Boards bear responsibility for their companies. Hence, the need to ensure that only persons with the right experience, competence and knowledge are appointed as directors. As indicated in my previous article, ‘Shaping Boards for the Future’ published in the BusinessDay issue of February 2, 2022, I noted that part of the key trends in corporate governance was the widening responsibilities of boards.
This trend broadening the responsibilities both within regulatory and non-regulatory frameworks are drawn from an increasing need for accountability of boards and directors.
A weak emphasis on responsibilities on a board is bound to lead to corporate failure for a company. However, in practice, how often are directors aware of what are their responsibilities and the expanding, widening scope of these responsibilities?
Directors have duties flowing out of their positions. Directors are trustees of the company’s money, properties and powers and as such are accountable for the company and ought to act in the interest of the company and the shareholders. This concept flows from English common law and equitable doctrines.
Though many of these ESG matters seem add-on for now, post-pandemic events have shown their growing importance in becoming value drivers for investors, regulators and the public on the companies they consider in terms…
The duties of directors in Nigeria are statutorily entrenched in the Companies and Allied Matters Act 2020 (CAMA). The duties of directors to their companies are: the duty of utmost good faith; duty to act in the best interest of the company; duty to show reasonable care and skill; duty to avoid conflict of interest; duty not to fetter discretion during votes; duty to ensure delegated power doesn’t amount to abdication of duty; duty not to make a secret profit; duty not to misuse corporate information; and duty to disclose interest in transaction, profit and multiple directorship. Directors can incur civil and criminal liabilities for their acts and omissions related to their statutory duties. Each director is individually responsible for the actions of the board in which he participates in, even if absent from the board’s deliberations.
Beyond the statutory duties of directors to their companies, there are widening regulations on expectations from boards and directors. Boards are responsible for monitoring the process and progress towards achieving set corporate objectives and accounting to shareholders, stakeholders and regulators on the company’s activities. These regulatory and legislative responsibilities go beyond the general duties of directors.
Also, by the Nigerian Code of Corporate Governance 2018 (NCCG), the board is responsible for the entrepreneurial and strategic leadership, ensuring succession planning for the board and senior management, managing risk and setting the tone for the ethical standards of the company.
Sector-specific corporate governance codes in Nigeria reiterate the duties of directors and add to the responsibilities of boards. The CBN’s Code of Corporate Governance for Banks and Discount Houses in Nigeria 2014 makes the board responsible for managing conflict of interest, monitoring management’s performance and every director is expected to attend all meetings of the board and its committees.
A board is expected to meet more responsibilities beyond statutory or regulatory provisions. In addition to its responsibilities to the company and shareholders, there is a widening group of stakeholders. A major trend which boards need to take note of is the importance of Environmental, Social and Governance (ESG) ratings of companies by shareholders and stakeholders.
Read also: Shaping boards for the future
In this sense, the responsibilities of boards go beyond delivery of financial value to social and ethical value for their companies. Under ESG, issues related to climate change, carbon emission reduction, water pollution, air pollution and deforestation; social-customer success, data hygiene and security, gender and diversity inclusion, community relations and mental health; Governance- board make-up, compensation, hiring and on-boarding are considered.
ESG metrics are being used to determine the future value of companies. There is value in reputation and the board has a responsibility to promote the company’s value. ESG helps to point companies toward where future profits and investments would come from. The growing importance of ESG can be seen from the CAMA 2020’s provision on the duty of directors to act in the best interest of the company to include having regard to the impact of the company’s operations on the environment in the community where it carries on business operations.
Also, the Climate Change Act 2021 requires that private organisations put measures in place to ensure the achievement of carbon emission targets in line with the National Climate Change Action Plan. It is foreseeable that the responsibilities of boards will increase to include reporting on energy use and carbon emission within their directors’ report in the nearer future as is now done in some other jurisdictions.
On the Social part of ESG metrics, directors should note that according to the 5WPR 2020 Consumer Culture Report, millennials say it is important for the companies they buy from to align with their beliefs and values and do not hesitate to boycott brands and companies they have purchased from previously based on their stance on issues.
These stances extend to diversity hiring policies, employee experience ratings, corporate reaction to socio-political events such as public protests and ethical sourcing of products among others. Boards also have the additional pressure on the Governance part of ESG to make more public disclosures and account for senior management remuneration and governance processes.
Though many of these ESG matters seem add-on for now, post-pandemic events have shown their growing importance in becoming value drivers for investors, regulators and the public on the companies they consider in terms of their resilience, buoyancy, corporate responsibility and ethics.
Knowledge and pointers to action on the widening responsibilities of boards and their directors are key to navigating towards the future. These and more are important considerations for successful boards to sustain their organisations now and beyond.