The roles, responsibilities and challenges of a director
A COMPANY’S direction and its ability to improve returns for shareholders every year depend a lot on the quality of its board. Directors have important responsibilities, and it is important that individuals understand these responsibilities before agreeing to take on a position as a director, said Robson Lee, a partner in Gibson Dunn’s Singapore office and a member of the firm’s mergers & acquisitions and capital markets practice groups.
Below, Lee addresses some of what directors – and shareholders – should know about the roles of a director.
Q: Why are directors important to a company?
A: A company, not being a natural person, cannot act on its own. It can only act through its directors and other officers with the necessary authority and power to act as the company or on behalf of the company.
The authority and powers of directors are usually set out in the constitution of the company, which the company may draw up on its own or adopt under the Companies (Model Constitutions) Regulations 2015.
Q: Could you briefly summarise the roles and responsibilities of a director?
A: The role and functions of directors have always been difficult to define.
The law as a whole has taken a pragmatic approach in not attempting to formulate an exhaustive list of matters that only directors can discharge.
As a matter of practice, the role and functions of directors would vary from company to company and it would largely depend on the arrangements of the internal management structure adopted by the company concerned.
Briefly, however, the roles of a director can be summarised as follows:
- To establish and implement basic objectives and broad policies of the company;
- To elect officers of the company and to advise, approve, supervise and review such officers;
- To acquire, dispose of, charge and safeguard the assets of the company;
- To approve important or major financial matters and to ensure that proper reports are given to shareholders;
- To delegate special powers to others on matters requiring board approval;
- To maintain, revise and enforce the constitution of the company; and
- To establish and perpetuate a sound board of directors.
Q: What are some of the risks that directors may not realise before accepting the position?
A: While it is an honour to be nominated and elected to a company’s board of directors, the position comes with serious duties and responsibilities.
Most prudent businessmen will not hesitate in refusing to guarantee a friend’s loan; however, they will readily fall for the dubious prestige of being invited on to the board of a company, sometimes with results infinitely more damaging.
For instance, directors actually face civil and criminal liabilities. Criminal liabilities arise from breaches of penal laws, while civil liabilities arise from breaches of fiduciary duties or from negligence.
Importantly, a director may face both types of liabilities for the same act or transaction. A director who accepts a bribe would be criminally liable for corruption in breach of sections 5 and 6 of the Prevention of Corruption Act (Chapter 241 of Singapore).
At the same time, the company may also sue the offending director to recover the bribe amount. Similarly, a director guilty of dishonest misappropriation of property would be liable for criminal breach of trust and would also be in breach of his fiduciary duty.
Q: What do you mean by fiduciary duty?
A: Directors are supposed to act not for their own benefit but for the benefit of third parties. This is the highest duty of care that the law can impose.
They must act in good faith, and with reasonable care and diligence.
The test is whether an honest and intelligent man in the position of the directors, taking an objective view, could reasonably have concluded that the transactions were in the interests of the company.
The courts will be slow to interfere with bona fide commercial decisions taken by directors, and it is the role of the marketplace to punish and censure directors who have, in good faith, made incorrect commercial decisions.
Directors can take risks if they honestly believe these risks to be in the interests of the company, and an inference of dishonesty will only be made if the risk proved palpably unreasonable.
In their actions, directors need to consider not just the interests of the company, but also the interests of shareholders. In most cases, the commercial and business interests of a company would coincide with the interests of the shareholders.
There may, however, be situations where the decisions of the directors have fulfilled the interests of the company but have a different impact on the interests of the shareholders or on different classes of shareholders.
The discharge of the directors’ duty must involve due consideration to the interests of the company and the shareholders as a whole.
If there is a conflict of interests among various classes or factions of shareholders, then the issue is resolved by determining what is fair between the different classes or factions of shareholders and not what is in the interest of the company as a whole.
Sometimes, this can be resolved by determining what the predominant interest of the majority of shareholders in a given situation is, and the directors must decide the action to be undertaken by the company that would best serve that predominant interest with the least harm to the interest of the other shareholders.
Q: What about the duties a director has towards a company’s employees and creditors?
A: While directors can take into account employees’ interests when making decisions, they are not required to do so under the Companies Act.
There are no case law authorities on the effect of this section, and any comments thereon would be speculative. As a preliminary comment, perhaps the directors, when taking into account the employees’ interests, cannot give it more weight or precedence over the interests of the shareholders as a whole.
It should also be noted that the section uses the permissive word “entitled” as opposed to the mandatory word “shall”, which may suggest that this section does not impose a compulsory duty on the directors to take into account the interests of the employees.
Meanwhile, creditors’ interests are quite irrelevant when the company is not insolvent. However, the same cannot be said as the company approaches insolvency.
As a company approaches insolvency, there may be no value in the company left for the residual claimants. Because of the incentive problems that are faced by all the shareholders, clearly some concern must be shown for the interests of the creditors.
Hence, if the directors act in a manner that prejudices the creditors in such a situation, they may be guilty of misfeasance.
Q: What are some necessary qualifications for an individual looking to become a director?
A: The Companies Act does not require much to become a director. A person must satisfy the following criteria:
- He must be a natural person (a company cannot be appointed a director);
- He must be at least 18 years of age; and
- He must have full legal capacity. Although this term is not defined in the Companies Act, this can generally be taken to mean a person who has the necessary legal capacity to give or take lands and other things or to maintain legal actions.
There are no other mandatory qualifications or requirements, but the Governance Code provides that the process for the selection, appointment and reappointment of directors, including the criteria used to identify and evaluate potential new directors, as well as certain key information regarding directors – such as their listed company directorships and principal commitment – should be disclosed in the company’s annual report.
The Companies Act does not require a person to hold any shares of a company before he can be appointed as its director. The constitution of the company may, however, specify that a director must hold a specified number of shares.
Q: That is quite a wide net. Are there any individuals who might be disqualified as directors?
A: The following categories of people would be committing an offence under the Companies Act if they act as directors:
- Undischarged bankrupts;
- Unfit directors of insolvent companies;
- People who have been convicted of certain offences including fraud or dishonesty punishable on conviction with imprisonment for 3 months or more, or any offence in connection with the formation or management of a corporation;
- Individuals with persistent default in delivering documents; and
- Individuals who are a director in not less than 3 companies that were struck off within a 5-year period.
Q: Are there different roles for different types of directors?
A: There are 8 types of directors:
1. Executive directors – Those who work for the company on a more or less full-time basis. A managing director is an executive director who is in charge of managing the company.
2. De facto directors – A person who acts as a director even though he was never appointed as such. This person is subject to the same duties and obligations of a formally appointed director, even if he has never been formally appointed.
3. Alternate or substitute directors – Someone appointed by a director to act as his alternate or proxy. An alternate director is considered a full director, and can be made fully liable for any consequences that may arise in his capacity as alternate.
4. Additional directors – The constitution of a company usually empowers the board to appoint further directors, in addition to the number already appointed, as well as to fill up casual vacancies in the board of directors.
5. Associate directors – They do not have voting rights except with the consent of the directors. The purpose is to allow individuals to understudy the role and functions of the directors with a view to subsequently appointing them formally.
6. Shadow directors – While not directors, they control the board from behind the scenes. This could be the case when a holding company or its directors exercise control over the board of a subsidiary.
7. Non-executive directors – These directors are often nominees of major shareholders whose main task is to keep a close eye on the executive directors in order to safeguard the major shareholder’s investment.
8. Independent directors – A subset of non-executive directors whose rise to prominence stems from the increased focus on corporate governance. They must be able to exercise their business judgment without interference from the company, its related corporations, its substantial shareholders or its officers. This category forms an integral part of the board of a listed company.
Q: What are the rules governing remuneration for directors?
A: Directors are not entitled as of right to receive remuneration. Nonetheless, the consideration underlying a director’s remuneration package is that this should be attractive enough to attract, retain and motivate talented individuals to remain as directors and run the company successfully.
At the same time, companies should avoid paying excessive salaries, which may attract negative sentiment by shareholders or even the public, particularly during challenging economic times.
The remuneration package should ideally be performance-based, such as the inclusion of performance incentives and profit hurdles before a bonus can be paid.
Long-term incentive schemes could take the form of grants of options, shares or other deferred remuneration, whereby only a portion of benefits can be exercised and/ or paid out each year.
In the case of non-executive directors, factors to be taken into account include effort and time spent on the company as well as the level of contribution.
Non-executive directors should not be overcompensated such that their independence can be called into question.
The Governance Code states that a company should be transparent about its remuneration policies, level and mix of remuneration, the procedure for setting remuneration and the relationship between a director’s remuneration, performance and value creation.
The company should also report to the shareholders each year the remuneration of each individual director and the chief executive, and at least the top five key management personnel (who are not directors or the chief executive) in bands of $250,000 and in aggregate the total remuneration paid to these key management personnel. A breakdown of the remuneration, such as base salary, bonus, etc, should be provided.
For transparency, the Governance Code further recommends that the annual report disclose details of the remuneration of employees who are substantial shareholders of the company, or are immediate family members of a director, the chief executive or a substantial shareholder of the company, and whose remuneration exceeds S$100,000 during the year, in bands no wider than S$100,000.
Additionally, details of the employee’s relationship with the relevant director or the CEO or substantial shareholder will have to be disclosed.
This article is brought to you by Robson Lee, a partner of Gibson Dunn