The organisation’s directors are normally appointed by shareholders at the recommendation of the Board’s Nominations Committee. However certain directors are appointed by a particular stakeholder. By way of Memorandum of Incorporation some shareholders with a certain equity holding may be permitted to appoint directors. In some cases providers of capital or debt like banks may through contract appoint directors. In Group Corporate structures, companies may appoint either employees or directors to the subsidiary Boards. In NGOs there may be some stakeholders with the right to appoint directors. All these directors who are appointed by a particular shareholder are referred to as representative directors since they are appointed ostensibly to represent the interest of that stakeholder.
These representative directors create numerous complexities which need to be managed. The appointing party would want to view the director as representing their interests and so would like to direct them in a way they should vote or decide while on the Board. However this conflicts with the fiduciary role of the director that clearly expects the director to make decisions ONLY in the best interests of the company and to act independently. Representative directors should be cautious as they can suffer personal criminal and civil litigation for their decisions while on the Board. The appointing authority may not suffer the same fate. There are cases where the appointing stakeholder needs to be careful to avoid being considered a “deemed” de facto director and be held criminally liable for the decisions of the director they “control”.
In the Fisheries Development Corporation of SA Ltd case the court found that “A director in that capacity is not the servant or agent of a shareholder who votes for or otherwise procures his appointment to the board ….The director’s duty is to observe the utmost good faith towards the company, and in discharging that duty he is required to exercise independent judgement and to take decisions according to the best interests of the company as his principal. He may in fact be representing the interests of the person who nominated him, and he may even be the servant or agent of that person, but, in carrying out his duties as a director, he is in law obliged to serve the best interests of the company to the exclusion of the interests of any such nominator, employer or principal.” (Fisheries Development Corporation of SA Ltd vs Jorgensen and Another; Fisheries Development Corporation of SA Ltd vs AWJ Investments (Pty) Limited and Others 1980 (4) SA 156 on pages 158 and 164)
An example is that a director appointed to a subsidiary board may be expected to vote for a dividend declaration by the Holding Company BUT this may not be in the best interests of the subsidiary company on whose Board she serves. The law requires that director to vote in the best interests of the Company even if she may suffer sanction from her employer. To avoid this conflict the appointing stakeholder, the director and the company must agree on format of handling this conflict in a was that does not violate the law.
I once served on the Board of a non profit organization where the principal expected directors to make decisions in his interest and not in the interests of the company. It was a painful experience until I chose to resign as the working relationship was no longer tenable. He literally wanted me to serve as a simple proxy while he remained the decision maker. Some NGOs may view representative directors as spokespersons for the principal who makes the decision without carrying the legal liability.
One more time let me emphasize that the legal position is that the representative director once appointed has the company as his principal and not the appointing person.
The Corporate Governance Network gives the following guidance for these representative directors:
• Understand your fiduciary responsibilities as directors
• Ensure that appropriate training is received on governance and directors’ legal duties
• Establish at the outset what the appointing company expects from you in your role as directors and, agree, with each of the parties involved, what may and may not be divulged, also bearing in mind the provisos of the Law. If, at the outset, the appointing company expects you as the director to breach your fiduciary duty, then it is prudent to decline the appointment
• Understand what process you should follow when faced with a dissenting view from the board on which you serve
• Ensuring that you have access to legal advice at the Company’s expense.