Tag Archives: unfettered independence

COMMON LAW DIRECTOR DUTIES II


We discussed two common law duties in the last post, today we cover the remaining duties.

The next key duty of directors is that they should exercise unfettered and independent discretion and judgement.

Directors should exercise objective and unbiased judgement on the affairs of the company independently from management and any shareholders, but with sufficient information to enable a proper and objective assessment to be made. The director should not be influenced by any other party interested in the outcome of the decision. Put another way the director should be making his own decisions rather than simply implementing the instructions/commands from stakeholders. This flows from the concept that it is the director who is both personally and criminally liable for performance of the duty of care and good faith to the company. I have seen many fall foul of this common law duty in Board rooms. Some directors try to flow with anything that the Group CEO or the most powerful principle wants. This may be due to the fact that they want to stay on the Board and fear jeopardizing their income or they derive some social value form regarded as a compliant director.

 A corollary of this is that even when directors depend on information from experts, consultants and other members of the company for information, they still need to exercise their minds and make unfettered decisions.  The directors have to be very familiar with the governing documents and business model of the organization

The other common law duty is that directors should avoid having their persona interests conflict with those of the organization. A related duty is the disclosure and management of any potential conflicts. The personal interests of a director; or of people closely associated with that director, should not take precedence over the interests of the company.

 This implies that in their responsibilities to the company they should not put their own interests before the organization. This can happen, for example, in State Owned Entities where directors can vote to pay themselves very high board sitting fees when the entity is loss making. Similarly directors should not in any way misappropriate corporate opportunities due to the company as well as improperly competing with the company.

Similarly a director should not make any secret profits or possible incidental profits at the expense of the company or accept profit from third parties using their position as directors.

These common law duties are quite onerous and should be carefully considered before and during Board services. They can be detrimental to your wealth creation if you are found liable personally for violating them. Many people in NGO voluntary corporate Boards usually take these casually not realizing that they are still responsible legally even if they are not paid.

I hope this discussion has been enlightening and helps you in your fiduciary duties.