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Opinions of Thursday, 23 August 2018

Columnist: Saeed Salahudeen

Can a Non-Executive Director be held liable for the actions and inactions of executives?

I have read copiously and meticulously the statement issued by Dr. Otabil regarding the banking crisis and his involvement, either directly or indirectly.

As a student of the law with particular interest in Corporate Law and Governance, I decided to subject the statement to regorous legal analysis and scrutiny.

For the sake of those who might not have the privilege of reading the statement issued by the revered man of God, here are the relevant facts as per the statement issued by the revered man of God:

Dr. Otabil was the Board Chair of Capital Bank until its devastating end, a year ago; Dr. Otabil’s position in the defunct bank was a non-executive role and as such, he was not involved in the day-to-day management and operations of the bank; In the course of time, some decisions made by the board turned out well while some did not turn out as anticipated; Dr. Otabil also emphasized his good intent for the bank and that at all times he did what he felt was in the best interest of the bank.

From the foregoing facts, the following legal issues arise for determination:

1. Whether or not, a non-executive director of a company could be held liable for the actions and inactions of management of the company;
2. Whether or not a non-executive director, has a lesser role to play in corporate governance?

In resolving the above legal issues, the following rules are applicable;

Section 203 of the Companies Act, 1963 (Act 179) states:

1. "A director of a company stands in a fiduciary relationship towards the company and shall observe the utmost good faith towards the company in any transaction with it or on its behalf.
2. A director shall act at all times in what he believes to be the best interests of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skilful director would act in the circumstances.
3. In considering whether a particular transaction or course of action is in the best interests of the company as a whole, a director may have regard to the interests of the employees, as well as the members, of the company, and, when appointed by, or as representative of, a special class of members, employees, or creditors, may give special, but not exclusive, consideration to the interests of that class.
4. No provision, whether contained in the Regulations of a company, or in any contract, in any contract, or in any resolution of a company shall relieve any director from the duty to act in accordance with section or relieve him from any liability incurred as a result of any breach thereof".

Hayfron-Benjamin J.as he was then known said in OKUDJETO AND OTHERS v IRANI BROTHERS [1974] 1 GLR 374-388, "The conduct of a company's business is the responsibility of the board of directors. Directors are appointed to direct and administer the business of a company. They need not be called directors. They may be called, for example, governors, council, senate, regents, trustees, executives, management committe or any other term, but so long as they have been appointed to direct and administer the business of a company, they are the company's directors."

In BOUSIAKO CO. LTD v GHANA COCOA MARKETING BOARD; KWABO-OSIEKYERE CONSTRUCTION WORKS v GHANA COCOA MARKETING BOARD (CONSOLIDATED) [1982-83] GLR 824-846, the defendant board purported to deny validity of a letter written on its behalf by one Dr, Erbynn by which the board agreed to make certain payments to the plaintiff's. In disposing off this argument, Osei-Hwere J. as he was then known said " I have no doubt that Dr. Erbynn who wrote as the chairman of its Central Tender Board and also a member of the interim Management Committee (IMC) had the fullest authority to write on behalf of the defendants to announce the awards".His Lordship also refereed to the three - member IMC as the "directing mind" of the Cocoa Marketing Board.

In CMMODORE v FRUITS SUPPLY (GHANA)GHANA LTD [1977] 1 GLR 241- 28 , the court of appeal held that a director occupied a fiduciary position and therefore was precluded from entering into a binding contract on behalf of the company in which he himself has a personal interest which conflicted or might conflict with the interest of the company.

Section 4.12 of the Cadbury Report [1992], states "An essential quality which non-executive directors should bring to the board's deliberations is that of independence of judgement. We recommend that the majority of non-executive directors on a board should be independent of the company. This means that apart from director’s fees and shareholdings, they should be independent of management and free from any business or other relationship, which could materially interfere with the exercise of their independent judgement"

Per section 4.1 of The Code of Best Practice, the four main provisions with respect to the board are:
1. The Board should meet regularly, retain full control over and monitor the executives. (S1.1);
2. Non-Executive Directors should bring independent judgement to bear on issues of strategy, performance, resources including key appointments and standard of contract (S2.1);
3. A director’s service contract should not exceed three (3) years without shareholders’ approval (S3.1);
4. It is the board's duty to present an independent assessment of the company's position (S4).

Relating the facts to the rules, the following critical legal analysis can be made:

Professor L.C.B Gower, in the Final Report of the Commission of Enquiry into the Working and Administration of the Present Company Law of Ghana stated that subsection (1) of section 203 of Act 179 (supra) has two main facets: directors must act bona fide in the interest of their compsnies; and directors must not place themselves in a position in which their interests conflict with their duties.Gower further noted that per section 203 (2) of Act 179 (suora) directors must act bona fide in what they consider - not what a court may consider - is in the best interest of the company.

A sober reading of section 203 (2) of Act 179 ( supra) reveals that in addition to his duty of good faith, a director must display some degree of care and skill. The question then is: what is the degree of care and skill a director ought to display in managing, directing and having suprintendence over the affairs and business of a company?.

As the business world comes to expect higher standards by the passage of the Code of Best Practice on corporate governance ( supra), the law on corporate governance should develop in step. It therefore stands to reason that:

1. A faithful, diligent, careful and ordinarily skilful board of directors would meet regularly, retain full and effective control over and monitor the management of the company;
2. A faithful, diligent, careful and ordinarily skilful non-executive director would bring independent judgement to bear on issues of strategy, performance, resources including key appointments and standard of contract;
3. A faithful, diligent, careful and ordinarily skilful director would follow up and ensure that the financial statements of the company is prepared in accordance with the Companies Act, 1963 (Act 179) and International Financial Reporting Standards (IFRS).

From the foregoing analysis, the following conclusion is drawn;

1. Non-executive directors can be held liable for the actions and inactions of executives, even though non-executive director are not involved in the day-to-day management and operations of the company;
2. Non-executive directors are rather vested with enormous responsibility as far as good corporate governance practice is concerned.

By Saeed Salahudeen
The writer is a Chartered Accountant and a Law student ar Gimpa Law School.
Salahu222@yahoo.com