Ideas & Debate

When the law is an ass in corporate governance

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Summary

  • Company law governs the way companies are run within a legal jurisdiction.
  • At the heart of company law is the premise that shareholders who create a company choose the manner in which they want that company to be governed through the establishment of memorandum and articles of association.

The law is an ass.” That opinion was expressed by Mr Bumble in Charles Dickens’ epic classic Oliver Twist, when he learned from Mr Brownlow that, under Victorian law, he was responsible for actions carried out by his wife.

“If the law supposes that,” said Mr Bumble, squeezing his hat emphatically in both hands, “the law is an ass — an idiot. If that’s the eye of the law, the law is a bachelor; and the worst I wish the law is that his eye may be opened by experience — by experience.”

Company law governs the way companies are run within a legal jurisdiction. At the heart of company law is the premise that shareholders who create a company choose the manner in which they want that company to be governed through the establishment of memorandum and articles of association.

The memorandum of association defines the objectives for which the company is being formed, while the articles of association define the manner in which that company will be governed including amongst other things how directors will be elected, annual general meetings will be convened, rights of shareholders, etc.

ARTICLES OF ASSOCIATION

So for a certain very large and prestigious city hospital in Nairobi that has been in the media for all the wrong reasons lately, looking at its articles of association happens to be quite an illuminating exercise.

By way of background, the hospital has seen more CEO changes in the last couple of years than the filters on its medical waste incinerators have been replaced.

I looked at the articles of association of the institution, which were extensively amended at a special general meeting in July 2020.

In the old articles of association, a fairly laid-back culture was legislated around conflict of interest of board members.

A member of the board, or a company or firm in which he was a shareholder, director or partner was allowed to contract with the institution for a profit and that contract was not deemed to be voided due to the board member’s relationship with the institution. However, the board member was expected to disclose that interest at a board meeting and not expected to vote where that interest was being discussed.

If that member did go ahead and vote, then the vote was not supposed to be counted. It gets even more interesting as that prohibition not to count the conflicted director’s vote could be “suspended or even relaxed” at a general meeting of the company.

The new articles of association seem to have attempted to fix that loophole by expressly forbidding any board member or any firm or company in which he is a shareholder, director or partner to contract with the institution going further to state that such contract shall be voided.

This is where it gets interesting though, hence the use of my words “an attempted fix”.

In the same breadth, a subsection of the curative clause goes ahead to state that no board member shall vote in any contract or arrangement which he is directly or indirectly associated with and his interest must be disclosed and declared by him at the board meeting at which that contract is determined.

So on the one hand, the first clause states thou shalt not contract with this institution, while the second clause states well actually, in case you do have a contract then you cannot vote at a board meeting discussing that contract and you must also disclose your interest.

As an avid user of this hospital’s services, I can attest without fear of contradiction that their propensity to heal me of my ailments is far better than their propensity to cure their constitutive documents of board member conflicts of interest.

In next week’s column, I’ll delve a little bit deeper into the other corrective attempts that this institution has made in its drive to remedy itself of its corporate governance malaise. One really gets a sense that the writers of the document shared the Dickensian character’s view that the law is an ass.

[email protected] Twitter: @carolmusyoka