Directors of listed companies face unenviable obligations. They have to comply with various statutes, the Listing Manual and the common law. They have to make timely, accurate disclosures, but avoid over-disclosure which floods the market with irrelevant information. To navigate this plethora of obligations, remembering the basic rules of engagement can focus a director’s attention to what is critical, and what is not.
It’s tough to be a director of a listed company these days. When things go wrong they are always in the line of fire. Did they perpetrate or condone the wrongdoing? Or were they just wilfully blind, negligent, or sleeping on the job while collecting their fees? The buck stops at the board, and the law does not make significant distinctions between directors who are executive and non-executive, or independent and non-independent. Every director owes fiduciary duties.
These obligations are manifold. Directors face a raft of rules and regulations – the Companies Act, the Securities and Futures Act, the Listing Manual, and their general fiduciary obligations. And these are not exhaustive. It is a challenge for any director to keep up.
Directors cannot act in a manner that will harm the company. They must exercise reasonable care and skill in the conduct of the Company’s affairs. That is obvious, but it doesn’t end there. They also cannot allow their private interests to conflict with the company’s interests. As a corollary to this, there are restrictions against self-dealing, which find expression in rules which limit interested or related party transactions (IPTs or RPTs). Clearly, IPTs and RPTs are not prohibited, but there are constraints. Depending on their magnitude, they must be disclosed, and there must be consent, by the board, and sometimes by the shareholders.
Beyond the self-dealing prohibition, a director generally cannot make profits by reason of his position as a director, whether directly, or through corporate information or opportunities. Again, this is not an absolute rule. The obligation of directors to declare and disclose their interests and conflicts of interests, whether in transactions or relationships, is both general and specific. The raison d’etre of disclosure is not only prophylactic, but also to ensure accountability and transparency where a company’s business intersects with a director’s private interests.
There is more. The shareholder dynamics in listed companies differ from private companies. Directors of public companies must keep their shareholders informed, through regular and timely announcements of material information as prescribed by the listing manual. In listed companies, the stakeholders can include the market and investing public at large. This means that the obligations owed by a director of a listed company are more extensive than in a private company. Directors must ensure that information is disseminated transparently and that there is no asymmetry in the flow of such information. They must also ensure that the information announced is not misleading, or does not create a false market. They must resist the temptation to regurgitate copious but immaterial data in an announcement, simply to avoid any allegation of withholding information. Over-inclusiveness is not proper disclosure, as material information gets buried in the verbiage. But, directors must disclose fully, not in half-measures which may give the wrong impression – and avoid obfuscation by sugar coating, euphemism or “consultant waffle”.
How does one then navigate this plethora of rules and regulations, some in the fine print of legislation, and some in the ether of the common law?
It can, be distilled to a simple equation. A director must always act in the best interests of the company. Who is the company? When solvent, it is the general body of its shareholders. The “best interests of the company” is the touchstone and point of reference for any director. All the specific rules and duties are arguably sub-rules which support this fundamental obligation.
The difficulty is in the application. While we can articulate best principles, commercial reality, inevitably creates conflicts. Each situation is highly fact sensitive, and solutions are not always easy or obvious. A combination of principled and practical thinking is required. Take for example, a scenario where a director in Company A is also a director/shareholder of Company B, in a transaction where A is buying B. Clearly, disclosure is required. Also, that director should not vote as there is an obvious conflict. Should that director take part in deliberations concerning that transaction? There is no default rule suggesting a prohibition, but on balance, that director may wish to refrain in order to avoid contaminating the discussion with a partisan view. Should that director then excuse himself from the meeting, or be excluded from all information concerning that transaction? That is less clear.
Take a scenario one step removed – a similar transaction, A buying B, and a director of A has an interest in a professional services firm advising Company B; but that director is not otherwise involved in the deal. Disclosure is required at the appropriate time. That director also should not vote. Neither of these are controversial. But must the director refrain from deliberations or comment? Must that director excuse himself from any meetings or be excluded from any information on the transaction? Again, there is no conclusive rule. Once disclosure is made, there ought not in most cases be any problem with a director commenting on a transaction in compliance with his duty to act in the best interest of the Company – either by providing insight, background, or domain expertise to assist the rest of the board. This is not uncommon in some larger corporate groups where there are IPTs or RPTs. The non-independent directors often take part in discussions, share their views and expertise, and let the independent directors vote while they recuse themselves. What is important is that the board is aware of and considers the possibility of conflict, and has a clear process to deal with that conflict of interests.
Ultimately, the duties imposed on directors serve the larger objective of advancing the company’s best interests. It is often possible to find technical lapses and breaches, which have no impact whatsoever on the decision making or best interests of a company. The disclosure regime is one such instance. Sometimes disclosure of a director’s interest is not made, but the board and all involved in the decision making process are aware of that interest. In other instances, the director makes disclosure before any discussion to approve a transaction at a board meeting, and does not vote or influence the vote; but it transpires that he could have made disclosure at an earlier date. Depending on the facts, an argument could be made that those non-disclosures are strictly speaking, breaches, even though they cause the company no harm. That’s like a footballer being in an offside position but not interfering with play. No harm has been done, and to demand absolute adherence to rules for the sake of strict compliance alone values form over substance.
The converse can also happen in the realm of IPTs/RPTs. There may be full disclosure and consent to an IPT or RPT. But this does not automatically mean that the company’s best interests have been protected. Was the deal at arm’s length? Could the company do better dealing with a non-related party? There are other instances where executive directors who are controlling shareholders of listed companies concurrently have private business interests in the same commercial space as the listed company. How do they then allocate the corporate opportunities that come their way? Do they direct that corporate opportunity to the listed company, or to their own private interests? How do they decide, and should they even be making that decision? It may well be possible that all the appropriate disclosures are made, and on paper, all the required resolutions are passed and consents given. That is not a guarantee that the decision of the listed company to pass up the opportunity and let the relevant director pursue it privately, is genuinely in the best interests of the company. Here, substance may not always be protected by adherence to form.
The bottom line is that even with the best intentions, technical lapses and breaches will occur, and while we should work to minimise or eliminate them, those are not real threats to the corporate governance regime. This does not excuse carelessness. We should exercise vigilance in detecting these lapses, and put processes in place to deal with them, because this ultimately builds foundational trust and confidence in the system. More subtle is the behaviour that scrupulously dots every “i” and crosses every “t”, but in substance, puts the company at risk or deprives the company of profit or opportunity – that is a far greater systemic and existential threat. Our increased scrutiny must be go back to basics – and focus on the core issue: Does this benefit the company; does this harm the company; or is this in the company’s best interests? Form facilitates, but it is not governance.