An interesting change in the articles of association happened mid 2020 when some amendments were made to the terms of directors as well as the election process for the board.
Just as reminder, the memorandum of association of a company sets forth the objectives for which the company is created while the articles of association define how the company will be governed.
Last week I started on an analysis of the articles of association of a company limited by guarantee that owns a large hospital in Nairobi. The hospital has been in the media for much of 2020 due to the changes in its executive suite that have caused much angst for the past chief executives as well as the board of management, as the directors collectively call themselves.
An interesting change in the articles of association happened mid 2020 when some amendments were made to the terms of directors as well as the election process for the board. Just as reminder, the memorandum of association of a company sets forth the objectives for which the company is created while the articles of association define how the company will be governed.
Collectively, these documents are the constitution of a company by which the Companies Act protects the shareholders by ensuring any activities that the directors and management undertake are strictly within the realm of the constitutive documents. Consequently, changes to these documents are usually a clear indication of curative process, as the shareholders amend clauses that are perhaps not fit for purpose.
For instance, in this hospital’s case, directors were permitted to hold three consecutive terms of office and would only be allowed back on the board after a year’s cooling off period. The July 2020 amendments changed this to a maximum of two consecutive terms with directors allowed to be re-elected onto the board after a five-year cooling off period. One is left to wonder what mischief this was intended to cure and one could hazard a guess that perhaps the same faces were emerging during election time despite the one-year thumb-twiddling hiatus.
It gets even more interesting when one examines the amendments that were simultaneously made to the governance process. The old articles of association provided that elections for directors would be held during the annual general meeting and gave an elaborate process for nomination of directors. However, the new articles of association now insert a clause creating a “Board of Trustees” whose main object shall be the advancement of medical practice and research, managing the company’s elections, mobilising resources for the company, coordination of the company’s different organs as well as safeguarding the assets of the company.
The trustees are to be governed by a trust deed which shall be approved and registered by the company’s board of management. I have to admit that this is a very curious insertion into the articles of association. The role of the board of trustees sounds pretty much like the role that an ordinary board of directors should be undertaking. It essentially creates a new centre of power that can work either in tandem with or incongruent to the board of management.
Why should a new entity be charged with managing the elections of this company and exactly what does “managing elections” mean, particularly when the elaborate process of director nominations was maintained in the new articles of association?
The motivations for this insertion start to get clearer when you read what it takes to be a trustee. The board of management of the company makes recommendations to the company’s members on who should be elected as a trustee. The recommended trustees are required to have been members of the company for at least 30 years and should have demonstrated leadership within the company. “Elementary, my dear Watson” is what Sherlock Holmes would have told his very capable assistant, were Watson to ask what the thinking behind this curious insertion was.
A centre of power to “mobilise resources for the company”, “manage elections” and “safeguard the assets” has been created. Further, that exclusive club will be determined by the board of management who will select from amongst old members of the company of at least 30 years standing!
What is surprising is that these amendments were accepted by the shareholders and adopted in mid 2020. It remains to be seen if this will be an AstraZeneca shot in the arm for an institution that has been plagued by a corporate governance malaise of Covid-19 proportions.
Reducing the terms of office for the board of management and tacking on a five-year cooling off period can, on the face of it, appear to be streamlining a director tenure problem. But coming in hot like a sniper’s bullet from a distant hill is the creation of another governance framework that safeguards the “old guard” at the institution. This is where the plastic rubber gloves will meet the surgical road.
