Ideas & Debate

Tough business of bearing the director’s duties

boss

Diligence can be achieved by providing the right amount of information to bosses. FILE PHOTO | NMG

John Juma, a director at a Nairobi Securities Exchange(NSE) listed company, sat attentive during the board meeting. A senior manager was making a presentation about the company’s operations.

The presentation was detailed and very comprehensive, but failed to capture what risks underpinned the operations. John leaned forward at the end of the presentation, ready to ask the senior manager some questions.

The chairman gave John the floor and he asked his question, “What part of the operations gives you sleepless nights?” The senior manager thought for a minute and then began to answer.

As he spoke, he glanced aside at the managing director and an imperceptible look was exchanged. But John’s non-verbal cue radar was on optimal performance that morning and he caught the exchange, noticing how the senior manager’s body language shifted immediately thereafter. The manager spoke but gave a fairly high level and, what John thereafter realised was, a politically correct answer. John let it slide. This was not the place to engage what was clearly an underlying issue that needed to be unpacked in greater detail. He needed to find out from the managing director what the true story was, and he would do this after the board meeting.

The business of being a director of a Kenyan company is very tough. What used to be the common law fiduciary duties of care, loyalty to the company and acting in good faith amongst others have now been codified into law.

If you throw in the even more rigorous expectations on directors of listed companies that the Capital Markets Authority Governance Code applies, it should make a director of a listed company a fairly worried one. Ignorance of the law is no defence. Whatsoever.

The difficulty though of being a director is that a board is a social system that requires a significant amount of cohesion and mutual respect in order to work efficiently. That mutual respect underpins the requirement for challenge and intellectual discourse, since directors are required to hold management to account as they provide both oversight on past activities and insights on strategic initiatives. Where management treats such challenge and discourse as an impingement of their capabilities, they fail to recognise the statutory duty of the director to exercise that exact right to question, interrogate and seek clarity.

That statutory duty of the director is to exercise care, skill and diligence in the execution of their oversight duties. The director also has the statutory duty to act in the best interests of the company.

If management are not exercising the right amount of restraint or control over the business, it will fall squarely on the shoulders of the directors in the event that a massive fraud occurs that significantly affects the business.

If in doubt, look at the court proceedings where Chase Bank (in receivership) has sued 20 defendants some of whom were the bank’s directors. The first pleading is that the defendants jointly and severally had a duty of care to the plaintiff and, specifically, a duty to act in good faith and in the best interests of the bank.

What management of listed and regulated companies often fail to realise is that their acts and omissions have consequences that impact on players outside of the management suite. They also forget that under Section 238 of the Kenyan Companies Act 2015, a shareholder can bring a derivative claim in respect of any actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of a company.

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So a director who fails to both identify and monitor the business risks of a company as required under the CMA governance code can be viewed as failing to exercise their statutory duty of care and diligence as provided in the Companies Act.

This director will be hard placed, in a court of law, to say that management failed to tell him about what fraudulent acts were taking place. The law requires the director to ensure that risks are both identified and monitored ceaselessly.

John’s instincts were right. There were some frauds taking place in the organisation, but were not being highlighted at the board level. The bigger issue that had to be made manifestly clear was that management was putting all the directors at risk by deliberately keeping them in the dark. Ignorance is no defence.

A solution was found by creating an incidence report that was tabled at the board meeting every quarter which highlighted all the risks that materialised as well as what steps were taken to mitigate their non-recurrence.

By providing the right amount of information to directors, a clear position of appropriate diligence over the business could now be demonstrated.