Wednesday, November 30, 2022

Reflections on PEEPA fiasco: revisiting directors’ Duties and Liability

The duties of directors and government feature prominently in company law. These duties go along with the directors’ liability and breaches of such duties.

This article aims to highlight some possible reforms to the current law governing company directorship, duties and liabilities, reflecting on the current company law reform process in Britain as a guide to possible reforms. My reasoning behind falling on the British template is that Botswana, among several other African states, is obviously historical. I have no intention to give a lecture on directors duties and those of government but it is my intention to make a brief mention that such duties demand a fair level of care and skill for both parties. Basically, directors remain highly indebted for such duties and liabilities to the respective company throughout their term of office. In other words, the primary role of such duties is to advance and protect the interests of the respective company at all costs. In that respect, it is my well considered assumption that the Serwalo Tumelo chaired PEEPA board had prudent reasons for disengaging Joshua Galeforolwe as the Chief Executive of the strategic privatisation agency. The PEEPA board, as Galeforolwe’s immediate superior, remains the most informed decision-maker in the fate of the Chief Executive. It remains a matter of great interest to the corporate world to examine the mandate of the Tumelo led board and the source that the Vice President and Cabinet derived from, the supposedly informed decision to overturn that of a legitimate board. Common sense dictates that the Tumelo board was performance driven and if the incumbent Chief Executive did not measure-up in terms of expected institutional deliverables, it is the board that wields the prerogative to manage him out in line with the laws of the land towards the objectives of Vision 2016. In as much as the Tumelo board would have been required to appraise the Cabinet through the relevant minister, on developments at PEEPA and recommend the most profitable course of action, it remains highly unlikely that its decision and recommendations respectively, would be overturned. It would have been gross incompetence for the board not to act on counter-productivity warranting summary dissolution following appraisals by either the responsible minister or an appointed competent commission against the laid down expectations as a performance yard-stick. The corporate world does not stop wondering as to whether the PEEPA board is really meant to be functional or it is meant for window-dressing purposes only going by the Cabinet’s bullish attitude against it. The law on directors’ duties is premised on case law. Through the determination of disputes the courts have developed a set of rules governing the duties owed to the company by the respective directorate. There is no specific statutory statement of duties save for minor references in the Companies Act. Falling on the law maxim that ignorance of the law is no defence, there is an assumption that everyone knows or should know the duties of directors and the laws that govern that arena.

Consequently, those who take up directorships are assumed to know what their duties are and all the rules that relate to liability for breach. Given that a plethora of these duties are case law premised, this assumption appears to be baseless when one considers that very few people have access to case law other than those who have received some basic legal exposure. However, this does not just affect directors as it also extends to shareholders who are also assumed to know the duties that directors owe to the company and the avenues available to them to police the duties. The common law also offers the avenue of the derivative action by which shareholders can take action on behalf of the respective organisation against director deviance. In this case the Cabinet has to show cause as to why it cannot respect the Tumelo board’s decision to manage Galeforolwe out of the privatisation agency by proving board deviance through the respective minister or a competent commission of inquiry. Without such solid reasoning the cabinet action tends to assume a more of a jobs for pals complexion as it, inevitably, insulates favoured poor performers and castrates the supervisory authority {the board} out of action. The cabinet decision to impose Galeforolwe on PEEPA has the effect of a highly humiliating reprimand for the Tumelo board and worse, a government “vote of no confidence” which would warrant its immediate dissolution. If the Tumelo board has been proven to be incompetent by the Cabinet, then there is no cause to allow Tumelo and all the other previous members to continue to hinge within the corridors of PEEPA. It is an undisputable fact that the affected membership now stays on as free-riding passengers most careful about falling out of favour with the Cabinet. This fully reduces the entire organisation into more of a social club than a competence driven strategic national entity. The secret of the PEEPA success does not lie in either a shrunk or bloated board but in commercial wisdom of the best order alongside progressive stakeholder intervention/s. However, not only is it very difficult to take this action, but it is also not widely known to shareholders who should be taking such action. There is no way such shareholders may get to action the enforcement of duties if they are totally ignorant of the available avenues towards such action. Given this situation, it is possible that apart from economic factors, ignorance, rather than the lack of grievances explains the limited levels of shareholder activism in corporate affairs. In order to deal with these short-comings, the reform in Britain has taken the route of ensuring that the duties of directors are disentangled from secrecy to meet the twin aims of enhancing certainty and to make the rules more widely known and accessible to directors, shareholders and other stakeholders rather than going into blind investment.

The reforms will among other features, include making a statutory statement of the duties of directors to replace the common law and equitable rules. In making such a statement, the legislature would be aiming at having duties that reflect the modern business needs and expectations of the wider pool of stakeholders. The British have termed the approach “enlightened shareholder value” which in effect might also be termed the stakeholder approach. The principle underpinning this approach is that in exercising duties, directors must promote the basic goal of ensuring the success of the company for shareholders’ benefit and in doing so must take account of the long term implications, employees’ welfare and interests, consumers and suppliers’ interests as well as the interests of the wider community. The company ought to be commercially successful but also taking responsibility for wider interests. The same approach will apply to the remedies for breach of duties in that there will be a restatement of the common law and the equitable rules to ensure certainty and wide knowledge across the market. The statutory statement of duties will leave room for the courts to interpret and develop provisions as appropriate to enable the development of the law in line with commercial dynamics. In addition, there will be provision of separate guidance in plain language to empower users to have access of the governing rules. These changes should at least bring major issues in company law closer to the target group thereby enhancing the potential for a more useful role in the governance of companies. As far as liability is concerned, the reforms are guided by two counter-balancing concerns. First there is a desire to ensure that there are strong laws to deal with cases of negligence and dishonesty on the part of directors. At the same time there is need to retain a large and diverse pool of qualified and seasoned persons with the willingness and readiness to take-up directorships. No gap fillers or the usual third world political correctness driven ceremonial directorships that have seen top-flying companies and public enterprises continue to lose altitude at a tremendous speed. With the current developments at PEEPA the board becomes unaccountable and timid. The Chief Executive, backed by Cabinet becomes an inadvisable tiger to the board, and, inevitably, subordinates it.

On the one hand, too much risk of either personal board membership liability or ceremonial board membership {window-dressing} may scare-off high-quality candidates for directorships and too much protection might also lead to moral hazard whereby unscrupulous individuals may take on uncalculated risk which can be damaging to the company. There is still further consideration with regard to whether there should be further reform to allow companies to limit directors’ liability to the company for breach of duty of care, skill and diligence.

In conclusion, it is clear that the reform process in Britain is guided by the desire to make the law more accessible to users. The more knowledge and information the stakeholders have, the better they are able to make informed decisions. It is expensive and time taxing to always resort to professional advice for simple issues that can be handled internally. Indeed, if people who need to use the law do not know the laws because they are not clearly stated, it becomes very difficult for them to carry out their responsibilities and effectively meet all stakeholder expectations. It is difficult in such a scenario, to effectively promote corporate governance. I have sought to bring to the attention of interested stakeholders these developments in a jurisdiction on which our law is designed in the hope that it may protect, grow companies and spur debate on how to enhance our own corporate landscape.

* Reginald Gola is an internationally renowned Organisation Development Consultant. He can be reached at: [email protected]


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