeed, it can be safely asserted that directors are the ‘mind and will of the company’.

It is in this respect that the authors agree with Dr. Kunle Aina when he opined that the (board of) directors are not only responsible for the management of a company but also have the responsibility ‘for adopting corporate governance and practice in the company’.


1.2 Objective of the Study

It is against the foregoing background that this article analyses, in the succeeding chapters, the duties of directors in line with CAMA, corporate governance codes and case law.

Having adopted the black-letter approach as well as a comparative approach to our legal analysis, the article proceeds with an examination of corporate law jurisprudence and a review of the duties of directors under three broad categories fiduciary duties, the duty of care and duty of loyalty. This article also seeks to elucidate on certain pertinent terms like what it means for directors to act ‘in the best interests of the company’ or for ‘corporate benefit’.


1.3 Scope of the Research

The scope of this research is limited to the central issues of interests and accountability arising from the position and the duties of a director under the company law. The study examines the relevant provisions of the Companies and Allied Matters Act, 2004 as well as the Code of Corporate Governance by Securities and Exchange Commission, 2011 and Code of Corporate Governance for Banks, 2006 by the Central Bank of Nigeria, respectively, among so many other corporate laws. Additionally, due to the global relevance of the subject matter of the research, references to and cases from foreign jurisdictions have been extensively used.


1.4 Research Methodology

The research is largely based on doctrinal method. Two types of data – secondary and primary sources – are used in this research. Primary sources of data which are case law arising out of the decisions of courts and relevant statutes have been extensively used in writing this research. On the other hand, the secondary sources of data used in this research include text books, journals, magazines, newspapers and internet. This, it is strongly believed, will help for scholarship and deep appreciation of the subject matter. In all, an analytical mode of writing has been adopted followed with a descriptive style wherever necessary. Relevant data collected from different sources are duly acknowledged and analyzed at the foot of every page where they appear; and adequate recommendations made thereon.


1.5 Review of Related Literature

Most of the available works and corporate governance deal with the concept of corporate ownership and control. Reference to the separation of ownership and management, and concern over its effect; go back at least to 1776 when Adam Smith, writing about joint stock companies, stated:

The directors of such companies ……., being the managers rather of other people‟s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matter as not for their master‟s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of affairs of such a company.

Adam Smith‟s „Wealth of Nations‟ is perhaps the major driving force for several modern economists to develop new aspects of organizational theory. Smith‟s basic contribution, therefore, was his ability to create insight into the need for managerial accountability. His criticism was focused on both the owners and the managers. Logically, he had stated that the equity owners quite often show that they have no knowledge or understanding of the business of the company. For the directors of an enterprise, he said that they cannot be expected to oversee the business activities with the same vigil and interest as the partners of a private organisation. In other words, their interest will be low since the equity invested in the business does not belong to them. On the whole, Smith‟s work was an explicit statement about laxity and levity on the part of corporate managers.

The major demerit of Adam Smith‟s work was that it is not contemporary with modern reality. Whereas the view of Adam Smith is quite valid but in the backdrop of the emerging global market and explosion of expertise and knowledge, there has got to be two sets of bodies-one that provides the capital and the one which manages. Of course, the complications of modern commercial enterprise make it virtually essential that the matters should be left to experts.

In 1932 Adolf Berle and Gardiner Means coined the phrase “the separation of ownership and control”. In their seminal book, The Modern Corporation and Private Property, Adolf Berle and Gardiner Means alerted the public to the consequences of the emerging modern corporation in which ownership of shares, due to its diffusion, is separated from control. They identified the situation in the United States of America whereby the need for capital in larger companies was leading to the situation where no individual shareholder held a large or significant percentage of shares. They argued that this dispersion of capital among an increasing number of small shareholders has consequently led to a weakness of control by these shareholders over the activities of management. In Berle and Means‟ eyes, not only were managers in charge of the management of the company, but they were also in control of the control.

The book is well written and moreover, it shows evidence of deep research, particularly with regard to use of primary data. Also, it was one of the first few works elucidating separation of corporate ownership and control.
While acknowledging that Berle and Means have done a great work, their description of separation of ownership and control that was the main theme of their book was a pejorative one and also their understanding of the concept was rather pessimistic. They did not consider the evolution of the corporation as a positive economic force. Rather, they largely considered the emergence of the modern corporation in which managers were omnipotent and continuously expropriate dispersed shareholders as a market failure and the implications of their work was that the government must intervene to correct this market failure. They failed to realize that there is a difference between saying that there is a dispersion of stock holdings and a separation of ownership and control. The dispersion of stock holdings does not necessarily imply that managers are omnipotent and continuously expropriate shareholders. It is also interesting to note that while Berle and Means acknowledged the relationship between property rights and incentives, they never saw the implications of their statement with regards to the problem of separation of ownership and control.

Closely related to Berle and Means’ work is Paul Davies „Principles of modern company law‟ which is concerned with corporate investment. Paul Davies while accepting Berle and Means‟ view explained that direct or indirect investment in companies constitutes the most important single item of property for most people but whether this properly brings profit to its owner no longer depends on their energy and initiatives but on that of the management from which they are merely reduced to suppliers of capital. The book is useful for its treatment of the topic under consideration. However there are embodied in the statement two concepts that are at odds with current analyses of the separation of ownership and control. First, modern analyses do not take as its ideal the notion that the shareholder should have the ability to monitor or control management. Indeed, policies that encourage shareholder control may undermine the benefits of separation of ownership and control. Rather, much modern analysis has focused how actors other than shareholders may effectively monitor and constrain managerial behaviour. Second, and perhaps more importantly, many modern analyses do not assume that it is socially desirable for managers to act in the interests of their current principals. The assumption of owners as mere suppliers of capital as stated by Paul Davies, therefore does not accord with realism. Jensen and Meckling, have expressed concern that the issues of the “separation of ownership and control” in modern corporations are purely associated with the general problem of agency in which they described the relationship of managers and shareholders in relation to corporate affairs as that between the agent and the principal. There is therefore an element of risk that the manager as agents may choose to act in their own interests rather than the interest of shareholders. According to them, the principal is able to limit the divergences from his interest through the creation of various incentives to which the agent can benefit from and engaging in monitoring costs aimed at limiting future deviant activities of the agent. For example, providing bonding costs for the agent to guarantee that he will not harm the principal, and where this happens, ensuring that the principal is compensated. Though Jensen and Meckling mentioned the important role of monitoring in an agency relationship, they do not examine further how a large firm achieves efficient monitoring. In other words, how do firms structure their corporate governance in order to control the agency problem created by the separation of ownership and control? Similarly, Jensen and Meckling‟s suggestion for giving of incentives as a way of aligning the divergent interests of corporate stakeholders is quite an unrealistic assumption as managers have different preferences, goals, etc. There is therefore no unique line of behaviour expected of managers with regard to incentives.

Fama and Jensen, in their seminal paper,21 predicted that the separation of ownership and control leads to the decision systems that separate decision management from decision control. They broadly define decision management as the initiation and implementation of decisions, and decision control as the ratification and monitoring of decisions. As the board of directors is the common apex of the decision control system of organisations, their hypothesis implies that the greater the separation of ownership and control, the greater will be the separation of management and the board of directors. A testable implication of Fama and Jensen‟s hypothesis, therefore, is that board independence increases in the degree of the separation of ownership and control. Jensen and meckling‟s prediction on the issue is very weak and of limited application because most public companies have major owners who are likely to act as managers.

It is in the foregoing context that Shleifer and Vishny‟s suggestions become apposite. Shleifer and Vishny have suggested that if the individual is protected in the right both to use his property as he sees fit and to receive the full fruits of its use, his desire for personal gain, for profits, can be relied upon as an effective incentive to his efficient use of any industrial property he may possess. They further suggested that when control rights are concentrated in the hands of a small number of investors with a collectively large cash flow stake, concerted action by investors is much easier than when control rights, such as votes, are split among many of them. In particular, the majority shareholder has the incentive to collect information and monitor the management, thereby avoiding the traditional free rider problem faced by investors of widely held firms. The majority shareholder also has enough voting control to put pressure on the management in some cases, or perhaps even to oust the management. The shortfall in this suggestion is the clear lack of appreciation for the enormous benefits inherent in the separation of ownership and control of companies. Certainly, it would be very difficult to have a large number of shareholders – or even a relatively small number of shareholders – attempting to run the business directly through democratic means. Management by rationally apathetic shareholders would be both logistically problematic and substantively unwise. In contrast, decisions making is much more efficient with separating ownership and control.

Many authors believe that directors and managers are the agents of shareholders and therefore responsible for maximizing the shareholders‟ interest. Ayua Ignatius, one of the proponents of this belief, holds the view that the residuary powers of the company do reside in the general meeting of shareholders acting by ordinary resolution and that so far as traditional company law is concerned directors are no more than the agents of the shareholders. He has argued that to hold otherwise will be to dissimulate the purely instrumental character of a company as a private property of shareholders. However, Kay and Silberston, offer a dissenting view and argue that a public corporation is not the creation of private contract and thus not owned by any individual. According to them, company law does not explicitly grant shareholders ownership rights because the corporation is regarded as an independent legal person separate from its members and shareholders are merely the “residual claimants” of the corporation.

This view as held by Kay and Silberstein agrees more with section 37 of the Companies and Allied Matters Act, 2004 and therefore more appealing and acceptable. The fact that, from an economic view point, shareholders collectively are regarded as the „owners‟ of the company does not alter the conclusion that the individual shareholder‟s right are not equivalent to “ownership” rights, i.e., rights to control and protect the property as well as to assert damage claims. The corporate law views shareholders‟ relationship to the company as merely contractual. The substantive content of the contract is found in the company‟s articles of association and in the Act. Therefore, shareholder neither has direct ownership rights in the capital which he has invested in the company, nor ownership of an interest proportionate to his investment in any corporate property. He merely has a contractual right to receive his proportionate share of corporate property when it is distributed.

There is also a controversy among scholars and other stakeholders as to the appropriate authority to which the company executives should be accountable. One school of thought is of the opinion that they should be accountable to the public or government since a company is created by government. Dodd, one of the pioneer proponents of this view argued that since companies were brought about by the state, the state should regulate the absolute control of corporate property exercised by corporate managers not only for the benefit of shareholders but also for society at large. He viewed corporations as autocratic merchant state that derived their powers from the government and must be brought under government control for the benefit of society at large. In the same vein, Raph Nader, reinforced this position when he stated in 1970s that in view of the fact that the economic corner stone of corporate control has broken down, government should get more involved in the control of corporations.

Another school of thought has advocated that the company executives should be made accountable to the shareholders only. Spearheading this argument is Berle and Means who viewed corporate officers as representatives and was concerned about making corporate managers more responsive to the economic interests of shareholders. They hypothesized that shareholders had surrendered control of the corporation to management and that such control needed to be returned to shareholders through the enforcement of fiduciary duties owed to them by officers and directors. Nevertheless, Harold William warns that even when the directors are held accountable to the shareholders; it is not just individual shareholders but an institution.


Chapter Five


Summary and Conclusion

5.1 Summary

This article considers the duties imposed by law and sound principles of corporate governance that directors of a company should adhere to. It posits that it is ‘in the best interest’ of a public company that directors should not only discharge their duties dutifully, as required under the law, but also act ‘conscientiously,’ in accordance with sound principles of corporate governance. The article asserts that the Securities and Exchange Commission (SEC) Code of Corporate Governance for Public Companies (SEC Governance Code) is not intended as a rigid set of rules, but as a guide to facilitate sound corporate practices and minimum standards of corporate governance expected particularly of public companies with listed securities. The responsibility for ensuring compliance with the principles and provisions of the SEC Governance Code lies primarily with the Board of Directors.


5.2 Conclusion

From the ‘sudden bankruptcy of Enron in 2001’ to WorldCom and Tyco joining ‘the ranks of infamy’ as well as ‘the collapse of Lehman Bros.’, adherence to sound corporate governance principles plays cannot be overemphasized. Gone are the days when public companies and even non-companies alike could afford to ‘keep doing business the same old way’ without any form of ‘corporate ethics’ to guide corporate dealings. Such public companies definitely need not be told that it is in always in the best interest of public companies to ensure that directors not only discharge their duties as required under the law but also in accordance with sound principles of corporate governance. Consequently, whilst it is noted that the SEC Governance Code is not intended as a rigid set of rules but expected to be viewed and understood as a guide to facilitate sound corporate practices, it is pertinent to note, as rightly stated by the very respected learned Professor of Law and Senior Advocate of Nigeria, Prof. Konyinsola Ajayi SAN that: “[a] genuine embrace of Corporate Governance will bring about a positive multiplier effect on the corporate success and wellbeing of a corporation”.


Duties And Position Of Company Directors Under Nigerian Company Law


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