Thursday, October 1, 2020

The Debswana Board: learning how to say “fiduciary duties”

This article is not the result of spontaneous communicativeness owing to my curious nature. I have had a good deal of thinking about this matter that came to the fore in a piece I wrote previously in the Sunday Standard in which I cautioned that the late Mr Louis Nchindo should not be convicted by the court of public opinion.

It had been my wish that others, whom, by virtue of their station or the well-established reputation of their veracity, gave their opinion a better chance of being given serious thought, or would not amount to exclusion from some sphere of usefulness peculiarly suitable to their capacities, would build on my comments and write.

But this reason has now no further weight since and no one has written. News media attention has, recently, focused on the criminal case, with front page attention given to the intention, supposedly, of the Director of Public Prosecutions to withdraw charges.

Although this assumption is based wholly on ignorance, it reflects some of the policy dilemmas with which political leaders must grapple. This is because Debswana is partly owned by the government. Therefore, questions arise as to how a company is directed and controlled, that is, corporate governance. Although corporate governance is a multi-faceted concept, it can be understood as a set of policies, rules and institutions affecting the way an organization is directed, administered or controlled, and invariably involves relationships among the (principal) players involved such as directors, management and shareholders. Governance applies to all organizations, not least Government, town and district councils, schools, sporting bodies, etc.

For example, President Khama endorsed the “social contract” between society and his government, implying that the country would be run on principles of democracy, accountability, responsibility and transparency. Why is corporate governance important to Botswana?

Research shows that governance is at the heart of investment decisions, and that companies with good governance produce more sustainable and better long term results than companies that do not have good governance. So, good governance makes good business sense.

Therefore, the value of governance lies in its contribution to both business prosperity and political accountability. As has been said by others, if a country does not have a reputation for strong governance, money will flow elsewhere.

Our assets are a stable political system, sound macro-economic policy, modern infrastructure, world class banking system, etc. Unfortunately, this reality is contaminated by the perception of poor governance in some leading state owned enterprises or “parastatals”. It is the responsibility of a company’s board of directors to ensure that the business is run properly. The directors occupy a trust relation as between themselves and the company, and are burdened and restricted by fiduciary obligations.

Directors or board members are often referred to as “trustees”. It must be noted that calling directors as trustees has enormous legal implications. First, all directors act as agents of the company and in that representative function they have obligations which are fiduciary in nature. Second, directors control the property of the company.
However, they neither actually have title (as do trustees); nor do they own the property, invested in the company itself, a company being recognized by our legal system as having separate corporate personality, and enjoying all the powers of a natural person, including the capacity to own property. For example, Debswana formed a company called Tourism Development Consortium, in 2001.

Subsequently, TDC acquired land (including Lot 55720) from the then Ministry of Local Government, Lands and Housing. Although a company has all these legal powers of a natural person, nonetheless, it is incapacitated. To understand this, imagine that a person is involved in a road accident and suffers extensive brain damage so that he or she is mentally incapacitated on account of the injury.

An incompetent person in our example would need a legal guardian (appointed by the courts) who is responsible for the custody of his or her property.
Accordingly, directors are able to control the property of the company and for that reason they are responsible for safeguarding it from wrongdoing.
There is no doubt that directors are fiduciaries, even when they are not trustees in the strict sense.
The major difference between directors and trustees in a strict sense is that trustees generally have a very narrow discretion within which to operate. They are required to avoid risks and to conserve the trust’s property, whereas directors have a wide discretion and their duty is not to avoid risks but to take risks if they think it is worth it.

But company directors are trustees in the important sense that they have control of corporate property. The difficulty is that it is not always easy to decide what corporate property actually is. It is usually so when property belonging to the company is misappropriated by a director that the courts start using the language of the trust and say that a director is liable as a trustee. To whom is the director a fiduciary? It is not disputed that directors owe fiduciary duties to their company. The law shows that the director’s liability to the company does not depend on the company showing any loss or damage.

The fiduciary duties are now supplemented by a host of statutory provisions under the Companies Act 2003. These include the duty to act in good faith in the interests of the company, to act for proper purposes, not to put themselves in a position of conflict, and to declare an interest. What does the phraseology “the interests of the company” mean? One of the most common areas in practice where this issue comes about is in the context of groups of companies.

The term “group” is understood as referring to two or more companies “with common or interlocking shareholders, allied to unified control or capacity to control.” Generally speaking, it is wise when advising a director of a group of companies to ensure that the directors of each company in that group act in the interest of one company. TDC was formed by Debswana. It has been alleged on behalf of the DPP that land was allocated to TDC “in 2002, under direct grant by the Minister’; that this was “to assist the Debswana Tourism Development Project which was considered to be of major national importance”; further, that Government understood TDC to be a subsidiary of Debswana, and that the investment in Tourism Development was to be made by Debswana.”

It would appear that the latter proposal was sanctioned, in principle, by the Debswana board on 16.4.02 and (apparently) approved on 31.5.02. It should be noted that at this time the government’s goal was to diversify the economy by reducing dependence on diamonds. Significantly, it has been alleged on behalf the DPP that internal changes in TDC took place in terms of which, “on the 19th February 2002, the inaugural meeting of subscribers resolved that the 1st and the 3rd Defendants should be appointed Directors of Tourism Development Consortium (Pty) Ltd, … [and] to transfer the shares issued to [Morupisi] and Bonny Thebenyane to the 1st and 3rd Respondents, respectively.” That, in plain English, means that TDC had ceased to be a Debswana subsidiary as of 19.2.02.

I have already said that it is wise when advising a director of a group of companies to ensure that the directors of each company in that group act in the interest of one company.

I should add that in practice it will often be in the interest of one company in the group to do something which will also be of benefit to another company in the group or the group as a whole. It is usually very difficult to challenge the decision of a director in such circumstances providing the directors ask themselves the right questions.
The conundrum is whether it has ever occurred to the Debswana directors to ask themselves the right questions and, particularly, since as directors they are able to control Debswana’s property, whether, for that reason, they are responsible for safeguarding it from any wrongdoing.

Finally, attention should be drawn to the new law which sets out the basic duties required of a director. The underlying philosophy is to provide an appropriate balance between the need not to discourage enterprise and initiative on the director’ part (to take risks with corporate property if they think it is worth it), and provide protection against misuse by directors of their powers for personal advantage and protection against indolence or recklessness in a director’s oversight of the company’s affairs.

This is reinforced by requiring a company’s board to keep a register of interests in which all interests disclosed by directors to the board are to be recorded and are available for inspection by any director or shareholder. The statutory duties apply mainly to directors although they may also apply sometimes to the company’s senior officers.

Both directors and senior management are to exercise their powers honestly in good faith in the best interest of the company and, in doing so, to exercise a degree of care, diligence and skill. Has the Debswana board failed to discharge their obligations? What are the consequences of their dereliction from duty?

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