Appointment of directors: a critical step towards survival and growth of companies

The position of directors as the first and residual employees of companies with responsibility for the day-to-day management demands careful and deliberate consideration in their appointments – so as to not only meet the legal requirements but also provide the requisite managerial pool for companies.

The provision of funds either as equity or debt is no longer the only major requisite driver for a company’s survival and growth. Rightfully, leadership manifested by the competencies of directors has become the catalyst in facilitating growth. Therefore, in any appointment or decision-making about directors – either as first directors or replacements, the considerations cannot be limited only to meeting the minimum requirements of law.

The general legal threshold set out by the Companies Act, 2019 (Act 992) on the appointment of directors is lacking in substance of the kind of leadership required to drive companies’ survival and growth agenda – as the complexities of managing businesses today call for the development and implementation of additional qualification benchmarks by companies in ensuring the right leaders (directors) are appointed.

In this article, I shall evaluate the general legal qualification requirements for the appointment of directors and make a case for the institutionalisation of a robust leadership and professional checklist as a necessary and complementary requirement in appointing directors.

Who are directors of a company?

Generally, the Companies Act, 2019 (Act 992) defines “directors” as “those persons, by whatever name called, who are appointed to direct and administer the business of the company” – however the Act provides for other circumstances where persons could be clothed with directorship without duly being appointed.

To perform the functions of directing and administering the business of a company, the Companies Act has assigned directors acting either as a team or individually certain duties, prescribed mode for the exercise of their powers and imposed restrictions on the exercise of their powers as well – and with the opportunity to use the registered constitution of a company to enhance same.

The essence of the provision of detailed matters relating to directors by the Companies Act signifies the practice importance of directors as the “brains” of companies – as companies rise and fall on the acts and competencies of their directors (the day-to-day managers).

Nonetheless, the Companies Act has not provided any managerial competence checklist to be considered in the appointment of directors except for some other minimum qualification requirements.

In addition to the requirements of not being an infant, a person adjudged to be of unsound mind, a body corporate, a person prohibited under Act 992 or an undischarged bankrupt (unless granted leave by the court), any person who has not within the preceding five years been charged with or convicted of a criminal offence involving fraud or dishonesty, promotion or incorporation or management of a company or declared insolvent can be appointed as a director of a company.

The general lack of specification on managerial competencies has resulted in many “unqualified” appointments of persons with no skill or expertise to act as brains of companies.

Examples of “square pegs in round holes” abound in the directorship positions of many companies – with many completely unqualified to discharge their minimum duties and obligations as directors due to the lack of managerial competencies. The legal requirement to appoint and maintain a minimum of two (2) directors of companies should not be met without a careful consideration of the proven related skills, competencies, leadership traits among others of persons to be appointed as directors.

Leveraging the appointment of directors for survival and growth

In recent years, the business landscape has significantly changed due to advances in science and technology, changing consumer behaviour, enhanced business regulations, regional business promotion efforts, global responses to emerging issues of environment, social and governance (ESG), pandemics among others.

These developments demand new leadership and change-makers that will help companies respond timeously through the design, deployment and review of resilience systems for their operational activities.

Essentially, the effective utilisation of the appointment opportunity of directors can trigger the creation of a pool of expertise – persons with varied professional backgrounds to help companies develop corporate strategies, create a corporate culture that embodies professionalism, ethical standards, integrity and compliance.

The experiences, skills, competencies and values of persons appointed as directors can have greater influence on the corporate governance practice, provide human resources to respond to emerging threats like cybersecurity, novel and disruptive technologies – innovation, limit potential liabilities from non-compliance with regulations or flowing from acts of directors among others.

Persons with value systems that abhor corruption and its allied practices, encourage teamwork, promote accountability and transparency are the ones companies must consider in addition to the minimum legal qualification threshold in the appointment of directors.

For these and many benefits, every director appointment decision must be influenced by the consideration of defined expertise, leadership qualities, people management skills etc.

How to institutionalise the additional qualification requirements

The starting point is to undertake diagnosis of companies to understand the human resource requirements at their board levels. The outcome will help develop a comprehensive qualification criterion for the appointment of directors.

To institutionalise these criteria, companies must take the step to utilise the permission of the Companies Act to include these criteria in their registered constitution – and where no constitution is registered, register one with such provisions.

Subsequently, fidelity to the strict observation of these criteria in appointing directors is critical for deriving the benefits of appointing competent persons as directors. To derive the maximum benefits, the appointment of competent persons as directors should also not just be an end in itself but seen as a means to managing performance with clear targets and reward schemes.

Conclusion

The benefits of appointing persons with the right managerial competencies in addition to meeting the minimum requirements of law is of an immense contribution to the survival and growth of companies. Therefore, the exercise of the power to appoint directors of companies cannot continue to be done casually.

To leverage the benefits, an objective criterion must be developed and institutionalised to promote strict compliance and drive the long-term sustainability of companies.

>>> the writer is a lawyer and reachable at [email protected]

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