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Statutory_ Regulatory and Legal by fjwuxn

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									LEGAL, STATUTORY AND REGULATORY
 RESPONSIBILITIES OF A DIRECTOR
   BY A. B. MAHMOUD, SAN, OON, FCIARB
A presentation to the
Good Governance &
Regulatory Leadership Forum
Organised by the Central Bank of
Nigeria and the Securities &
Exchange Commission
May 13-15, 2010
Abuja, Nigeria
THE OUTLINE
    The presentation will attempt to cover the following:


 Corporate Governance as the Context
 The Concept of Good Corporate Governance
 The Board as Pivot of Corporate Governance
 Sources of the Duties/Responsibilities of
  Directors
 The Common Law Duties of Directors
 Statutory Duties of Directors
 Regulatory Responsibilities of Directors.
 The New Code of Corporate Governance for
  Public Companies issued by SEC
 Concluding Remarks
CORPORATE GOVERNANCE AS THE
CONTEXT
 This forum is taking place against the backdrop
  of great turmoil in the world economy.
 Witnessed major financial crisis; corporate
  Scandals
 In Nigeria, we have also witnessed our own share
  of abuses, banking Crises; abuse of the Capital
  market;
 Weakened Investor confidence
.......CORPORATE GOVERNANCE AS THE
CONTEXT
 Capital Flight
 Some thoughts that the recent crises is a
  reflection of very weak Corporate Governance
  Environment in the Country.
 Triggered New Responses: Legal and
  Institutional Reforms, Corporate Governance
  Reforms etc.
 In Nigeria, we have the SEC Code of Corporate
  Governance, CBN Code of Corporate Governance,
  NAICOM Code of Corporate Governance, and
  PENCOM Code of Corporate Governance
.......CORPORATE GOVERNANCE AS THE
CONTEXT
   Back to Basics: Do those who run the companies
    know their basic legal and statutory
    responsibilities: Consequences: criminal, civil?

   Who is a director? What are his/her
    responsibilities? How are they enforced?
THE CONCEPT OF CORPORATE
GOVERNANCE
 Corporate Governance: a term widely used, but
  may mean different things to different people.
 The etymological origin may be said to drive from
  the Greek and Latin: Corpus (meaning body)
  hence corporation: Body of people or group of
  people authorised to act as an individual albeit
  artificial.
 Governance: From gubernatio: management or
  government: to guide, steer or act as a pilot
....THE CONCEPT OF CORPORATE
GOVERNANCE
 Definitions:
 UK: Report of the Committee on the Financial
  Aspects of Corporate Governance: “Corporate
  governance is the system by which companies are
  directed and controlled”
 Corporate governance can be defined as the set
  of processes, customs, policies, laws and
  institutions affecting the way a company is directed,
  administered or controlled.
....THE CONCEPT OF CORPORATE
GOVERNANCE
   OECD (Principles of Corporate Governance):

       Corporate governance is the system by which
        business corporations are directed and controlled.
        The corporate governance structure specifies the
        distribution of rights and responsibilities among
        different participants in the corporation, such as the
        board,      managers,     shareholders    and    other
        stakeholders and spells out the rules and procedures
        for making decisions on corporate affairs. By doing
        this, it also provides the structure through which the
        company objectives are set and the means of
        attaining      those    objectives   and    monitoring
        performance.
....THE CONCEPT OF CORPORATE
GOVERNANCE
   Two major theories of the Corporation underpin
    the philosophy of Corporate Governance:
      Narrow view: The corporation exists for the purpose
      of promotion of shareholder interests. Corporate
      governance is concerned with ensuring the firm is
      run in the interests of shareholders.
     Underlying this is notion of invisible hand as the key
      principle that the organisation of the economy is
      based on.
     The objective of the firm is to maximize the wealth of
      the shareholders
     Any social issues can be addressed through taxation.
....THE CONCEPT OF CORPORATE
GOVERNANCE
   the justification of this view assumes perfect
    markets, perfect competition, symmetric
    information and so forth. This of course, is
    hardly ever the case, not even in developed
    countries least of all developing countries like
    Nigeria.
....THE CONCEPT OF CORPORATE
GOVERNANCE
   The second theory of the Corporation is that the
    corporation exists to pursue the interest of wider
    set of stakeholders: employees, customers,
    shareholders etc.

       Corporate governance under this broader view, is
        concerned with ensuring that firms are runs in such
        a way a country‟s resources are used efficiently
....THE CONCEPT OF CORPORATE
GOVERNANCE
   The corporate laws and the corporate governance
    rules and practices in most countries tend to place
    somewhere along this continuum.
       UK, US closer to the narrower view
       Germany, Japan and South African lean towards the
        broader view.

   It is important to emphasise the link between
    corporate governance and the law. The law
    imposes duties on directors which they must
    discharge. In our country, these duties originate from
    common law principles but in the main now codified
    in the our company statute. The primary role of
    corporate governance is to provide structures and
    processes to enable directors discharge these legal
    and statutory duties.
THE BOARD AS THE PIVOT OF GOOD
CORPORATE GOVERNANCE.....
   Whatever theory of the Corporation or Corporate
    Governance one subscribes to, the Board of Directors
    is a central organ for „directing and controlling‟ the
    Company.

   The board of directors stands at the center of good
    corporate governance. Company law places the basic
    authority for managing a corporation in the collective
    hands of the members of the board of directors. The
    board does not run the company on a day-to-day
    basis, that is the role of the officers or managing
    directors. However, the board is responsible for
    setting basic company policy and approving any major
    changes in directions.
...........THE BOARD AS THE PIVOT OF GOOD
CORPORATE GOVERNANCE
 The board stands in the middle between
  shareholders and officers in the sense that
  shareholders elect the board members and the
  board appoints the officers.
 Good corporate governance principles with regard
  to directors have two basic elements:
     (1) The election of and procedural operation of the
      board; and
     (2) The fiduciary duties of board members.
SOURCES OF THE DUTIES OF DIRECTORS
  Common law
  Statutory Law: Company Law,
        other statutes: ISA, CBN Act, Banks and Financial
         Institutions Act, Failed Banks, ISA,
    Other Responsibilities in the various codes:
      SEC Code for Public Companies
      CBN Code of Corporate Governance for Banks
      NAICOM Code of Corporate Governance
      PENCOM Code of Corporate Governance
DUTIES OF DIRECTORS
   Who is a Director?
     Section 244(1) of CAMA: Directors of a company
      registered under this Act are persons duly appointed
      by the company to direct and manage the business of
      the company.
     A person not duly appointed a director cannot bind
      the company. However where the company describes
      him as such or holds him out as a director, there is a
      presumption that they have been duly appointed.
     It is a criminal offence to for a person not duly
      appointed to hold himself out as a director
     Section 567 of CAMA: “includes any person occupying
      the position of director by whatever name called”
........DUTIES OF DIRECTORS
   Common law duties:

     In common law the Board of Directors owe fiduciary
      duties to the shareholders (and the company). These
      principles have been espoused by the courts in
      various decision over the centuries.
     There two fundamental elements to this fiduciary
      relationship:
         Duty of loyalty
         Duty of care (Business Judgment Rule)

            Others have argued for a third and even a fouth element

                Duty of Disclosure
                Extra care when faced with a hostile take -over
........DUTIES OF DIRECTORS
   Duty of Loyalty:
     A director is at all times serve the best interest of the
      company; He must avoid a situation of conflicting interest
      with the company. His conduct and decisions must be
      consistent with his obligation to the company and must not
      be influenced by personal or business considerations
      inconsistent with the interests of the company.
     Elements of these duties include:
           Refraining from conflict of interest situations with the company
            (no self-dealing transactions)
           Using company information solely for the benefit of the
            company
           Maintaining confidentiality of company information
           Ensuring that decisions are motivated solely by the best
            interests of the company
           Ensuring that business opportunities relevant to the company
            pursued on behalf of the company (Corporate Opportunity
            Doctrine)
           Not engaging in competitive enterprise with the company
........DUTIES OF DIRECTORS
   The concept of duty of loyalty has been described in
    an English case: Bristol and West Building Society v.
    Mathew (1996) 4 11 ER at 710- 711: “the
    distinguishing obligation of a fiduciary is the
    obligation of loyalty. The principal is entitled to the
    single-minded loyalty of his fiduciary. The core
    liability has several facets. The fiduciary must act in
    good faith; he must not make profit out of his trust;
    he must not place himself in a position where his duty
    had his interest may conflict; he may not act for his
    own benefit or the benefit of a third person without
    the informed consent of his principal. This is not
    intended to a be an exhaustive list, but is sufficient to
    indicate the nature of fiduciary obligations.
........DUTIES OF DIRECTORS
   The Nigerian courts have followed this
    established principle:
     Nigerian Posts Authority v. Panalpina World
      Transport SC 31/73 at 113
     Nasr v. Berini (1968) 1 All NLR 274, 293
         “We do not accept the argument that the plaintiff
      had not unjustly enriched himself at the expense of
      the bank. There is a broad principle of equity
      developed to ensure that trustees, agents, or persons
      standing in such legal relationships shall not retain a
      profit made in the course of or by means of their
      office. The principle extends to all fiduciaries and is
      applied in a variety of circumstances”
........DUTIES OF DIRECTORS
   Duty of Care
     the duty to pay attention and to try to make good
      decisions.
     The Basic principles are:
         Reasonable investigation of facts: directors should exercise
          diligence in gathering all relevant facts, analyse issues
          carefully in a considered manner and use their best
          judgment in reaching a decision
         Risk Taking: directors are not prevented from taking
          reasonable business risks where legitimate business
          considerations warrant such risks.
         Duty to monitor:

            Internal controls

            Future risk potentials

            Compliance with regulatory requirements
........DUTIES OF DIRECTORS
   OECD Principles contains an excellent summary of
    the duty of care:
   “The duty of care requires board members to act on a
    fully informed basis, in good faith, with due diligence
    and care. In some jurisdictions there is a standard of
    reference which is the behaviour that a reasonably
    prudent     person    would     exercise    in   similar
    circumstances. In nearly all jurisdictions, the duty of
    care does not extend to errors of business judgment so
    long as board members are not grossly negligent and
    a decision is made with due diligence etc. The
    principle calls for board members to act on a fully
    informed basis. Good practice takes this to mean that
    they should be satisfied that key corporate
    information     and     compliance       systems    are
    fundamentally sound and underpin the key
    monitoring role of the board...”
........DUTIES OF DIRECTORS
   Some Illustrations:
   Re: City Equitable Fire Insurance Co. Ltd. (1925) Ch 407:
    The principles were well set out:

       A director need not exhibit in the performance of his duties of a
        greater degree of skill than may reasonably be expected from a
        person of his knowledge and experience.....

       A director is not bound to give continuous attention to the
        affairs of his company. His duties are of an intermittent nature
        to be performed at periodic board meetings, and at any
        meetings of any committee of the board upon which he happens
        to be placed....

       In respect of duties that, having regard to the exisgencies of
        business and the articles of association, may properly be left to
        some other official, a director is, in the absence of grounds of
        suspicion, justified in trusting that official to perform such
        duties honestly
........DUTIES OF DIRECTORS
   Smith v. Van Gorkom, 488 A. 2d 858 (1985) decided
    by the Delaware Supreme Court provides an excellent
    illustration of the concept of duty of care.
     A retiring CEO negotiated to sell the shares of the
      company at $55 per share; the selling price at the NYSE
      was $39
     The board of the company consisting 5 „inside directors‟
      with the bacground of law and accounting 166 years of
      commulative service in the company and another 5
      „outside‟ directors who comprised 4 CEOs of other
      companies an economist and dean of business school
      approved the deal in a board meeting that lasted less than
      2 hours, without any report on valuation of the company‟s
      shares.
     At the challenge of shareholder who alleged breach of duty
      of care the directors contended that the board was
      eminently qualified to reach the decision without any
      reports or external analyst
........DUTIES OF DIRECTORS
   The Delaware Supreme Court ruled that the directors
    had violated their fiduciary duty of care by not giving
    adequate attention to the valuation of the company.
    The Court‟s opinion stated.
    “On the record before us, we must conclude that the
    Board of Directors did not reach an informed business
    judgment ...in voting to sell the company for $55 per
    share....Our reasons, in summary, are: the directors
    (1) did not adequately inform themselves that the $55
    price was reached by the CEO without any
    evaluation; (2) were uninformed as to the intrinsic
    value of the company; and (3) were grossly negligent
    in approving the sale after only two hours without
    prior notice or support documentation.”
STATUTORY DUTIES
   Nigerian Company Law sets out the major duties of
    Directors in Sections 279, 280 and 282 of CAMA;
    These represent to a large extent codification of the
    common law duties discussed:
   Section 279 provides:
     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.
     The main elements of this relationship are set out in
      subsections 2 to 9. Of significance are:
           SS(2) defines the circumstances when fiduciary duties are owed
           SS (3)require a director to act all times in what he believes to
            be the best interest of the company to preserve its assets,
            further its business...in such a manner as a faithful, diligent,
            careful and ordinarily skilful director would act in the
            circumstance.
........STATUTORY DUTIES
     SS(4) mandates a director to have regard to the interests of
      the company’s employees in general as well as the
      interest of its members
     SS (5) requires a director to exercise his powers for the
      purpose for which he is specified and shall not do so for
      collateral purpose
     SS (6) A director shall not fetter his discretion to vote in
      a particular way
     SS(7) permits delegation but prohibits abdication of
      duty
     SS(8) a director is not relieved from the duty to act in
      accordance with Section 279 even if such a provision is
      contained in the articles, or resolutions of the company or
      any contract;
     SS(9) provides that duty imposed on a director under this
      section shall be enforceable against the director by the
      company.
........STATUTORY DUTIES
   S280 of CAMA deals with conflicts of duties and
    interests
   SS (1) prohibits conflict of personal interest with
    duties as a director
   SS (2) prohibits secret profit or unnecessary benefit
   SS (3) secret profit shall be accounted to the company
   SS (4)inability or unwillingness of the company to
    perform any function under its articles and
    memorandum is not a defence for any breach of duty
    of a director under the Act.
   SS (5) duty not to misuse corporate information does
    not cease by virtue of leaving the office of a director
   SS (6) disclosure of interest before transaction and
    before secret profits are made in a general meeting
    may relieve the director of liability.
........STATUTORY DUTIES
   Section 282 Deals with Duty of care and skill
   SS(1) provides that “Every director of a company shall
    exercise the powers and discharge the duties of his office
    honestly, in good faith and in the best interests of the
    company, and shall exercise the degree of care, diligence
    and skill which a reasonable prudent director would
    exercise in comparable circumstances”.
   SS(2) Failure to take reasonable care in accordance with
    S282 shall ground an action for negligence and breach of
    duty.
   SS (3) directors are individually responsible for actions of
    the board in which he participated. Absence unless
    justified shall not relieve responsibility
   SS (4) imposes the same standard of care to directors duties
    to the company on both executive and non-executive
    directors. Though additional liability may arise by reason
    of master-servant relationship in the case of EDs
........STATUTORY DUTIES
   There are several other duties of a director that are
    contained in various Sections of CAMA which a
    director should be aware of:
       S63: deals with the division of powers between the general
        meeting and the board of directors.
       S277: Disclosure by directors of interest in contracts
       S290: personal liability of directors and officers
       S 340: Disclosure of transactions, arrangements, loans,
        quasi loans and other dealings in favour of directors
       S 342: Directors Reports giving a fair view of the
        development of the business of the company and its
        subsidiaries during the year and their position etc.
       S 343: Signing of Balance sheet
       S345: lay and deliver financial statements of the company
        within 18 months of incorporation and at subsequently at
        least once every year.
........STATUTORY DUTIES
 The Role of Advisors: directors should recognise
  the role of professional advisors. Expert advice
  and counsel are often necessary elements in the
  decision making process. Company lawyers and
  accountants perform especially important roles in
  assisting the board and officers to navigate
  through important legal and financial decisions
  and guide the application of good corporate
  governance principles and standards.
 The important role of the company secretary:
  expert legal opinion, clarify issues of conflict of
  interest, or potential breach of duty
REGULATORY RESPONSIBILITIES
   It will be a daunting task to attempt to deal with
    all the duties on imposed on directors regulatory
    bodies. These are varied and may be sector
    specific:
     Those imposed on public companies generally say by
      SEC
     Imposed on the companies operating in the Banking
      or Financial Sector by CBN or under BOFIA
     Imposed on companies operating in the Insurance
      Sector
     In addition to Statutes imposing various duties, the
      various regulators have issued respective Codes
      which with the exception of the Code issued by SEC
      will be sector specific
.......REGULATORY RESPONSIBILITIES
   The general principles of regulatory control centre around the
    following issues:

       Reporting: CAMA, ISA, BOFIA etc impose various reporting
        requirements: These may be general such as Directors Reports under
        S342 CAMA or Financial Statements S 345, Auditors Report and
        filing with the Commission 345 (3); Reporting could be to shareholders
        in a general meeting or to the regulators or both; S24 of BOFIA Duty
        of director ensure that proper books of accounts are kept on all
        transactions...necessary to explain such transactions and give a true
        and fair view of the State of affairs of the bank

       Disclosure: Various laws require disclosure by directors of certain
        information: conflict of interest situations, interests in transactions,
        loans to directors, related party transactions; etc S18 of BOFIA No
        manager or any other officer of a bank shall (a) in any manner
        whatsoever, whether directly or indirectly have personal interest in
        any advance, loan or credit facility; and if he has any such person
        interest, he shall declare the nature of his interest to the bank;
.......REGULATORY RESPONSIBILITIES
   Prohibition/exemption: Certain conduct may be
    prohibited (eg insider dealings in securities ISA
    S111) Some conduct permitted only with clear
    exemption is granted; Prohibition of Interlocking
    Directorships S19 of BOFIA SS (4)Every director of a
    bank shall sign a code of conduct in such form or
    manner as the Bank may, from time to time,
    prescribe. (5) The chief executive of a bank shall
    cause all the officers of the bank to sign code of
    conduct as may be approved by the board of directors.
   Permissions/approvals: There certain conducts for
    which prior permission or approvals may be needed
    which directors ought to be aware of under various
    statutes.
THE NEW SEC DRAFT CODE OF CORPORATE
GOVERNANCE

 In 2003 Code of Best Practices on Corporate
  Governance jointly issued SEC and CAC was
  adopted. (following the Atedo Peterside
  committee report).
 A 16 member technical committee was
  inaugurated in Sept. 2008. This committee
  submitted its report in March 2009 along with a
  draft new code.
 Membership of the committee was drawn of
  largely private sector but included professionals
  from varied backgrounds: lawyers, accountants,
  bankers, a past and a serving president of the
  IoD etc
......THE NEW SEC DRAFT CODE OF
CORPORATE GOVERNANCE

   The Process:
       the process was consultative: all registered public
        companies were invited to submit memorandum to
        the committee
       Key stakeholders and individuals, professionals
        organisations, labour organisations, academics, were
        also invited
       All regulatory agencies and some international
        organisations were invited to committee retreats for
        presentations and consultations;
       General public
       Comparative study and review of various codes
......THE NEW SEC DRAFT CODE OF
CORPORATE GOVERNANCE

   The outcome: the report of the committee
    contained in 3 volumes contained its findings
    and recommendations; a new draft code and the
    copies of all memoranda, academic papers,
    presentations and deliberations of the committee.

   The draft code has now been exposed (with some
    modifications approved the Board of SEC after
    consultations with other regulators)
......THE NEW SEC DRAFT CODE OF
CORPORATE GOVERNANCE
   I am sure we are all familiar with the new code. It may
    sufficient to highlight a few things.
   The main highlights:
     The 2003 Code was based on the principle of voluntary
      compliance. It was intended as a guide to public companies.
     The new draft code seeks to move away to from voluntary
      compliance and demands “all companies whose securities are
      listed on a recognised securities exchange shall comply with
      the principles and provisions of the code which should form
      the basis of the minimum standard of their corporate
      behaviour”
     Companies seeking to raise funds from the capital market,
      through issuance of securities will be expected to demonstrate
      sufficient compliance with the principles and provisions of the
      code appropriate to their size, circumstances or operating
      environment
     It is intended that the Code shall be fully enforceable by SEC
,,,,,,THE NEW SEC DRAFT CODE OF
CORPORATE GOVERNANCE

   The code seeks to achieve 6 broad objectives:


       Enhanced governance structures
       Greater protection of shareholder rights
       Improved risk management and internal audit
       Greater disclosure
       Enhanced relations with stakeholders
       Enhanced sustainability appreciation
.......THE NEW SEC DRAFT CODE OF
CORPORATE GOVERNANCE

   Part B of the Code deals with the Board of
    Directors
     Responsibilities of the Board are clearly defined
      Section 2. These include being responsible for
      performance and affairs of the company setting
      strategic goals and deploying resources towards
      attaining those goals. Ensuring company is properly
      managed and overseeing the effective performance of
      management in order to “protect and enhance
      shareholder value and to meet the company‟s
      obligations to its employees and other stakeholders”
     The Duties set out in S 3: overseeing management,
      identification of risk and monitoring risk managment
      systems
...........THE NEW SEC DRAFT CODE OF
CORPORATE GOVERNANCE



     Succession planning
     Overseeing the effectiveness and adequacy of internal
      control systems
     Performance appraisal and compensation of board
      members and senior executives
     Ensuring integrity of financial reports
     Maintaining ethical standards
     Ensuring compliance with laws
CONCLUDING REMARKS
   A director occupies a key position in the company. His
    duties are defined by the courts, statutes and in
    various codes.

   Every director is fully answerable for his actions and
    actions of the Board.

   Understanding these duties is key to good corporate
    governance.

   It helps to avoid liability both civil and criminal.

Thank you for your attention

								
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