Introduction
In Kenya, directors’ duties and responsibilities are outlined in the Companies Act, which emphasizes their fiduciary responsibilities, duty of care, and accountability to shareholders. Directors steer the success of a company and are tasked with making strategic decisions, safeguarding the company’s assets, and ensuring compliance with legal and regulatory requirements. Understanding these duties is essential for maintaining good governance, fostering trust, and protecting the company from legal and financial risks.
A CEO’s Downfall
James, the Managing Director of a once-thriving manufacturing company is a bit of a crook. He has been taking out funds from the company accounts for personal use. He also ignores his board of directors’ advice and has cancelled the Annual General Meeting for the past two years. Instead, he is focused on making short-term profits so no one notices money is missing from the accounts. He is also failing to adhere to company regulations and general industry standards.
One of the shareholders has organized a meeting of the shareholders. He has requested that the books of accounts be tabled at the meeting and a special resolution passed to remove James from his position.
This story underscores the critical role that directors play in guiding a company’s direction and the responsibilities they have to the shareholders. They must operate with good faith and work for the betterment of the company while adhering to their legal obligations.
Who is a Director?
A director is an appointed or elected member of the board of a company, tasked with overseeing its management and ensuring it runs smoothly. Directors act on behalf of shareholders to implement the company’s strategic direction and ensure compliance with both company laws, the company’s consitution and other internal policies.
In Kenya, the responsibilities of directors are governed by The Companies Act, 2015. It defines the legal duties that directors owe to the company, its shareholders, and other stakeholders. Directors must act in good faith, maintain transparency, and avoid conflicts of interest.
The Key Duties and Responsibilities of Directors
Directors in Kenya are entrusted with significant responsibilities, and the law outlines their core duties, which include:
1. Duty to Act Within Powers
Directors must act under the company’s Memorandum and Articles of Association, which outline the scope of their powers. They must also ensure that their decisions align with the company’s objectives and best interests.
For example, in the case of Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964), the court stressed that directors must not exceed their powers, and failure to do so can result in personal liability.
2. Duty to Promote the Success of the Company
Directors must always act in a way they believe will benefit the company. This means making decisions that foster the company’s long-term success while considering the impact on employees, customers, suppliers, and the community. Directors should also prioritize the interests of shareholders.
3. Duty of Care, Skill, and Diligence
Directors are required to act with the care, skill, and diligence expected of someone in their position. This duty is particularly crucial when making business decisions, as directors should have a reasonable level of knowledge and competence.
In the case of Re City Equitable Fire Insurance Co Ltd (1925), it was ruled that directors are not expected to have extraordinary skills, but they must exercise reasonable care in their duties.
4. Duty to Avoid Conflicts of Interest
Directors must avoid situations where their personal interests conflict with the company’s interests. For instance, they cannot benefit from contracts they have personally negotiated on behalf of the company unless the shareholders approve.
The Companies Act, 2015 requires directors to declare any personal interests in transactions or arrangements the company enters into. Failure to disclose conflicts can lead to removal or legal action.
5. Duty Not to Accept Benefits from Third Parties
Directors must not accept bribes, gifts, or any benefits from third parties that could compromise their ability to act in the company’s best interest. This duty ensures that directors remain impartial and committed to promoting the company’s success rather than personal gain.
6. Duty to Exercise Independent Judgment
While directors may rely on experts or professional advice, they must exercise independent judgment in decision-making. They cannot simply follow instructions from others, including major shareholders, without considering the broader interests of the company.
This duty was emphasized in Foss v Harbottle (1843), where the court ruled that directors must make independent decisions that align with their duties to the company.
7. Duty to Ensure Compliance with Laws and Regulations
Together with the Company Secretary, Directors are responsible for ensuring that the company complies with all legal requirements, including company laws, tax laws, employment regulations, data protection laws and environmental standards. Non-compliance can lead to fines, penalties, and damage to the company’s reputation.
Additional Responsibilities of Directors
Directors also have several operational responsibilities that are essential for the company’s smooth functioning:
1. Filing Company Returns and Maintaining Records
Directors must ensure that the company complies with regulatory filing obligations, such as submitting annual returns to the Registrar of Companies. They are also responsible for keeping accurate financial records, maintaining registers of shareholders and directors, and ensuring transparency in company dealings.
2. Calling Shareholder Meetings
Directors are responsible for calling shareholder meetings, such as annual general meetings (AGMs), and ensuring proper communication between the board and shareholders. During these meetings, they present the company’s performance, seek shareholder approvals, and address any concerns.
3. Oversight of Financial Management
Directors oversee the company’s financial management, including approving budgets, monitoring cash flow, and reviewing financial statements. They must ensure that the company remains solvent and complies with accounting standards and regulations.
4. Risk Management
Directors must identify potential risks to the company and put measures in place to mitigate them. This includes managing operational, financial, and legal risks. Directors must ensure that the company has adequate insurance coverage and is prepared for unforeseen challenges.
5. Ensuring Corporate Governance
Directors are responsible for maintaining good corporate governance practices. This includes establishing clear lines of communication between the board and management, fostering transparency, and ensuring that the company follows ethical practices in all dealings.
The Liabilities of Directors
While directors enjoy some level of protection, they can be held personally liable for certain actions. For instance, if a director acts negligently, breaches their duty of care, or engages in fraudulent activities, they may face civil or criminal charges.
In the case of Kenya Commercial Bank Ltd v Nyamangu Holdings Ltd (2015), the court held that directors could be held liable for engaging in fraudulent transactions that resulted in significant losses to the company.
Additionally, directors can be disqualified from holding office if they are found guilty of misconduct under the Insolvency Act of 2015.
How Directors Can Fulfill Their Duties and Responsibilities Effectively
For directors to effectively fulfil their duties and responsibilities, they must:
- Stay Informed: Directors should continuously educate themselves about the company’s operations, industry trends, and legal requirements. This ensures they can make informed decisions.
- Seek Professional Advice: Where necessary, directors should seek legal, financial, and technical advice to help them make decisions in the best interest of the company.
- Maintain Transparency: Directors should ensure that their actions and decisions are transparent and in line with corporate governance standards. This fosters trust with shareholders, employees, and other stakeholders.
- Regularly Review Policies and Procedures: Directors should periodically review the company’s policies and procedures to ensure compliance with laws and regulations. This reduces the risk of legal challenges and helps the company remain competitive.
Conclusion: Directors as Stewards of Corporate Success
Directors play an essential role in guiding a company toward success. Their duties are more than just making decisions—they must act with integrity, care, and diligence to protect the interests of the company and its stakeholders. By fulfilling their responsibilities, directors not only avoid legal pitfalls but also contribute to the long-term success of the business.
If you’re a director looking to understand your obligations or a business seeking expert advice on corporate governance, reach out to us. Our team of experienced corporate lawyers is here to provide the legal support you need.