A company acts through two bodies of people; its shareholders and its board of directors. The board of directors are in charge of the management of the company’s business; they make the strategic and operational decisions of the company and are responsible for ensuring that the company meets its statutory obligations. The directors are effectively the agents of the company, appointed by the shareholders to manage its day-to-day affairs. In Kenya, company directorship is governed by the Companies Act of 2015. In this article we’ll take an in depth look at who exactly a company directors are and the role they play in the company’s management.
NATURE OF DIRECTORSHIP
All registered companies must have directors, and normally there must be at least two, although one suffices for a private company. The position of directors is similar to that of trustees. This means that they do not have legal title in trust property instead they are bound to invest for the benefit of the company e.g. in their fiduciary relationship to the company, in issuing shares, and approving transfer of shares. They are, however, trustees for the company, and not for the individual shareholders, nor for third parties who have made contracts with the company.
A director’s fiduciary duty refers to their trust and confidence in the company. A fiduciary is someone who acts for or on behalf of another in a relationship of trust and confidence, which equity protects by imposing on the fiduciary a duty of loyalty. This duty requires that a director should not utilize the fiduciary position in a way which adversely affects the interest of the person for whom the fiduciary is acting.
Directors are also sole agents for the company when they make contracts for the company and, as such, are in a fiduciary position to the company and cannot make secret profits at the company’s expense.
WHAT CAN COMPANY DIRECTORS DO?
The powers of directors are usually set out in the company’s Articles of Association (Company Constitution). Directors have a duty to carry on the business of the company. They also have powers of management of the company.
The powers of directors may be increased or in certain circumstances restricted by the shareholders. If the directors act beyond their powers the shareholders may vote to have them removed from the position. A director is in a fiduciary position to the company in his capacity as an agent, and he cannot, therefore, place himself in a position where his own interests conflict with his duties. Directors must on no account make any secret profits. Any such benefit is regarded as a bribe, and the directors are accountable to the company for such.
LIABILITIES OF COMPANY DIRECTORS
The directors are liable for negligence or breach of trust in relation to the company’s affairs. They will also be held liable in cases of fraud or gross negligence in respect to the company or third persons.
During the course of a winding-up (process by which a company’s assets are collected and sold in order to pay its debts), the Companies Act provides that a director who has misapplied or retained or become liable or accountable for any money or property of the company, or has been guilty of any misfeasance or breach of trust in relation to the company, may be compelled to repay or restore the money or property or to pay such sum to the company as the court thinks fit.
Directors are personally responsible for fraud; although, where the company has taken advantage of and benefited from a director’s fraudulent misrepresentations, the company may be held bound as well as the directors.
Managing a company is no easy feat and so it helps to know what exactly a managerial/ directorship position entails. Hopefully this article provides some useful insight on what the role of a company’s director entails.