According to Section 279 of the Companies and Allied Matters Act (CAMA), as fiduciaries, Directors are expected to act in good faith at all times – a duty primarily owed to all stakeholders in the Company; exercise power only for proper purpose – if not, they may be liable to the Company for losses incurred; exercise care and skill – what a prudent Director would do in comparable circumstances; protect corporate property, opportunity or information; not to allow personal interests to conflict with their duties and responsibilities as Directors and not to fetter their discretion. These are statutory duties and are enforceable against the Director by the Company. Indeed to underscore the sacrosanct nature of these responsibilities, subsection 8 of Section 279 provides that “No provision, whether contained in the articles or resolutions of a company, or in any contract shall relieve any director from the duty to act in accordance with this section or relieve him from any liability incurred as a result of any breach of the duties conferred upon him under this section”.
A Director’s fiduciary duty is owed to the Company and not to the shareholders. As such, to the extent that the best interests of the Company may diverge from what is in the best interests of the shareholders, the Director must act in the best interests of the Company. A Director may not fetter her discretion by contracting with other Directors or with third parties to act in a certain way in the future. The duty not to fetter her discretion applies regardless of whether the Director is nominated or appointed by a particular shareholder, and whether the Company is private or public. The interests of shareholders are often aligned with the interests of the Company, however, where such interests are in conflict, the Director’s duty is to the Company which has stakeholders, including employees, creditors, regulators, etc, all of whose interests should be considered.
An example of a divergence of interests is where the Board is faced with a decision to either pay dividend after five consecutive years of losses or embark on an upward review of employee remuneration that has been kept constant during the “trying period”. The shareholders would typically vote in favour of a dividend pay-out, whereas it could be in the best interest of the Company at the time to approve an upward review of compensation to employees who have made it possible for the Company to come out of the woods. After all, according to Richard Branson “if you can put staff first, your customers second and shareholders third, effectively, in the end, the shareholders do well, the customers do better, and yourself are happy”.
The obligation not to fetter their discretion precludes Directors from agreeing to pre-agree, the manner in which they exercise their discretion. In other words, a Director’s obligation to act in accordance with his fiduciary duties would usually take precedence over any course of conduct she may have previously agreed with co-directors or third parties. The ability to make independent judgement is core to the performance of the Director’s fiduciary duties. If she has agreed ahead of a Board meeting to vote in a particular way, it goes without saying that she would not be willing to consider superior argument, a contrary position or indeed fresh facts that should make the position she had taken ahead of the meeting not in the best interest of the Company.
Shareholders on the other hand are free pursuant to a Shareholders Agreement to fetter their discretion and agree to vote in a particular way. Such a position can however only be given effect to at a shareholders’ meeting and not in the Boardroom. A nominee Director representing a Private Equity (PE) firm for example on the Board of a portfolio company cannot fetter her discretion to vote in a particular way as this will not be in the best interest of the company – even though it may serve the narrow interest of the PE firm. The directors of a company incorporated under the Companies and Allied Matters Act are subject to statutory and common law fiduciary duties that transcend the duties owed by the Director to a nominator. The mere appointment as a nominee does not imply a duty to act in favour of the nominator.
An important issue which arises in this regard is the extent to which a director who is appointed as a nominee director may be subject to a duty to act in accordance with the wishes of his nominator. In Hawkes v Cuddy (2009) EWCA Civ 291, Stanley Burton LJ stated that: “In my judgement, the fact that a director of a company has been nominated to that office by a shareholder does not, of itself, impose any duty on the director owed to his nominator. The director may owe duties to his nominator if he is an employee or officer of the nominator, or by reason of a formal or informal agreement with his nominator, but such duties do not arise out of his nomination, but out of a separate agreement or office. Such duties cannot however, detract from his duty to the company of which he is a director when he is acting as such … an appointed director, without being in breach of his duties to the company, may take the interests of his nominator into account, provided that his decisions as a director are in what he genuinely considers to be the best interests of the company; but that is a very different thing from his being under a duty to his nominator by reason of his appointment by it.”
Ultimately good governance hinges amongst other things on the honest communication (by way of appropriate disclosures) between Management and the Board so that everyone knows everything they need to know, and having Directors with sound judgment and independent character, able to set the appropriate tone at the top, and enforce it. Hence the increasing clamour for more Independent Directors on Boards.