Company directors are the backbone of any successful organization, playing a crucial role in shaping the company's strategy, direction, and overall performance.
The responsibilities of directors have evolved, especially under regulatory frameworks like the Companies and Allied Matters Act (CAMA) 2020 in Nigeria.
Whether you're a new or aspiring company director, understanding the breadth of your role is critical to ensuring the success and compliance of your business.
Understanding Directors under the Companies and Allied Matters Act (CAMA) 2020
In this guide, we will delve into the world of company directors, exploring their roles, responsibilities, and best practices.
Who is a Company Director?
A company director is an individual appointed by the shareholders or other directors to manage the day-to-day affairs of a company. Directors serve as the company's agents, making decisions on behalf of the company, handling its business operations, and ensuring compliance with laws and regulations.
Under CAMA 2020, a company must have at least two directors, except for small companies, which can have just one. Directors may be appointed through ordinary employment, a company resolution, or the company's articles of association.
A director can wear many hats:
A strategist executing the company's vision
A trustee safeguarding the company's assets
An agent acting on behalf of shareholders
A skilled professional bringing expertise to the table
Types of Company Directors
Different types of directors serve various roles in a company, and understanding these distinctions is essential for organizational clarity and compliance.
CAMA 2020 recognizes multiple kinds of directors, each playing a unique role in the corporate orchestra:
Executive Directors
Executive directors are involved in the daily management and operation of the company. They hold a managerial role and typically have contracts of employment with the company.
Non-Executive Directors (NEDs)
Non-executive directors do not engage in day-to-day operations. They bring an independent perspective and are often involved in oversight, governance, and strategic planning.
Managing Director (MD)
A managing director is a senior executive director who takes responsibility for overseeing the overall operations of the company, usually under the board’s supervision.
Statutory Directors
Statutory directors are those officially appointed to act on behalf of the company. Their authority is derived from their appointment by shareholders or through other formal processes.
Independent Non-Executive Directors (INEDs)
These are usually highly experienced sector-specific professionals appointed in a strictly professional capacity to bring their professional skill sets to bear in the service of the company as directors independent of the control of either the party appointing them or the company itself.
The appointment of such directors is also usually a compulsory compliance requirement in some sectors e.g. Banks and Public Limited Liability Companies (PLCs).
Alternate Directors
An alternate director is appointed to act in the place of a director if they are unable to attend board meetings or perform their duties.
Nominee Directors
These directors are appointed by a specific shareholder or external entity, such as an investor or government, to represent their interests on the board.
Although not officially appointed, shadow directors have significant influence or control over a company's decisions and are considered de facto directors under certain legal frameworks.
Chairman of the Board
The chairman of the board leads the board of directors and oversees its meetings. While not involved in day-to-day management, they play a critical role in ensuring effective corporate governance.
Some Directors may double as Chairman and CEO while some are called Presidents.
Qualifications of a Company Director
While CAMA 2020 does not prescribe formal educational requirements to become a company director, the person must meet the following general qualifications:
Must be at least 18 years old.
Must not be an undischarged bankrupt, unless a court permits it.
Must not have been convicted of a criminal offense related to fraud or dishonesty within the preceding five years.
Must not have been disqualified from being a director by a court order or regulatory body.
For public companies, specific qualifications for independent directors apply.
Appointment of Company Directors
Directors play a critical role in managing and guiding the company. The Companies and Allied Matters Act governs their appointment, duties, and removal, ensuring effective governance and compliance.
Appointment Process of Company Directors
Directors can be appointed in various ways, including:
Incorporation: During the company incorporation process, initial directors are appointed by the subscribers to the company’s memorandum of association.
General Meeting: Shareholders may appoint directors at a general meeting of the company.
By Board Resolution: Existing directors may appoint a new director to fill a vacancy, usually subject to approval by shareholders at the next general meeting.
Public companies often use nomination committees for director selection.
Minimum Number of Company Directors required:
Small companies: At least 1 director
Private companies (excluding small ones): Minimum of 2 directors
Public companies: At least 3 independent directors
How we can assist: Our team can manage the entire appointment process, from verifying qualifications to filing necessary documents with the Corporate Affairs Commission.
Removal of Company Directors
Under CAMA 2020, shareholders can remove a director before the expiration of their term by passing an ordinary resolution at a general meeting. A director may also resign voluntarily or be removed for reasons such as:
Mismanagement or misconduct
Failure to attend meetings without proper cause
Conflicts of interest or breach of fiduciary duties
Mental incapacity
Duties of Company Directors under CAMA 2020
CAMA 2020 provides a clear framework for the duties and responsibilities of company directors, which are largely aimed at promoting transparency, accountability, and corporate governance. Some of the key duties include:
Duty of Care, Skill, and Diligence Directors are required to act with the level of care, skill, and diligence that a reasonable person would exercise in their position. Directors must use any special skills they have to the benefit of the company.
Duty to Act in Good Faith Directors must act in good faith in the best interests of the company, considering the interests of employees, shareholders, and other stakeholders.
Fiduciary Duty As fiduciaries, directors must prioritize the interests of the company over their personal interests and avoid conflicts of interest.
Duty to Avoid Conflicts of Interest Directors must not allow their personal interests to conflict with the company's interests. When a conflict arises, it must be disclosed to the board.
Duty to Exercise Powers for Proper Purposes Directors must use their powers for the purposes for which they were conferred and not for personal gain or to harm the company.
Duty to Promote Success Directors must act to promote the success of the company for the benefit of its shareholders and stakeholders, considering long-term factors, reputation, and the company's overall impact.
Duty not to accept benefits from third parties: Refusing benefits offered because of their position as director.
Duty to declare interest in proposed transaction or arrangement: Disclosing any personal interest in company dealings.
Company directors wield extensive powers to manage the company’s affairs. These powers include:
Management of the Company’s Business: Directors oversee business operations, ensuring that company goals are achieved.
Authority to Bind the Company: Directors can enter into contracts and make decisions on behalf of the company.
Delegation of Powers: Directors can delegate certain functions to other executives or sub-committees but are ultimately responsible for ensuring that the company is well-run.
Financial Management: Directors are responsible for safeguarding the financial health of the company, including approving budgets, dividends, and financial statements.
It’s important to note that directors' powers are derived from the company’s constitution (Memorandum and Articles of Association), resolutions passed by the board, and applicable laws such as CAMA 2020.
Director's Legal Liabilities and Consequences
Directors may face personal liability if they fail to fulfill their duties or if they act improperly. These liabilities can be civil, criminal, or both.
Breach of Fiduciary Duties: Directors may be held personally liable for any loss suffered by the company due to a breach of fiduciary duties.
Fraudulent Trading: Under CAMA 2020, directors may face criminal penalties if they knowingly run a company with the intent to defraud creditors or for fraudulent purposes.
Wrongful Trading: If a director allows a company to continue trading when they knew, or ought to have known, that the company was insolvent, they may be personally liable for debts incurred during that period.
Fines and Penalties: Failure to comply with statutory obligations, such as filing annual returns or holding general meetings, can lead to fines imposed by the Corporate Affairs Commission (CAC).
Disqualification: Directors can be disqualified from serving if found guilty of misconduct, fraud, or repeated failures in their role.
Non-profit organizations: Directors (often called trustees) must ensure the organization fulfills its charitable purposes.
Partnerships: Partners often act as de facto directors.
Conclusion
The role of company directors is crucial for the success and sustainability of businesses. By understanding their responsibilities, qualifications, and the legal framework that governs their actions, directors can effectively contribute to the growth and development of their companies.
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