The powers conferred on companies by law to carry on or undertake any business or activity, do any act, or enter into any transaction is generally a decision-making power. The decision-making regarding management and operation, investment, recruitment, profit-sharing among others requires individuals or bodies to act on behalf of the company. The Companies Act, 2019 (Act 992), specific industry legislations, or the registered constitution of a company may mandate individuals or bodies to act on behalf of a company – as a company is an artificial person and cannot act by itself.
Mainly, two central bodies – the board of directors and the shareholders either acting as a whole or by delegation of their powers are responsible for the entire decision-making of companies. Nonetheless, these two bodies have categories of decisions they can make on behalf of a company based on the provisions of the Companies Act, 2019 (Act 992), industry-specific regulations, or a registered constitution of a company.
It is therefore important to understand the roles and limitations of these two bodies in the decision-making processes of a company to foster its effective and sustainable company management.
In this article, I shall highlight the scope of the decision-making powers of the board of directors and shareholders whilst proposing ways to enhance effective decision-making procedures for companies.
DECISION-MAKING FOR COMPANIES
The Companies Act, 2019 (Act 992) enables the primary decision-making powers and processes for companies. In addition to Act 992, other industry-specific legislations and the registered constitution provide an outline of the “whos” and “hows” of a company’s decision-making process.
The outcomes of the decisions made by persons or bodies authorised by these laws and a registered constitution are considered as acts of a company – and what is deemed an act of a company (decision) is one which is generally undertaken by its members, board of director, its managing director or authorised agents.
The Companies Act, 2019 (Act 992) provides that directors either as managing director, executive or non-executive, de-facto or shadow or acting as a whole (board of directors) or by a committee of the board may take decisions relating to the principal activities of a company.
Also, the right of shareholders to attend a general meeting (or extraordinary general meeting) of a company, to speak and vote on resolutions is a right to make decisions for a company.
Apart from directors and shareholders, other decisions are made for companies by appointed agents like employees, distributors & agents, etc.
The need to avoid the confusion over which decisions are the preserve of the board or shareholders is why this article seeks to provide an outline of the type of decisions these two main constituent organs can make on behalf of a company.
THE DECISION-MAKING POWERS OF DIRECTORS
Directors are the managers of a company- they administer the affairs of a company. They owe the responsibility for the day-to-day management of a company and decide on matters of strategic direction, management, investment, sales and marketing, finance, declaration of dividends among others subject ordinarily to the approval of an established board.
The best way to understand the scope of the decision-making powers of directors is to look at what they are ordinarily precluded from. The exclusion list provided by Act 992 is the best attempt to avoid the provision of a pre-determined list of decisions, directors (the board) would have been subjected to under the law.
Further, it acknowledges the functional role of directors as day-to-day managers of companies with varying principal activities that cannot be tied to a pre-determined list of decisions – so as not to limit the abilities of directors to respond to exigencies of company management.
The limitations on the powers of directors are not substantive and absolute. They are procedural limitations subject to the passage of ordinary or special resolutions before such decisions are made.
Without the approval by an ordinary resolution, directors cannot issue any new or unissued shares except treasury shares on conditions prescribed by the Act.
Also, directors cannot make a voluntary contribution to a charitable or any other fund, other than pension fund for the benefits of employees or an associated company of the amounts the aggregate of which in any financial year exceed 2% of the retained earnings of the company at the end of the preceding financial year.
Further, except otherwise provided in the registered constitution of the company, and without the approval of an ordinary resolution, directors shall not exercise the power of the company to borrow money or to charge any of the assets of the company in proportion provided under law more than the stated capital of the company.
Another significant limitation subject to the passage of a special resolution is dealings in transactions classified as major transactions. A major transaction of a company including its subsidiaries has been defined by Act 992 to include:
a. The acquisition of, or an agreement to acquire whether contingent or otherwise, assets, the value of which is more than 75% of the value of the assets of the company before the acquisition
b. The disposition of, or an agreement to dispose of, whether contingent or otherwise, assets, the value of which is more than 75% of the value of the assets of the company before the disposition
c. A transaction that has or is likely to have the effects of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is 75% of the value of the assets of the company before the transaction.
Apart from these procedural limitations, directors also decide on matters among others relating to the casual filling of a board vacancy, the organization of annual or extraordinary general meetings, and the declaration of dividends.
THE SHAREHOLDERS’ RESERVED POWERS
Board of directors acting within the powers conferred by Act 992 or the registered constitution of a company are not bound to comply with the directions or instructions of the shareholders in general meetings. However, this does not imply that the decisions of the board of directors are not subject to the scrutiny and approval of shareholders.
Shareholders act as the final sieve for all company decisions. They ratify or confirm decisions taken by the board of directors and have the power to make recommendations on decisions to be taken.
Further, shareholders decide on the appointment of new directors, auditors, and secretary of a company including the decision on their remuneration. Also, they act on financial matters such as the approval of auditors’ reports on the financial statements of the company and the approval of dividends proposed for payment by directors.
To safeguard their interest as the residual owners of a company, Act 992 permits shareholders in circumstances where members of the board of directors are disqualified or are unable to act because of a deadlock to act. Likewise, shareholders can institute legal proceedings in the name of and on behalf of a company if the board of directors refuses or neglects to do so.
This discussion on the decision-making powers of shareholders is not exhaustive but representative of the influence they hold on a company’s decision-making process.
SOME STRATEGIES TO ENSURE AN EFFECTIVE DECISION-MAKING PROCESS
A clearly defined decision-making process promotes efficiency. It allows each decision-maker to recognize his/her limitations and avoid unnecessary power play. To achieve this, private companies must seek to adopt strategies that promote clarity, competence and build capacity for directors and shareholders to recognize their limitations and allow for the implementation of effective decision-making procedures.
Some considerations for an effective decision-making procedure are:
- The development of decision-making guidelines for directors and shareholders based on Act 992, specific industry legislation, and a registered constitution of the private company.
- Appointment of qualified, competent and persons with proven management expertise as directors to appreciate the need (benefits) to comply with law and guidelines.
- Appointment of professionals (individuals or corporate bodies) to serve as company secretaries and promote compliance culture.
- The institutionalisation of training and capacity-building programs for the board of directors and shareholders.
- Adopting good corporate governance structures that limit shareholders from becoming dominant members of the board of directors so as to promote proper scrutiny.
The artificial legal personality of private companies makes them unable to make decisions by themselves. Therefore, they act through two main constituent bodies – the board of directors and shareholders. These bodies must understand the types of decisions they can take on behalf of private companies and ensure adherence to such limitations. The strict compliance with such limits promotes effective decision-making with inherent benefits for private companies.
Image source: https://www.boardeffect.com/blog/modern-governance-approach-better-board-decision-making/