Learn key ethics of corporate rule

A company’s board must be very transparent in how it runs its affairs. FOTOSEARCH 

By CATHY MPUTHIA

The law provides that a company must have at least two directors in its board. In most simple firms there are two directors and a company secretary. However, in larger companies, the board is diversified with a lot of the members having technical qualifications.

It is therefore important for businesses to have proper governance mechanisms in place so as to ensure that the board or whatever other governing structure of the organisation is run well for maximum benefit of its shareholders.

The board remains liable for all decisions taken, to the shareholders, who are the actual owners of the company. In some cases the owners of the company are the same people who sit on the board. In such companies then there is little asymmetry of information between the board members and the shareholders.

In what is becoming a common trend today, shareholders are increasingly leaving the running of their company to experts. In such companies, the board needs to be very transparent in how it runs its affairs. The role of the board and mechanism of appointing its members of most companies is set out in the Articles of
 Association. When a company is being incorporated then one of the mandatory forms that accompany the registration documents is Form 203 which has the particulars of the board members as well as corporate secretary. The shareholders can appoint new directors to the company by way of shareholders resolution.

In other organisations the incorporation documents also set out the role of the governing board. For partnerships, the partnership deed sets out the role of the partners. Your lawyer will help you draft suitable deeds. In the absence of these documents in the event of a dispute the applicable law will be resorted to.

The Companies Act has more elaborate provisions concerning directors. There are some prohibited actions by directors and not all persons can serve as directors.

Directors owe the shareholders a number of duties as set out in principles of corporate governance.

The international principles of corporate governance provide that one of the principles for directors is to manage the affairs of the company in a transparent manner. This means that any information that would affect the value of the company significantly should be released to the shareholders.

Another principle of corporate governance is accountability. Directors remain accountable to their shareholders for any actions taken by them. There is increased litigation concerning management of companies, perhaps due to shareholder activism and knowledge of rights.