Why it is no longer a joke to wear the director’s hat

Louis Cabot once described his experience of serving on the board of Penn Central Railroad as it struggled through the 1970s and 1980s. He said: “We were treated like a rubber stamp. Board meetings would last only a half an hour. We’d start with the waiving of the minutes of the prior meeting, and then we’d have only a summary of those. Then we’d hundreds of different locations you never heard of....Then we’d turn to the financial reports. They weren’t in any form I’d ever seen. They were summaries. They didn’t show all the facts that later turned out to be crucially important’’ (Waldo, 1985. p. 4).

The above statement no doubt explains the way board affairs in Kenya have hitherto been conducted in a number of firms.

Luckily enough we now have The Companies Act, 2015. The Act draws heavily on the United Kingdom Companies Act, 2006. In particular, the Act has codified the duties of directors unlike before where reliance was placed on common law or what in legal parlance is referred to as precedent. It now expressly provides for a variety of duties on the directors. Among them:- directors must act within powers granted to them by the Articles of the Company and any statutory authority.

This being the case any acts outside these powers are ultra vires and the directors remain liable for them. In executing their responsibilities they must endeavour to promote the success of the company. This encompasses putting into consideration the corporate value or long-term success of the company and other stakeholder interests. They must exercise independent judgment in their execution of duties, apply reasonable care, skill and diligence to their tasks and avoid conflict of interests. Their responsibilities are to ensure that the corporation remains loyal to its corporate purpose, to exercise prudential judgment in carrying out these obligations while giving prominence and due regard to the interests of all shareholders (majority and minority) and for corporate value and sustainability.

The Act also introduced and codified the principle of derivative action. In essence, this means that the shareholders can take legal action on behalf of the company against directors who abdicate their obligations. Before the codification for one to successfully file any suit against a director or directors on behalf of the company s/he had to rely on the common law exceptions.

We have before witnessed increased shareholder activism with minority shareholders asserting themselves to the point of putting in a rival bid. A case in point was in the Rea Vipingo Plantations takeover by REA trading Limited. Indeed, last week we witnessed an objection by the minority shareholders of Unga Group Holdings Limited on the proposed takeover of Unga Group Holdings by the Seaboard Corporation of Delaware, US on the basis that the shares had been undervalued and that the takeover was in total disregard of natural justice, oppressive and prejudicial to their fiscal interests.

Board membership is a serious matter. It is not about padding a resume or receiving hefty allowances for mediocrity. It is not about filling the boardroom with people who will be rubber-stamps in the hands of executives. It is about courageous, visionary and curious leadership that asks tough and many a times uncomfortable questions, insists on complete answers, and takes its role in the company and in society seriously. They must be willing to ask the questions that will provide them with a complete understanding of the risks and rewards of any proposed plan of action and how it will affect the long- term viability and corporate success.