Critically evaluate the duties owed by directors of listed companies.
0
Table of Contents
1.0 Introduction ................................................................................................................................. 2
2.0 Literature Review ........................................................................................................................ 3
3.0 The Duties and Obligations of Directors in Uganda. ................................................................ 12
3.1 Obligation to reveal age to the company. .................................................................................. 12
3.2 Obligation to operate in the best welfare of the company......................................................... 13
3.3 Duty to exercise skill and care .................................................................................................. 14
3.4 Duty to act in good faith ........................................................................................................... 15
3.5 Obligation to guarantee conformity with the Company Regulations. ....................................... 16
3.6 Duty to adhere to the Obligations under Table F ...................................................................... 16
4.0 Conclusion. ............................................................................................................................... 18
References ....................................................................................................................................... 19
1
1.0 Introduction
Corporate governance encompasses the overall environment in which an organization
operates, characterized by a system of checks and balances that supports a healthy
equilibrium between risk and return. It refers to the processes and structures employed
to oversee and manage the company's business activities, with the primary aim of
safeguarding and enhancing shareholders' rights while also considering the interests
of other stakeholders. Additionally, corporate governance encompasses the operations
of the Directors, which includes their structure, leadership styles, processes, roles,
among others. Shareholders appoint directors, who are tasked with formulating
company fundamental policies. They act as intermediaries between the shareholders
and the managers. The Directors play vital roles in company management. This essays
examines the duties owed by Directors of publicly listed companies according to the
Companies Act, Cap. 106 of Uganda and the Companies Act 2006 of England and
other relevant legislation in Uganda, aiming to assess whether the existing legal
framework effectively addresses the corporate governance challenges faced by
Ugandan companies today. The primary assertion of this study is that the Companies
Act falls short in adequately addressing corporate governance issues.
The Board of Directors has often been viewed as a complex and opaque element
within company law, particularly in large corporations characterized by diverse and
widespread shareholding. Historically, company law has provided minimal guidance
on the operational framework of the board. From the outset, the significance of the
board in the company's functioning was acknowledged through the establishment of
various responsibilities assigned to directors acting on the company's behalf. However,
company law has not addressed critical issues regarding the specific functions that
should be allocated to the board or the optimal organizational structure necessary for
the effective fulfillment of these responsibilities1.
This study aims to explore whether the corporate governance laws in Uganda
sufficiently address the gaps related to the board's role in company management
especially listed companies. Furthermore, it aims to assess whether the compulsory
1
Japheth, Katto; Simeon, Wanyama; Miriam, E. Musaali, Corporate Governance in Uganda: An
Introduction to Concepts and principles, (Fountain Publishers, Kampala, 2014) p. 4.
2
compliance with the management code by companies would result in better
governance practices and contribute to the prosperity of businesses.
2.0 Literature Review
Shleifer and Vishny define Corporate governance to mean the methods employed to
ensure that investors receive a return on their investments. 2 It has developed as a
solution to the agency problem3, which arises from the division between ownership
and control4, with the goal of gauging the welfare of management with the particular
interests of shareholders5.
Perry along with Gregory6 contend that directors serve as the fundamental governing
body of a company, with their responsibilities being a crucial aspect of corporate law.
The authors further assert that directors hold authority over the management and
control of the company. Traditionally, in England, the duties of directors were defined
by common law. Prior to the enactment of the Companies Act 2006, these duties were
primarily governed by the equitable principle of fiduciary duty and the common law
of negligence.
Currently, however, these responsibilities are codified in Part 10 of the Companies
Act 2006. The codified duties are derived from specific common law principles and
equitable doctrines as they pertain to directors, replacing the previous rules and
principles regarding the obligations of directors to the company. Essentially, the
establishment of these duties illustrates the inherent conflict between the necessity for
directors to have the freedom to innovate and take risks to advance corporate
objectives, and the simultaneous requirement for safeguards to prevent the potential
misuse of that freedom.
Shleifer, Andrei and Vishny, Robert W. (1997), “A Survey of Corporate Governance”, The Journal of
Finance, Vol 52(2), pp. 737-783.
3
Pande, S., & Ansari, V.A. (2014). A theoretical framework for corporate governance. Indian Journal
of Corporate Governance, 7(1), 56-72 at p.58.
4
Ibid
5
Williamson,O. n 9 8 5 T Economic Institutions of Capitalism. New York, NY: Free Press
6
Bill Perry, Lynne Gregory, ‘The European Panorama: directors economic and social
responsibilities’ (2004)19 (10), J.I.B.R.R. 402-403.
2
3
Mofoluwawo 7 emphasizes that the authority and oversight of a publicly listed
company rest with its directors. The authors asserts that the law explicitly besets upon
individuals serving on the boards of companies a fiduciary duty to act in the best
interest of the company. This responsibility exists comprehensively; however, the
Companies Act of 2006, delineates specific duties that company directors owe to the
organization. Beyond the seven broad responsibilities specified in sections 171 to 177
of the Companies Act 2006, directors are also required to comply with further
obligations set forth in various other pieces of company-related legislation. Directors
are tasked with the responsibility of filing and reporting the company's fiscal report.
Directors are also necessitated to ensure compliance with applicable laws concerning
employment, trade, health, safety, and other relevant areas. Furthermore, they may be
legally obligated to disclose personal income and taxable benefits. Directors oversee
the internal governance of the enterprise and administer its affairs. Additionally, they
have responsibilities related to corporate transactions involving both the directors and
the company, as well as between the company and its shareholders, particularly in
situations of insolvency. In cases of violation of these duties, directors may face civil
liability, and if the breach constitutes a criminal offense, they may be subject to
criminal prosecution.
A listed company refers to a public company, also known as a publicly listed
company, which is owned by shareholders who possess shares that are traded on a
stock exchange8. To be classified as a listed company, an organization must meet the
criteria for its stock to be included in the formal catalog held by the Regulatory
Authority. Such companies are governed by listing rules, which require their stock to
be traded on a reputed Stock trade. A publicly listed company is mandated to fulfill
the ensuing obligations:
(i) submit frequent records as provided by the Exchange Act, and
(ii) ensure that its prevalent stock is cataloged on one or multiple National Securities
Exchanges, as defined by the Exchange Act.
7
Mofoluwawo, Oluwapelumi Mojolaoluwa, Appreciating the Duties of a Director of a Listed Company
(July 4, 2022). Available at
SSRN: https://ssrn.com/abstract=4226304 or http://dx.doi.org/10.2139/ssrn.4226304 [Accessed 11
April 2025]
8
Market Gallop, ‘Public Company: Meaning, Listing Process, Examples’ (2024). Available at:
https://marketgallop.com//public-company/. [Accessed 12 April 2025]
4
Consequently, directors of a company having their shares listed on the stock exchange
bear a set of responsibilities to the company, which will be explored in this paper. A
company is recognized as a legal entity, operating as a body corporate. Directors act
as envoys of companies and, therefore, retain specific responsibilities to the
corporation as a body corporate, rather than to shareholders individually, staff, and
external parties. Before the enactment of the Companies Act 2006, the primary
responsibilities of directors were derived from common law, which established a
fiduciary duty to the company rather than to its shareholders. However, the
Companies Act 2006 has codified these common law duties into statutory law.
Sections 171 to 177 of the Companies Act 2006 outline these duties:
-Section 171 provides for the Obligation to act within authority
- Section 172 provides for the Obligation to foster the prosperity of the company
- Section 173 provides for the Obligation to apply self sustaining decisions
- Section 174 provides for the Obligation to apply rational caution, expertise, and
assiduity
- Section 175 provides for the Obligation to evade conflicts of interest
- Section 176 provides for the Obligation not to take benefits from third parties
- Section 177 provides for the Obligation to disclose stake in planned businesses or
schemes.
Directors serve as representatives of the corporation at all times and should be
prepared to undertake every aforementioned responsibilities as circumstances require.
While the duties listed above are mandated by law, they do not encompass the entirety
of a director's obligations. In Secretary of State for BEIS v Selby, Al Sayed, Awan and
Bamford9, the judge determined such responsibilities are applicable to administrative
and non-administrative directors alike. The aforementioned obligations are primarily
derived from common law and principles of equity, as stipulated under section 170 of
the Companies Act 2006:
(3) These broad obligations are founded on specific common law rules and principles
of equity relevant to directors, replacing those rules and principles concerning the
obligations a director owes to the company.
9
Secretary of State for BEIS v Selby, Al Sayed, Awan and Bamford [2021] EWHC 3261 (Ch).
5
(4) The general duties are to be interpreted and enforced in a manner consistent with
common law rules or equitable principles, taking into account the relevant common
law rules and equitable principles when interpreting and applying the general duties.
(5) The general duties also extend to shadow directors, where applicable, as improved
by section 98 of the Small Business, Enterprise and Employment Act 2015.
Sumaira and Mohi-ud-Din Sangmi10 assert that from a legal perspective, a company is
regarded as an artificial entity that lacks physical existence, body, or soul.
Consequently, a company cannot act independently; a company solely operates
through its directors. Company directors form a governing faction entrusted with the
responsibility of overseeing the company's overall matters. Directors play a vital role
in corporate governance. The authors argue that directors are appointed by the
company's shareholders, who establish the overarching policies for the organization.
The corporate board supports management by overseeing administrative leadership
and making decisive conclusions. Directors are expected to control the company on
behalf of the shareholders, and company management entails balancing control
dynamics through which the company is operated, overseen, controlled, and held
accountable. The primary focus of this paper is to examine the duties directors owe in
publicly listed companies.
Fama and Jensen11 assert that the board of directors represents the "pinnacle of the
firm’s decision control system". The board is endowed with established roles and
functions, 12 and its effectiveness in enhancing the firm's value and influencing
outcomes is contingent upon how well it executes these responsibilities.13 Researchers
widely acknowledge several key roles of the board, including: (1) the oversight
function; (2) the decisive function; (3) the utility or capability provision function; and
(4) the advisory/counseling function.14
Sumaira Jan and Sangmi Mohiuddin “The Role of Board of Directors in Corporate
Governance”,(2016) Imperial Journal of Interdisciplinary Research (IJIR), Vol. 2(5), p. 714.
11
Fama, E. F and Jensen, M. C. (1983) “Separation of Ownership and Control”, Journal of Law and
Economics, 26 (2) 301-325
12
Johnson, J.L., Daily, C.M. and Ellstrand, A.E., “Boards of directors: A review and research agenda”,
(1996) Journal of Management, Vol. 22, pp. 409-438.
13
Murphy, S.A. and McIntyre, M.L., “Board of director performance: a group dynamics perspectives”,
(2007) Corporate Governance: An International Review, Vol. 7, pp. 209-224.
14
Bonn, I. and Pettigrew, A., “Towards a dynamic theory of boards: An organizational life cycle
approach”, (2009) Journal of Management & Organization, Vol. 15, pp. 2-16.
10
6
Numerous concepts of company management aim at elucidating the various roles of
corporate directors.15 A singular theory cannot fully encapsulate the complexities of
effective corporate governance; therefore, a combination of theories is necessary for a
comprehensive understanding.
Berle & Means16 illustrated the agency question with the ensuing correlations:
Usually it is stated that a horse proprietor bears responsibility; if the horse
survives, they must provide for it, and if it dies, they must bury it. In contrast, no such
accountability exists for a stockholder. The stockholder is largely powerless to
influence the underlying asset. The intrinsic values associated with ownership have
become detached, leading to a transfer of responsibility and substance that were once
inherent to ownership to a distinct group that now holds control.
Agency theory adopts a rather cynical perspective on human behavior, positing that
managers are likely to act in their own interests at the expense of the principals or
owners unless they are subjected to constant oversight.17 It characterizes an agent's
conduct as opportunistic and self-serving, driven by the desire to fulfill their own
interests.18
Agency theory aims to reconcile the interests of owners and managers. 19 According to
this theory, the primary role of the board of directors is to oversee the company's
management to protect shareholders' interests. This oversight is believed to lead to a
reduction in agency costs and an enhancement in the firm's performance.20 Agency
theory anticipates a dynamic and effective board of directors capable of fulfilling its
responsibilities. This theory aligns with Uganda's legal framework, which promotes
the separation of powers.
In contrast, stewardship theory recognizes a trust-based relationship between
shareholders and management, which helps to lower the costs associated with
15
P. M, Madhani, Diverse Roles of Corporate Board: Review of Various Corporate Governance
Theories, (2017) The IUP Journal of Corporate Governance, Vol. 16, No. 2, pp. 7-28.
16
Adolf, Berle, Augustus and Gardiner, C. Means, The Modern Corporation and Private Property,
(Brunswick, NJ. Transaction Publishers, 1932)
17
Donaldson, T. and Preston, L.E., “The stakeholder theory of the corporation: Concepts, evidence, and
implications”, (1995) Academy of management Review, Vol. 20, pp.65-91.
18
Podrug, N., Filipovic, D. and Milic, S., “Critical overview of agency theory”, (2010) DAAAM
International, Vol. 21, pp. 1227-1228.
19
Fama, E.F. and Jensen, M.C., “Separation of ownership and control”, (1983) Journal of Law &
Economics, Vol. 26, pp. 301-326.
20
Drieghe, R (1986). Boards Of Directors And Corporate Governance. The Case of Greenmail
(agency Theory, Corporate Control) (Order No. 8610520)
7
monitoring and controlling managerial behavior.21 This theory posits that managers
are fundamentally trustworthy and act as responsible stewards of the resources
entrusted to them.22 Ioannis23 notes that stewardship theory is rarely applied in board
studies, despite being fundamentally opposed to agency theory, as it does not rely on
the separation of ownership and control but rather on the inherent behavior of
managers.
Stewardship theory endorses CEO duality, arguing that to reduce agency costs, the
roles of CEO and chairman should not be separated. This duality fosters alignment
among the board, management, and shareholders, leading to greater efficiency and
effectiveness in achieving organizational objectives. Furthermore, stewardship theory
advocates for empowering management within organizations.
Davis24 contends that share-owners contribute to company management; however, the
Companies Act delineates specific responsibilities that are assigned to the Directors,
excluding share-owners from these duties. He identifies two primary areas of
corporate governance for the board: the preparation of year long financial statements
and records, and the ongoing management of the company, particularly, interactions
with the Companies Office. Additionally, Davis emphasizes that directors are under
an obligation to formulate statements and submit records annually to the Companies
Register/recorder, which must then be presented to shareholders during a general
meeting. Nevertheless, he does not address the practical challenges the Board of
Directors may encounter while fulfilling these responsibilities, a gap that this research
aims to address concerning the Companies Act 2012.
Tarinyebya25 referencing Table A of the Companies Act, Cap. 106 of Uganda, in
particular Article 80(1) asserts that the Board of Directors is tasked with overseeing
the management of the company's business and must exercise powers not reserved for
the general meeting. In carrying out their duties, the board possesses the authority to
21
Abdullah, H. and Valentine, B., “Fundamental and ethics theories of corporate governance”, (2009)
Middle Eastern Finance and Economics, Vol. 4, pp. 88-96.
22
Donaldson, L. and Davis, J.H., “Boards and company performance‐research challenges the
conventional wisdom”, (1994) Corporate Governance: An International Review, Vol. 2, pp.151-160.
23
Ioannis P. Gkliatis, ‘An Examination of the Board of Director’s and the Impact of the External
Environment and Board Characteristics’ (DPhil thesis, Brunel University 2014)
24
Davis, G.A, Gower and Davies: Principles of Modern Company Law, 9th Edition, (Oxford: Oxford
University Press, 2012)
25
Tarinyebya, W, A Practical Guide to Company Law (Fountain Publishers, Kampala, 2015)
8
borrow, mortgage, or pledge organisation assets. However, legal disputes have arisen
regarding their power to authorize legal counsel to initiate lawsuits in the company
stead. Tarinyebya does not discuss the potential challenges the board may face in
executing these responsibilities, nor does the Companies Act 2012 provide guidance
on this matter, which this research seeks to address.
Bagrial26 states that Directors possess both statutory and broad responsibilities, that
encompasses the obligation to review the catalogue/prospectus circulated by the
company, ensure funds received from share candidates are properly stored, record the
addition of new shares in the company, and uphold duties of fair dealing, caution and
concern, competence, and persistence. Additionally, directors are expected to attend
board meetings; however, they are not required to be present at each gathering and
will not be regarded as accountable for negligence solely due to their absence. The
principle of delegatus non-protest delegares indicates that directors cannot delegate
their responsibilities. Nevertheless, considering the demands of the company and the
provisions of the articles of association, particular obligations and responsibilities
may be appropriately assigned to different management. Bagrial, nonetheless, does
not provide further details on how the board can address potential challenges in
fulfilling these duties or the practical strategies to manage them, that this paper aims
to explore.
Nerima27 posits that company management is shared among two bodies: the directors
and members. The latter are the company's owners, while the former are tasked with
its management and oversight. He defines corporate governance as the framework
through which company is managed and overseen. Nevertheless, he does not address
potential questions that may arise within company management, such as oversight
challenges, transparency concerns, conflicts of interest, and ethical violations that
may encountered by directors while exercising their duties, which this research seeks
to investigate.
26
Ashok.K, Bagrial, Company Law Twelfth Edition, (Vikas Publishing House Pvt Ltd, New Delhi,
2010)
27
Nelson, Nerima, A Practical Guide to Company Law and Practice in Uganda (Uncle Books
Publishers, Kampala, 2016).
9
Davis28 contends that regarding the distribution of roles among share-owners and the
directors, the principal-agent dilemma between managers and shareholders can be
effectively addressed by transferring decision-making authority from the agent (the
manager) to the principal (the shareholders). However, while this approach could
resolve principal-agent issues swiftly, the associated costs in large corporations are
typically prohibitively high. For practical reasons, the directors of large corporations
function under a comprehensive mandate of authority across all systems, with the
directors assuming the majority of responsibilities in the distribution of
responsibilities among the members' meeting and the directors themselves. However,
the potential challenges that may arise from this division of responsibilities between
the board and shareholders, as well as strategies to mitigate these challenges, are
aspects that this research aims to address.
Tumuheki 29 posits that the company management code established under the
Companies Act, Cap. 106 of Uganda is applicable solely to public companies, leaving
other types of companies with the discretion to either ratify the code or refrain from
doing so. This situation creates a significant dilemma concerning the implementation
of the Act's stipulations, which are not compulsory. Consequently, it can be argued
that both public and private companies must implement corporate governance
principles to ensure their continued viability. In the terrain of adherence to the
Companies Act, directors serves as the highest decision-making body, nominated by
the members of the company. Directors are tasked with exploring strategies that
promote the competitiveness and sustainability of the organization in the long term.
To achieve this, they focus on business strategies that meet members’ prospects,
address company disturbances, and adapt to consumer wants in a challenging market
environment.
Davis, L, “Company Law Reform in OECD Countries: A Comparative Outlook of Current Trends”
(2000). Available at: https://www.oecd.org/daf/ca/corporategovernanceprinciples/1857291.pdf.
[Accessed on 02 April, 2025]
29
Justice Tumuheki, “Towards Good Corporate Governance: An Analysis of Corporate Governance
Reforms in Uganda” (2007). Paper presented to the University of Cape Town in fulfillment for the
requirement for the degree MA.
28
10
Davis30 argues that the Board of Directors has often been viewed as a complex entity
within company law, particularly in large corporations with diverse and widespread
shareholder interests. Centralized management of the company's operations is
essential within the board. However, company law has historically provided limited
guidance on the operational aspects of this governing body. The recognition of the
board's pivotal role in company operations has led to the establishment of a broad
array of duties for directors acting on behalf of the company. Nevertheless, company
law has not addressed which specific functions should be allocated to the board or
how it should structure itself to effectively fulfill these responsibilities. This gap is
also reflected in the various statutes, regulations, and policies in Uganda.
Board structure encompasses various elements, including the composition, size,
independence, expertise, gender diversity, and frequency of meetings, all of which
influence its effectiveness. 31 Tricker 32 differentiates among directors who possess
administrative roles within the corporation and those who do not retain such power.
The structure of the board plays a critical role in its capacity to offer appropriate
guidance and curb managerial opportunism.33 While there is no universally applicable
formula for determining the ideal number of directors, Section 185 34 establishes a
minimum requirement of at least two directors for public companies and one for
private companies. Each organization has the autonomy to decide its board size;
however, this aspect is vital for corporate governance as it ensures effective oversight
of the company's management.35 It is important to note that public companies must
preserve a unitary organisation, which includes both administrative and nonadministrative directors.36 In a unitary organisation structure, executive directors are
responsible for the daily operations of the company, while non-administrative
directors, who do not engage in everyday governance, are selected for their specific
Paul, Davis and Sarah, Worthington, “Gower and Davies: Principles of Modern Company Law”, 9 th
Edition, (Sweet & Maxwell Publishers, UK, 2012).
31
C.P Abdul Gafoor, V.Mariappan, & S, Thiyagarajan, ‘Board characteristics and bank performance in
India” (2018). IIMB Management Review, 30(2), 160-167.
32
Tricker, R, International corporate governance” (Singapore: Prentice-Hall, .1994).
33
Lucas, E. K., Peter, N., G., Stephen, K., C., (2023) Board structure and the likelihood of financial
statement fraud. Does audit fee matter? Evidence from manufacturing firms in the East Africa
community Cogent Business & Management https://doi.org/10.1080/23311975.2023.2218175
34
The Companies Act, Cap. 106.
35
Said, R., Hj Zainuddin, Y. and Haron, H. , “The relationship between corporate social responsibility
disclosure and corporate governance characteristics in Malaysian public listed companies”, (2009)
Social Responsibility Journal, Vol. 5 No. 2, pp. 212-226.
36
Article 1(3) of Table F to the Companies Act, 2012.
30
11
skills and expertise to provide constructive challenges that support strategic decisionmaking.37 The law promotes a clear separation of responsibilities among the Chief
Administrative Officer and the Chairperson of the board. However, if these
responsibilities are held by a single individual, it is mandatory for the deputy
chairperson to be an independent director. Additionally, the board must include a
significant number of independent directors, and an annual rationale for the
consolidation of these roles must be provided.38
3.0 The Duties and Obligations of Directors in Uganda.
This part focuses exclusively on the duties and obligations of directors as defined
under the Companies Act, Cap. 106 of Uganda. Directors owe fiduciary duties to the
company itself.39 Shareholders are responsible for governance by appointing directors
and auditors, ensuring that a suitable governance framework is established. 40
Understanding the obligations and responsibilities that directors have towards the
company is essential for grasping the corporate governance framework in Uganda.
The company management code specified under Table F to the Companies Act, Cap.
106 of Uganda, and applies to publicly listed companies, which must ratify it upon
registration, while private companies have the option to do so.41 Without exploring
the issues raised by Section 14,42 it is assumed that all publicly listed companies (both
those established prior to the Companies Act, Cap, 106 and those registered under it)
have adopted Table F, whereas non public companies have not.
3.1 Obligation to reveal age to the company.
Any individual appointed as a director must notify the company of their age prior to
reaching eighteen years.43 Neglecting to fulfill this obligation constitutes an offense,
and upon conviction, the individual may incur a fine not exceeding ten currency
Anthony Julian , “The case for a unitary approach to governance” (2017). Available at:
https://www.civilsociety.co.uk/voices/julian-anthony-the-case-for-a-unitary-approach-togovernance.html. [Accessed on 28/03/2025]
38
Article 3 (2) (a) and ((b) of Table F of the Companies Act, Cap, 106.
39
David., J., Bakibinga ‘Analysis of some Recent Trends Affecting the Legal Powers. Duties and
functions of Company Directors’ (Ph.D. thesis University of London 1981)
40
ICAEW, “What is corporate governance?” Available at: https://www.icaew.com/technical/corporategovernance/principles/principles-articles/does-corporate-governance-matter. [Accessed on 27/03/2025]
41
S.14 (1) & (2) of The Companies Act, Cap, 106.
42
ibid
43
ibid, S.197 (1)
37
12
points for each day the non-compliance persists.44 This requirement overlooks the fact
that shareholders are responsible for appointing directors, and it is anticipated that
they will conduct due diligence before selecting a minor for a directorial role.
Furthermore, it is improbable that a minor would possess the necessary skills and
experience to qualify for a position on the board of a public listed company.
Additionally, it fails to consider that many companies in Uganda are privately owned
and family-run, where it is not uncommon for minors to serve as shareholders and
directors. The rigid enforcement of this provision creates an unreasonable situation
within non public companies.
3.2 Obligation to operate in the best welfare of the company
Managers are mandated to perform in a such a way that fosters the prosperity of the
business.45 In Re: Smith & Fawcett Ltd.46, Lord Greene stated that directors must act
"bona fide in what they consider... not what a court may consider... is in the interests
of the company and not for any collateral purpose." Clearly, directors have the
discretion to cause financial determinations in the best interests of the company
without requiring approval from shareholders or stakeholders. If members believe that
the conduct of the directors is detrimental, their only recourse is to petition the court.47
Fiduciary Duties of Directors and Conflict of interests are provided for under Section
170 to 177, of the Companies Act 2006 in the UK.
Pursuant to Section 175 of the Companies Act 2006, it is incumbent upon directors to
conduct themselves in a way that avoids conflicts between their personal interests and
those of the company. This responsibility includes circumstances related to the
improper use of the company's assets, information, or opportunities, as well as any
potential advantages the company might gain from such resources. The duty of the
director is based on two equitable principles: the non-conflict rule and the no-profit
rule, the latter being regarded as a subset of the former. Notably, the most significant
scenarios where these equitable principles apply are explicitly excluded from Section
44
Ibid, S.197(2)
Ibid, S.198(a)
46
[1942] Ch. 304 at p.306 C.A.
47
S.248(1) of The Companies Act, Cap, 106.
45
13
175 by subsection 175(3). In the case of Bray v Ford48, Lord Herschell laid down the
concept of conflict of interest, emphasizing its importance,
“It is an inflexible rule of a Court of Equity that a person in a fiduciary
position, such as the respondent’s, is not, unless otherwise expressly provided,
entitled to make a profit; he is not allowed to put himself in a position where his
interest and duty conflict.”
3.3 Duty to exercise skill and care
Directors is expected to practice a level of expertise and caution that a reasonable
person would apply when managing their own affairs. 49 The duty implies that
directors should act in alignment with the company's objectives to advance them
rather than hinder progress.The obligation for directors to apply the standard of a
reasonable person managing their business provides them with the opportunity to
formulate strategies that can enhance and expand the company.
In the United Kingdom, the obligation of care and diligence for directors is articulated
in Section 174 of the Companies Act 2006. This responsibility, which was previously
governed by common law, has been formally codified with the enactment of the
Companies Act 2006.
Section 174 stipulates that a director must demonstrate reasonable care, skill, and
diligence, reflecting the standard expected from a reasonably diligent individual who
possesses:
a) the general knowledge, skill, and experience anticipated from someone undertaking
the responsibilities associated with the director's position within the company; and
b) the specific knowledge, skill, and experience that the director individually
possesses.
a) Directors are obligated to perform their duties with adequate care and
competence50.
Nonetheless, a two-part test is established. In the case of Norman v Theodore
Goddard 51 , the court defined the expected standard of care for directors, which
encompasses:
48
Bray v Ford [1896] AC 44
ibid, 198(b)
50
Norman v Theodore Goddard [1991] BCC 14
49
14
a) an objective de minimis test that assesses what a reasonable director should do in
executing their specific responsibilities; and
b) a subjective test that evaluates whether a director, based on their unique
experience, skills, and knowledge, has failed to meet a certain standard in their
actions.
If a director has a greater level of knowledge, experience, and skill than what is
anticipated in the first part of the test, they will be assessed against the standard
outlined in the second part.
In the case of Re City Equitable Fire Insurance Co Ltd52, Romer J, highlighted that
understanding a director's duties necessitates an analysis of the nature of the
company's business. It is also essential to acknowledge how responsibilities are
distributed among directors and officials. Furthermore, he stated that in executing
these duties, a director must:
a) act with integrity, and
b) exhibit a degree of skill and diligence that mirrors the reasonable care an average
person would apply in similar situations for their own benefit. However,
c) a director is not obligated to demonstrate a higher level of skill than what could be
reasonably expected from someone with their background; therefore, they are not
liable for simple errors in judgment;
d) there is no requirement for a director to maintain continuous oversight of the
company's operations; their duties are typically performed intermittently during
scheduled board and committee meetings, and while attendance at every meeting is
not mandatory, they should attend when feasible; and
e) concerning any responsibilities that can be suitably delegated to another official
based on business needs and the articles of association, a director is entitled to trust
that official to carry out those duties honestly, as long as there are no reasons for
doubt.
3.4 Duty to act in good faith
This duty mandates directors to act honestly and fairly in and prioritize the interests
of the corporation. In fulfilling this duty, directors must treat members equitably,
51
52
Ibid, note 1.
Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
15
avert conflicts of interest, disclose any potential conflicts, refrain from deriving
personal profits at the company's expense, and reject any benefits from third parties
that could compromise their integrity. 53 It is unacceptable for a director to neglect
their duty of good faith, even if they believe their actions are advantageous to the
company.54 As directors, they are expected to prioritize the company's interests over
their personal ambitions.
3.5 Obligation to guarantee conformity with the Company Regulations.
The responsibility to see to it that the organisation adheres to the Company
Regulations and all other applicable legislations is solely on directors.55 The registrar
of a public listed company ought to be lawyer, bringing their legal expertise to assist
the board in meeting compliance obligations. While there are no specific
qualifications required for a company secretary in a private company, they too must
ensure adherence to the Act and other legal requirements.56 Compliance with the law
is essential, as various regulations impose different penalties for non-compliance,
which could hinder the company's ability to achieve its objectives.
3.6 Duty to adhere to the Obligations under Table F
The Companies Act, Cap. 10657, mandates that all boards and individual directors to
guarantee adherence to the principles set forth in the code. The Companies Act, Cap.
10658, enumerates the responsibilities of the board, which include:
(4) The Board is responsible for: (a) providing strategic direction;
(b) maintaining complete and efficient management;
(c) adhering to applicable legislations and rules;
(d) establishing degrees of relevance;
(e) delegating specific authorities to governance;
(f) reserving authority for itself when necessary;
53
ibid, 198(c) (i), (ii), (iii), (iv) and (v)
Baxt, R. (1996). Good intentions are not good enough if directors or officers breach their duties to act
in good faith and fail to avoid a conflict of duty and interest. Australian Business Law Review, 24(4),
395.
55
S.198(d) of the Companies Act, Cap. 106
56
ibid, S.190 (1) (a)
57
Article 22 of Table F to the Companies Act, Cap. 106.
58
Article 1(4) of Table F to the Companies Act, Cap. 106.
54
16
(g) having an avenue to company materials and reports;
(h) agreeing on a strategy that allows directors to seek separate qualified and skilled
advice;
(i) determining the quantity of directors necessary for effective board functioning;
(j) identifying and monitoring key risks and performance areas;
(k) recognizing and overseeing non-financial factors;
(l) documenting the facts and assumptions that support its conclusion regarding the
business's viability in the upcoming economic year, and if not viable, outlining the
steps being taken;
(m) clarifying the implications of all recommended decisions to be voted on at
members' meetings;
(n) promoting shareholder attendance at general assemblies;
(o) ensuring that the chairperson of the inspection of financial records and payments
commission, along with as many managers as possible, are present at shareholders'
meetings;
(p) providing the curriculum vitae of every manager slated for appointment;
(q) establishing a board constitution that delineates its obligations, which should be
gazetted in the year long report and at a minimum, hold the board accountable for(i) decisive planning;
(ii) observing viable operation;
(iii) assessing management performance;
(iv) formulating strategies and techniques;
(v) managing risks;
(vi) overseeing intramural administration;
(vii) implementing a communications strategy;
(viii) selecting directors;
(ix) on-boarding new managers; and
(x) evaluating managers.
(r) Striking an equilibrium between governance restraints and enterprising realisation;
(s) reviewing significant action schedules;
(t) evaluating and guiding the year long budget and financial schedules of the
company;
(u) supervise significant financial investments, procurement, and divestitures;
(v) guarantee regular and apparent processes for director selections and elections;
17
(w) uphold the virtue of the company's bookkeeping and fiscal recording networks;
and
(x) manage the processes of admission and exchanging information.
The Companies Act, Cap. 10659 provides quite an expansive range of responsibilities,
codifying the duties of directors without providing specific guidance on how to fulfill
each responsibility. This flexibility allows individual boards to develop their own
methods to ensure compliance with the code, which can be viewed as a basic checklist.
4.0 Conclusion.
In Uganda, the primary issues surrounding corporate governance involve the
responsibilities of the directors, their accountability to both shareholders and
stakeholders, and instances of financial misconduct. These factors have contributed to
the downfall of numerous organizations within the country due to inadequate
corporate management practices. Effective corporate governance is essential as it
highlights the vital role of a company's directors and the importance of adhering to
sound company management standards. The onus of a company's prosperity or failure
is placed on its directors, thereby fostering accountability. This guarantees that
persons holding positions of control and power recognize their obligations to
shareholders and society as a whole.
Uganda possesses a considerable amount of statutes, rules, and strategies aimed at
enhancing company management, as discussed in this paper. These legal frameworks
are crucial for promoting prosperity and economic growth in Uganda. Additionally,
the country has the prospect to advance potent corporate governance due to the
existing mechanisms. However, these mechanisms face several challenges that
overshadow their advantages. There is a pressing need to fortify the legal and
regulatory frameworks, with a greater focus on implementation and enforcement, to
guarantee effective auditing standards, regulated capital markets, effective directors,
and the security and safety of shareholders.
The Companies Act, Cap. 106 includes a corporate governance framework provided
for under section 14 and Table F to the Act. This framework enhances the substantive
59
Article 1(4)of Table F to the Companies Act, Cap. 106.
18
provisions regarding the structure and duties of company directors. It mandates a clear
separation of responsibilities between the chairperson of the board and the chief
administrative officer , who leads the company's management.
Additionally, the Act specifies qualifications for directors to ensure they are equipped
to manage the company's strategy, performance, conduct standards, and resources. It
includes regulations concerning director remuneration, board meetings, committee
functions, and board evaluations. The Act also addresses timelines for securities
transactions involving directors, the role of the company secretary in relation to the
board, risk management, internal audits, audit committees, sustainable performance
reporting, shareholder relations, and communication.
The Companies Act delineates the powers of Directors and members, with specific
matters reserved for shareholder decision-making as dictated by the articles of
association. In private companies, conflicts may arise between the interests of
directors and members, often due to personal interests that can compromise judgment
or conflict with the company's objectives. Moreover, the absence of a mandatory
corporate governance framework for private companies grants excessive discretion to
directors, potentially leading to mismanagement. Compounding this issue, the
Companies Act only stipulates age as a criterion for director qualifications, which
may hinder effective company management. Additionally, interference from company
members in management poses a significant challenge.
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