Introduction
The success of any company is fundamentally anchored in the strength of its leadership, particularly the Board of Directors. In Nigeria, where businesses face unique regulatory, financial, and operational challenges, the role of directors is both critical and complex. This article explores the vital role that directors play in a company’s growth, the importance of having a skilled and committed board of directors, and how business owners can ensure they are appointing individuals who can contribute meaningfully to the success of their organisation.
Defining Directorship
Directorship in Nigeria is a position of significant responsibility, requiring trust, expertise, and a clear understanding of legal obligations. Directors are persons appointed to oversee the management and strategic direction of a company, ensuring compliance with laws, safeguarding shareholder interests, and contributing to the company’s success. In Nigeria, the duties of directors are primarily outlined in the Companies and Allied Matters Act (CAMA) 2020, along with the various Codes of Corporate Governance.
Types of Directorships
To understand the duties a director plays in an organization, it is essential to grasp the roles of directors in a company. These include:
- Executive Directors: They are actively involved in the day-to-day management of the company, often as part of management teams or senior leadership.
- Non-Executive Directors: They do not partake in the daily operations but serve on the board to provide strategic guidance.
- Independent Directors: They have no material relationship with the company and bring unbiased opinions to guide company decisions.
- Shadow Director: They are not officially appointed but provide instructions or directions that the company’s directors customarily follow. They may be held equally liable for board decisions.
- Alternate Director: They are appointed to act on behalf of another director in that director’s absence.
Regardless of their specific role, these directors often share duties and liabilities due to their collective responsibility for overseeing the company’s operations and governance.
Key Duties of Directors in Nigeria
The responsibilities of a director go far beyond attending meetings or lending a name to the company’s official documents. Directors must act in the best interests of the business, displaying high levels of skill, care, and diligence. Some of the core duties of a director are:
- Fiduciary Duty: Directors must act to protect the organisation’s assets and represent the interests of shareholders according to Section 305(2) & (4) of CAMA;
- Due Care and Skill: They must demonstrate the level of care and skill that a reasonably skilled director would in similar circumstances. They also cannot delegate powers in such a manner that may amount to an abdication of duty (Section 308(1) of CAMA);
- Good Faith: All decisions must be made in good faith, promoting the company’s success for the benefit of its members and employees (Section 305(1) of CAMA);
- Corporate Governance: Directors are agents and trustees of the company, responsible for maintaining high standards of business conduct and ensuring statutory compliance in areas such as the company’s annual returns, tax obligations, and environmental obligations.
- Independent Judgement: Directors must exercise their independent judgement for the benefit of the company (Section 305(3) of CAMA);
- Conflict of Interests: Directors must avoid a conflict of interests between the company’s interest and their personal interest (Section 306(1) of CAMA); and
- Confidentiality: They must protect corporate information and avoid using it for personal gain, even beyond their tenure as a director (Section 306(5) of CAMA).
The Liability Factor
Furthermore, with great responsibility comes significant liability. Directors can be held personally accountable for the following:
- Negligence: Failing to exercise care, skill, and diligence can lead to legal actions for breach of duty (Section 308(2) of CAMA).
- Secret Profits: Directors who make undisclosed profits from their position must account for these earnings (Section 306(3) of CAMA).
- Board Decisions: Directors share collective responsibility for the decisions of the board, even in cases of absence, unless there is a valid reason for not participating (Section 308(3) of CAMA).
The Importance of Building a Strong Board
The board of directors consists of a group of directors and can be said to be the strategic brains of the company. For companies to thrive, it is essential to select directors who are not only skilled but also aligned with the company’s vision. Section 271 of CAMA requires companies (except small companies) to have at least two directors, while public companies must appoint a minimum of three independent directors, as stipulated in Section 275. These independent directors bring fresh perspectives, mitigating the risks of groupthink.
A well-structured board offers numerous advantages to a company, ensuring that it operates efficiently and strategically. Here are some key benefits:
- Strategic Vision and Leadership: The board provides the overall strategic direction for the company. It helps set long-term goals, identify growth opportunities, and ensure the company’s mission aligns with its actions. With their collective experience, board members can foresee challenges and guide the business through market changes.
- Diverse Expertise and Perspectives: A well-constituted board brings together individuals with varied backgrounds and expertise. This diversity allows for more informed decision-making, innovative solutions, and the ability to view issues from multiple angles. It also ensures that the company has access to skills it may lack internally.
- Risk Management: An experienced board is crucial for identifying, assessing, and mitigating risks. They oversee the company’s risk management framework and ensure that the business is equipped to handle financial, operational, and reputational risks, enabling it to grow with confidence.
- Accountability: A board holds management accountable, ensuring that the company’s performance is closely monitored and aligned with its objectives. This level of oversight encourages transparency and ensures that business operations remain focused on achieving the company’s goals.
- Access to Networks and Resources: Board members often have extensive networks that can benefit the company, opening doors to new partnerships, customers, investors, and market opportunities. Their influence can provide access to key resources, support expansion, and enhance the company’s reputation.
- Enhanced Corporate Governance: A strong board promotes high standards of corporate governance, ensuring compliance with laws and regulations. This not only reduces the risk of legal and financial penalties but also boosts the company’s credibility with investors, customers, and regulators.
- Talent Development and Succession Planning: Boards play a critical role in developing leadership talent within the organisation. They support the CEO and senior management in their roles, offer mentorship, and ensure effective succession planning to sustain long-term growth.
- Ethical and Cultural Oversight: A good board helps foster an ethical corporate culture by promoting transparency, integrity, and accountability. This influence can improve employee engagement, attract top talent, and enhance the company’s public image, all of which contribute to overall business success.
- Resource Allocation: The board oversees the financial health of the company, ensuring that resources are allocated effectively to support growth initiatives and operational needs. Their financial oversight ensures that the business maintains a strong balance sheet and stays on track with its financial goals.
The Challenges for SMEs and Startups
In many small and medium-sized enterprises (SMEs) and Startups in Nigeria, it is common for business owners to appoint friends or family members as directors and part of the board. While this may seem convenient, it often leads to governance issues. Unqualified directors can be a burden, lacking the necessary knowledge and expertise to contribute to the company’s success. Worse, they may be unaware of their legal liabilities, leaving the company exposed to penalties, regulatory issues, and financial losses. For instance, failure to file annual returns or meet tax obligations can lead to fines or, in severe cases, the dissolution of the company. As directors affect the running of the company and may suffer group liability, it is prudent to have skilled directors.
Additionally, onboarding family members and friends as directors simply to fill vacancies, while assuming you can handle all the work yourself is a common but misguided approach. The saying “two heads are better than one” holds true in business, especially when it comes to strategic decision-making. Enlisting skilled professionals with relevant expertise ensures that your company benefits from diverse perspectives, sound governance, and a shared sense of responsibility, which are factors that maintain long-term business success.
If you are a business owner who has appointed friends or family members without considering their qualifications, it is crucial to revisit those decisions. To avoid a situation where directors are unable to assume the full scope of their duties, you should select individuals who are not only skilled and experienced but also honest and committed. Appointing qualified professionals, rather than relying solely on personal relationships, ensures that your company is properly guided towards success.
How to Choose the Right Directors
Selecting the right directors can be the difference between a company’s success and failure and may pose a challenge for companies. Here are some tips for building a board that drives growth:
- Diverse Expertise and Experience: Look for directors who bring relevant industry-specific knowledge, as well as complementary skills in areas like finance, law, and marketing. Diversity has proven to be a driving factor for company success. A quick review of successful companies in Nigeria will reveal that their boards are diverse, not only in skills and experience, but also in gender.
- Alignment with Company Vision: Ensure your directors share your company’s long-term goals and vision, ensuring alignment in decision-making.
- Ethical Standards: Directors should have a reputation for integrity, as unethical behaviour can irreparably harm the company’s brand.
- Commitment: Serving as a director requires dedication. Choose individuals willing to invest time and effort into their role, and whose business does not compete with the business of the company.
- Independent Thinkers: A board should include independent directors who can offer objective and constructive feedback, and challenge board decisions productively.
- Regulatory Knowledge: Directors must be familiar with existing regulatory framework or have trusted agents or partners who are familiar with these frameworks, especially CAMA, to ensure compliance with legal obligations.
In essence, directors play a pivotal role in the success or failure of a company. The composition of the board, the skills of its members, and the strategic direction they provide all significantly impact the company’s growth. For SMEs, choosing directors based on trust rather than skill can lead to governance challenges and expose the company to unnecessary risks. It is essential to build a board that not only shares your company’s vision but also has the expertise and commitment to drive it forward.
At Syntax Legal Practitioners, we specialise in providing tailored solutions for businesses of all sizes and sectors, including regulatory advice, statutory compliance, and corporate governance support to help your company avoid legal pitfalls. Our team is equipped with extensive industry-specific legal knowledge and experience to guide you in selecting qualified directors.
Whether you need support in restructuring your board, understanding directorial duties, or ensuring regulatory compliance, we are committed to helping you thrive.
Schedule your session today and take the first step towards building a board that drives sustainable growth.
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