An Overview of the Responsibilities and Legal Obligations of Company Directors
In today’s complex corporate environment, directors are more than figureheads. They are stewards of legal and ethical corporate conduct. In Lesotho, the Companies Act 2011 (as amended) outlines a comprehensive framework for the conduct, powers, and responsibilities of company directors. Understanding these duties is essential not only for compliance, but also for fostering good corporate governance.
WHO IS A DIRECTOR?
Under Section 2 of the Companies Act of Lesotho, a “director” includes any person occupying the position of director, by whatever name it is called. This definition encompasses both de jure directors (formally appointed) and de facto directors (those acting in that capacity without formal appointment), as well as shadow directors, those whose instructions or directions are customarily followed by the board.
COMPANIES ACT 2011
Section 63 of the Act provides fundamental duties. Section 1, subject to subsection 2, states that a director of a company, when exercising powers or performing duties, shall act in good faith and on reasonable grounds in the interests of the company.
Section 2 provides that a director of a company, when exercising powers or performing duties as a director, shall exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account the nature of the business of the company, the nature of the decision taken, the position of the director and the nature of the responsibilities undertaken by that director.
Failure to adhere to or comply with these statutory duties/obligations attracts liability. Section 63 (3) provides that the directors, including former directors, shall be severally and individually liable to the company, its shareholders and any other person for any loss suffered by the company, its shareholders or any person as a result of the directors’ failure to perform their duties stated in subsections (1) and (2).
COMMON LAW DUTIES
Directors’ common-law fiduciary duties require them to exercise their powers bona fide and for the benefit of the company. In addition, they have the duty to display reasonable care and skill in carrying out their office. Directors’ fiduciary duties entail that they act in the best interests of the company, avoid conflicts, do not take corporate opportunities or secret profits, do not fetter their votes, and use their powers for the purpose conferred and not for a collateral purpose. The duty of care, skill, and diligence entails that directors must manage the business of the company as a reasonably prudent person would manage his own affairs. This fiduciary duty is a cornerstone of corporate governance, ensuring that directors prioritise the company’s interests above personal gain.
The “no-profit” rule emphasises that any contract between a director and the company is voidable if it results in a conflict of interest or secret profit. The rule is strict and leaves little room for exceptions. Even if the company suffers no loss, the director’s breach of fiduciary duty remains actionable.
The fiduciary duty of directors can be remedied by means of an interdict. This duty has a more far-reaching effect on senior employees and directors than on junior employees, because the latter group’s duty only extends to confidential confirmation and trade secrets. The fiduciary duty is therefore owed by senior management, and this common-law duty extends even after a director’s appointment has come to an end.
BOARD OVERSIGHT AND COLLECTIVE RESPONSIBILITY
Importantly, directors act as a board, not just as individuals. Collective decision-making does not dilute individual responsibility. Directors are expected to challenge decisions they believe are not in the company’s best interest and can be held personally liable for passive acquiescence.
MOHLOMI CORPORATE GOVERNANCE CODE
One of the principles of good governance is that directors must act in the best interest of the company. Mohlomi Code now specifically provides for the “apply or explain” principle that must be applied by directors when acting on behalf of the company. According to this principle, directors must act in good faith, in that they must be honest, act in the best interests of the company, not receive secret profits, and must promote the purpose for which the company was established. Under an “apply or explain” regime, the board of directors may collectively decide that following a recommended practice in the code is not in the best interests of the company, given the specific circumstances at the time. In such cases, the board may choose to adopt an alternative practice instead. It must explain the practice it applies, other than the recommended one, and the reasons for applying it. Hindsight serves as the ultimate judge of whether the board’s decision to apply an alternative practice was truly in the best interests of the company.
ACCOUNTABILITY AND LIABILITY
Directors’ accountability is not limited to internal company matters. They can be held liable to shareholders and third parties for losses resulting from breaches of their duties. This broad scope of liability ensures that directors remain vigilant and act in the company’s best interests at all times.
Directors who breach their duties may face:
- Civil liability: including compensation to the company for any loss caused.
- Criminal liability: especially where fraud, gross negligence, or wilful misconduct is involved.
- Disqualification: A person can be disqualified from acting as a director for breaches of fiduciary duties or insolvency-related misconduct.
CONCLUSION
Directors oversee the well-being of the company. They are entrusted with significant responsibilities that impact not only the company’s success but also the interests of its shareholders, employees, and the broader community. By adhering to the legal duties outlined in the Lesotho Companies Act 2011 and embracing the ethical standards outlined in corporate governance codes, directors can navigate their roles effectively, ensuring sustainable corporate growth and fostering trust among stakeholders.
