Directors’ duties, responsibilities and rights

• the common law
• statutes
• the memorandum and articles of association of the company
• service agreements specifically entered between the director and the company
• resolutions passed at members’ or directors’ meetings
• the rules of a regulatory body, if any

Common law duties:

A director's fiduciary duty

'Every director is bound at common law by a separate and distinct fiduciary duty to the company (the term ‘fiduciary’ being derived from the Latin ‘fiduciarius’ meaning ‘of trust’). Directors owe their fiduciary duty to the company as a corporate being in its own right and not to the members individually, not even to a member who is a majority shareholder. Even if a director occupies his position on the board by virtue of another position he holds (for instance, where he is appointed by a major shareholder or is entitled to a seat on the board by virtue of an executive position in the company), a director’s fiduciary duties rest upon him as an individual. The fiduciary duty is likewise not owed directly to creditors, employees or other stakeholders of the company, although there is a range of circumstances in which a director may, by virtue of the neglect of his fiduciary duty to the company, be held personally liable to the company’s stakeholders.' ^†

In this fiduciary capacity, a director assumes two roles, as an "agent" acting on behalf of the company, and as a trustee who controls company assets.

These roles give rise to the following directors’ duties:

• to act in good faith towards the company
• to act only within their powers and use their powers only for purposes which benefit the organisation. Directors who act outside their powers bind the company to the transaction but may be held personally liable if a loss results
• not to use for personal gain any information acquired in their capacity as a director
• to act in the best interests of the company and to avoid a conflict between personal and company interests
• to exercise independent judgment in decision-making. A director who is appointed to represent an interest group, for example employees, is nevertheless obliged to act in the best interests of the company as a whole

A conflict may sometimes arise between a director’s personal circumstances and that of the company. The law is unequivocal as to the course of action a director who has a conflict of interests must follow and a director may never prefer his interests over that of the company he is entrusted to direct. A director who does so may be liable to account to the company in respect of any profits he makes as a result of such a transaction.

Directors may often sit on the boards of several companies and conflicts may also arise between the divergent interests of these companies, thus presenting a problem to the individual who sits on the boards of both companies. It is important to note that where a director is simultaneously a director of a holding company and its subsidiary, he owes a separate and distinct fiduciary duty to both entities as legal individuals in their own right. A director must guard against a conflict of interests developing in a situation where he is a director of both the holding company and a subsidiary. Should a conflict arise which prevents him from discharging his duty to both companies properly, he should consider resigning from either or both boards.

Duty of care and skill

The degree of care and skill required is determined objectively by considering how a reasonable person with similar knowledge and experience would have acted, and then comparing this to the director’s actions. Each case is considered individually taking into account the nature of the business and the director’s specific obligations. As indicated earlier, no distinction is made between executive and non-executive directors.

Statutory Duties :

A director's duties in terms of the Companies Act

Directors have to comply with a number of obligations in terms of the Companies Act. These are dealt with in Annexure A.

Duties in terms of the memorandum and articles of association

The memorandum of association determines the scope of the company’s objects and powers, while the articles of association is a contract between members themselves and between members and the company. The articles therefore contain the internal rules by which a company is governed. The Companies Act provides a standard set of articles that many companies use as a basis but may amend to meet their specific needs. The memorandum and articles are integral to the company and directors should familiarise themselves with their contents since they invariably impose duties on directors.

Directors and shareholders – Decision making authority

Whilst shareholders retain ultimate responsibility for the company and have the power to remove or not to re-appoint directors, they in effect delegate the day-to-day running of the company to the directors who in turn appoint and supervise management. The board of directors must manage the company within the limits of legislation and the memorandum and articles.

The board may delegate certain powers to managers and at the same time impose appropriate restrictions and conditions which can be varied or revoked at any time. The directors have a duty to monitor management's performance and ensure that management work within their delegated power. In the absence of specific cause for suspicion, directors are generally entitled to trust management to perform their duties honestly and to accept and rely on the judgment, information and advice of management when reaching their own decisions. Directors should not lose sight of the fact, however, that they remain ultimately liable, both jointly as a board and individually, for the well being of the company.

Directors’ power to bind the company

'Normally the powers and duties of directors are left undefined and it is implied that directors possess all powers necessary to enable them to direct the affairs of the company. The articles may sometimes seek to limit these powers or to specify particular duties, in which event these limitations must be strictly complied with. A director may not enter into transactions on behalf of the company which are beyond the powers conferred upon him by the articles, the Act and common law.

In some circumstances where directors have acted beyond their powers as directors, the shareholders may subsequently ratify their action by special resolution. Ratification is not possible, however, where the action falls outside the object of the company as defined in the company’s memorandum of association. Directors will be liable to the company for any financial losses incurred by it as a result of them having acted outside the scope of their authority. Any member of the company may institute action against any incumbent or previous director where the company has suffered damages due to a breach of trust or a wrongful act by that director. [§266]

Loans to directors

Loans made either directly or indirectly to directors are prohibited unless:

• all members give their consent
• a special resolution approves a specific loan
• the loan is to enable a director to perform his or her duties
• the business of the company is to make loans
• the loan is to provide assistance to enable the director to participate in a company’s share incentive scheme
• the loan is for directors' housing
• the loan is made to a director of a subsidiary who is not also a director of the lending company [§226]

Indemnifying directors

A company may take out insurance to indemnify its directors or officers for negligence, default, breach of duty or breach of trust. [§247] This provision was introduced by a 1999 amendment to the Companies Act and it is suggested in King II that directors persuade their companies to take out this insurance.

' In terms of §248, if, in any proceedings for negligence, default, breach of duty or of trust against a director, officer or auditor, it appears to the court that the person has acted honestly and reasonably, the court may relieve him, wholly or partially, of his liability. The burden of proof to show that he acted honestly and reasonably in the context of surrounding circumstances is on the director seeking relief.' ^†

Dissenting Directors

Where a director strongly disagrees with a board decision, he has several ways to indicate this dissatisfaction. A dissenting director may:

• prepare a memorandum setting out his objections
• raise these concerns at a formal board meeting, requesting that a meeting be convened if the matter needs urgent attention and the next board meeting is too late to give proper attention to the issue
• insist on a full hearing at the meeting and request that detailed objections be recorded in the minutes of the meeting
• seek professional advice if this is appropriate. (King II recommends that the company should have a procedure for the director to be able to do so at the expense of the company).

If the matter is not resolved at a board meeting, the dissenting director could call a general meeting (if authorised by the articles) or rally shareholders to call a general meeting as the shareholders hold the ultimate power in the company. If this is not possible and the director is not prepared to abide by the majority board decision, he may have no alternative but to resign.

Rights of Directors

Directors have the right to:

• inspect the company’s accounting records, assisted by an accountant [§284(3)]
• claim reimbursement for expenses incurred
• discharge their duties without interference from co-directors
• participate in the strategic management of the company and attend and vote at board meetings
• receive reasonable notice of meetings
• take independent professional advice at the expense of the company

Key questions:

• Am I complying with my common law and statutory duties as set out above?
• Are there any provisions in the memorandum or articles of association, which impose additional duties on me?
• Is there a conflict of any nature between my interests and those of the company?
• Am I sure that contracts I enter into on behalf of the company are within the scope of the memorandum and articles of association?
• Has the company taken out directors and officers liability insurance and am I sure I understand the conditions under which I am indemnified?
• Do I need to seek independent professional advice to enable me to better understand my role and duties as a director?