A company, although is an artificial person, it cannot act for itself. It acts through individuals running the company. Therefore, section 211(1) of the Companies Act 2016 (“the Act”) states that “the business and affairs of the company shall be managed by, or under the direction of the Board of directors”. A director is an officer of the company. He is also an agent of the company and the company, being a principal, is bound by the acts of its agents. Thus, when exercising his powers, a director owes a fiduciary duty towards the company. Here are some of the important roles and responsibilities of a director of a company:
Duty No.1: Carry out proper purpose and act in good faith for the benefit of the company
A director must at all times exercise his powers in accordance with the Act for a proper purpose and in good faith in the best interest of the company. When exercising his duties, the director must only consider the interests of the company and nobody else’s, not even his own personal interest or the shareholders’ interest.
- When issuing new shares, the directors must exercise their power for a proper purpose i.e. to increase the company’s capital for the purpose of financing its business. The power cannot be exercised for the purpose of diluting the voting power of existing shareholders.
- Where the shareholders have followed the requisite procedure to call for a shareholders’ meeting but the directors try to block such request by refusing it.
- Where the company has committed an offence due to a decision made by a director but the board decides not to take action against that director to protect him.
Duty No.2: Avoid any conflict of interest
A director must not:
- use the property of the company;
- use any information acquired by virtue of his position as a director of the company;
- use his position as such director or officer;
- use any opportunity of the company which he became aware of, in the performance of his functions as the director or officer of the company; or
- engage in business which is in competition with the company,
to gain directly or indirectly, a benefit or profit for himself or any other person, or cause detriment to the company without the consent of the board or ratification passed in a general meeting.
A director who has an interest in a transaction with the company which may be in conflict with his fiduciary duty as a director is required to declare the fact and the extent of the conflict at a board meeting at his earliest opportunity and he should abstain from the voting process.
Duty No.3: Exercise reasonable care, skill and diligence
A director must exercise reasonable care, skill and diligence with the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities. A director should always ensure that the decisions he makes are of the highest standards and in the best interests of the company. Such duty applies whether the director is an executive director or non-executive director and it also extends to the senior management staff i.e. CEO, CFO, COO etc.
Making business judgment
When it comes to making a business judgment, a director must:
- make the decision for a proper purpose and in good faith;
- not have a material personal interest in the subject matter;
- make the decision based on information given which the director reasonably believes to be appropriate under the circumstances and that the decision is in the best interest of the company.
Reliance on information
When exercising his duty, a director may rely on information provided by:
- an officer whom the director believes to be reliable and competent;
- a professional or expert engaged by the company;
- another director; or
- a committee to the board of directors, on which the director is not a member.
However, despite relying on the information provided by others, he must still act in good faith and make independent assessment of the information provided.
Delegation of power
A director may delegate any power of the board to a committee, director, officer, employee or expert unless such delegation is prohibited by the Act, the company’s constitution, the board resolution or members’ resolution. The director may discharge his duty if the director believes that the delegatee would exercise the power in conformity with the duties imposed on the director and the delegatee is reliable and competent.
Implementing system of internal control
A director of a public company or its subsidiary is required to ensure that the company has implemented a system of internal control. Such system should provide a reasonable assurance that the company’s assets are safeguarded against loss from unauthorised use or disposal and all transactions are properly authorised or recorded to enable preparation of the company’s financial statements.
Now that you know all about the roles and responsibilities of a director, but do you know there are many types of directors? Read the article here to learn more about all the types of directors for a company in Malaysia. Do you know the responsibilities of a director and a shareholder is not the same. Learn more about the role and rights of a shareholder in this article.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.