What is Means to Wear the Director's Hat in light of The Companies Act, 2015

By: Ibrahim Kitoo

An Advocate of the High Court of Kenya Specialising in Corporate Law and Corporate Governance.

Email: [email protected]

Introduction

Louis Cabot once described his experience of serving on the board of Penn Central Railroad as it struggled through the 1970s and 1980s. He said:

"We were treated like a rubber stamp. Board meetings would last only a half an hour. We’d start with the waiving of the minutes of the prior meeting, and then we’d have only a summary of those. Then we’d hundreds of different locations you never heard of... .Then we’d turn to the financial reports. They weren’t in any form I’d ever seen. They were summaries. They didn’t show all the facts that later turned out to be crucially important'' (Waldo, 1985. p. 4).

The statement by Louis no doubt explains the way board affairs in Kenya have hitherto been conducted in a number of boards.

Enron is a fine example of what happens when the board of directors does not exercise its authority, ask questions, and demand accountability from its executive leadership. It shows the ripple effect of allowing conflict of interest to hold sway and result of short-term omissions that cause long-term devastation. Assuming that Enron’s board was unaware of the true state of the company because of misleading information from its Chairman, Chief Executive Officer and auditors Kenneth Lay, Jeffrey Skilling and Arthur Andersen LLP respectively, it is appropriate to ask whether or not they could have discovered such information with more effort.

The Companies Act, 2015.

Luckily enough we now have The Companies Act, 2015. The Act draws heavily on the United Kingdom Companies Act, 2006. In particular, the Act has codified the duties of directors unlike before where reliance was placed on common law or what in legal parlance is referred to as precedent. The Act now expressly provides for a variety of duties on the directors of a company. Among them:- directors must act within powers granted to them by the articles of the company and any statutory authority. This being the case any acts outside these powers are ultra vires and the directors remain liable for them. In executing their responsibilities and duties they must endeavour to promote the success of the company. This encompasses putting into consideration the corporate value or long-term success of the company and other stakeholder interests. They must exercise independent judgment in their execution of duties, apply reasonable care, skill and diligence to their tasks and avoid conflict of interests. Indeed, directors must be able to identify the key issues facing the corporation. They must be able to ask the questions necessary to safeguard the owners’ interest and obtain, evaluate, and act on the answers. Their responsibilities are to ensure that the corporation remains loyal to its corporate purpose, to exercise prudential judgment in carrying out these obligations while giving prominence and due regard to the interests of all shareholders (majority and minority) and stakeholders for corporate value and sustainability.

The Act also introduced and codified the principle of derivative action. In essence, this means that the shareholders can take legal action on behalf of the company against directors who abdicate their obligations to the company. Before the codification for one to successfully file any suit against a director or directors on behalf of the company s/he had to rely on the common law exceptions as laid out in the case of Foss - Versus - Harbottle. We have before witnessed increased shareholder activism with minority shareholders asserting themselves to the point of putting in a rival bid. A case in point was in the Rea Vipingo Plantations takeover by REA trading Limited. Indeed, last week we witnessed an objection by the minority shareholders of Unga Group Holdings Limited on the proposed takeover of Unga Group Holdings by the Seaboard Corporation of Delaware, United States on the basis that the shares had been undervalued and that the proposed takeover was in total disregard of natural justice, oppressive and prejudicial to their fiscal interests.

Conclusion

Board membership is a serious matter. It is not about padding a resume or receiving hefty allowances and/or remuneration for mediocrity. It is not about filling the boardroom with people who will be rubber-stamps or pliable tools in the hands of executives. It is about courageous, visionary and curious leadership that asks tough and many a times uncomfortable questions, insists on complete answers, and takes its role in the company and in society seriously. They must be willing to ask the question of management that will provide them with a complete understanding of the risks and rewards of any proposed plan of action and how it will affect the long term viability and corporate success.

As the Enron scandal demonstrated, the impact of corporate governance failures is wide, deep and devastating.. Could a properly functioning board have prevented the collapse? Yes, if its members were willing to take their responsibility seriously and uphold stewardship. Indeed those who are unwilling to shoulder the ethical responsibilities to shareholders and the public should not allow themselves to be nominated to any board of directors. The potential for significant damage to the nation, the economy, and individual lives is too great to have anything less than serious leaders in board of director positions. In the words of Jim Leng, former Chairman, Corus Group, the day of the gifted amateur is long gone. Today's directors must be more engaged, shrewd, enterprising, more numerate and more technically competent than ever.