Duties of Directors

 

 

 

A Director is a person responsible or authorized to manage and direct the affairs of a corporation or company or specific division within the organization. They serve as leaders of the organisation and are expected to make important decisions that would affect the direction of the organisation and determine the level of the organisation’s success. Since they are responsible for strategic planning, financial management, creation of policies and other key issue within the organisation, Directors of a company owe statutory duties and obligations to the company and its shareholders.

The general duties of directors are based on common law rules and equitable principles that apply in relation to directors and have effect in place of those rules and principles with respect to the duties owed to a company by a director. They are to be interpreted and applied in the same way as common law rules or equitable principles, and those interpreting and applying those rules and principles are required to have regard to the corresponding common law rules and equitable principles.

 

    1. Duty of director to act within powers

A director of a company is obligated to act in compliance with the constitution of the company; and only exercise powers for the purposes for which they are conferred. A company's constitution is a legal document that outlines the rules and principles that govern the internal management and operations of a company. It sets out the rights, powers, and duties of directors, shareholders, and other officers of the company, as well as the procedures for decision-making, meetings, and other activities. In many countries, including the United States, the constitution is also known as the company's bylaws or articles of association.

The constitution typically includes provisions related to the company's purpose, the number and powers of the directors, the issuance and transfer of shares, and the distribution of profits. The constitution plays a crucial role in defining the relationship between the company and its stakeholders, as well as providing a framework for the company to operate within the legal and regulatory framework of its jurisdiction. It is an important document that helps ensure that a company operates in a transparent, accountable, and responsible manner.in Kenya, a company’s constitution comprises of : (a) Articles of Association; (b) Any resolution or agreement relating to the company that has been recorded by the Registrar; and (c) Any court order that alters the company's constitution;

 

    1. Duty to promote the success of the company

The Directors of a company are required to act in in good faith to foster the success of the company for the benefit of its members. The actions of the Directors should be in consideration of:

  1. the long term consequences of any decision;
  2. the interests of the employees and creditors of the company;
  3. the need to foster the company's business relationships with suppliers, customers and others;
  4. the impact of the operations of the company on the community and the environment;
  5. the desirability of the company to maintain a reputation for high standards of business conduct; and
  6. The need to act fairly as between the directors and the members of the company.

 

    1. Duty to exercise independent judgement

A director is legally required to exercise independent judgment when making decisions on behalf of the company. This duty binds the Directors to act in the best interest of the company in consideration of all factors. Further, a director ought not to be influenced by other directors or shareholders, but rather put the interests of the company first. This duty can be overlooked in instances such as : where the company enters into an agreement that restricts the future exercise of the Directors’ discretion; or when the constitution of the company authorises it.

 

    1. Duty of director to exercise reasonable care, skill and diligence

In most jurisdictions, directors are considered to be fiduciaries of the company and owe a duty of loyalty and care to the company and its shareholders. The duty of care requires directors to act in good faith, with due diligence and care, and with the level of skill and care that a reasonable person in a similar position would use under similar circumstances. This means that directors must take reasonable steps to inform themselves about the company's business and affairs, and to make informed decisions that are in the best interests of the company and its shareholders.

Directors are expected to attend board meetings, review financial reports and other relevant documents, and ask appropriate questions to ensure that they understand the company's business and the risks it faces. They must also ensure that the company complies with applicable laws and regulations.

If a director fails to exercise reasonable care, skill, and diligence, they may be held liable for any losses or damages suffered by the company or its shareholders. This liability may be personal and may extend to both civil and criminal actions. Therefore, it is important that directors take their duties seriously and act in the best interests of the company and its stakeholders.

In performing the functions of a director, a director of a company is obligated to exercise the same care, skill and diligence that would be exercisable by a reasonably diligent person with:

  1. the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions performed by the director in relation to the company; and
  2. The general knowledge, skill and experience that the director has.
    1. Duty of director to avoid conflicts of interest

It is the duty of a director of a company to avoid a situation in which they have or can have, a direct or indirect interest that conflicts, or may conflict, with the interests of the company. This duty in particular relates to the exploitation of: any property; confidential information of the company; the director's position in the company; or opportunities in or for the company. Further, it does not matter whether the company could take advantage of the property, confidential information or opportunity.

As a fiduciary, a director has a duty to avoid conflicts of interest. A director must act in the best interests of the company and its shareholders, and not in their own personal interests or the interests of another company or person. Directors have a duty of loyalty to the company, which means that they must act in good faith and with a reasonable belief that their actions are in the best interests of the company. This duty of loyalty requires directors to avoid situations where their personal interests conflict with the interests of the company.

To fulfil their duty to avoid conflicts of interest, directors must disclose any potential conflicts of interest to the board and recuse themselves from any decisions where their personal interests may conflict with the interests of the company. They must also act in an impartial manner when making decisions, and ensure that any transactions between the company and related parties are conducted on arm's length terms.

The duty to avoid conflicts of interest is an important aspect of corporate governance, as it helps to ensure that directors act in the best interests of the company and its shareholders, rather than their own personal interests. Failure to fulfil this duty can lead to legal liability for the director and damage to the company's reputation. A director who contravenes this duty is criminally liable to disqualification for a period not exceeding five years.

 

    1. Duty not to accept benefits from third parties

A director of a company is allowed to accept a benefit from a third party unless the benefit is given because: of the fact that the person is a director of the company; or to influence any act or omission of the person as a director. A Director who contravenes this duty commits an offence and is liable on conviction to a fine not exceeding one million shillings