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The Primary Responsibility of the Board: Company or Shareholders


David Singh (profile here) and Dr Shffi Mohamad (here) say that the role of the board of directors in corporations is related to supervision and planning, in particular, governance, strategic direction, and accountability. But it's more complicated than it seems.

In practice, this is operationalised by mapping out corporate strategies and policies, supervising executive actions and rendering accountability to shareholders and other stakeholders in accordance with the corporation’s goals and objectives.

In respect of the latter, it is for the board to judge, on a case-by-case basis, which stakeholders it considers as ‘relevant’ and which of their interest is appropriate to meet, considering the law, relevant regulations, and commercial considerations.

The fact is clear that shareholders appoint the board as their representatives to protect their interests and. in spite of this, the board’s primary responsibility is not to the shareholders but, rather, it is to the company.

Malaysian corporate law is noticeably clear about this. Section 213 (1) of the Companies Act 2016 states that a director shall at all times exercise his powers in good faith in the best interests of the company. This view also fits in well with the corporate finance perspective as financial capital in a company is provided by both the shareholders and debt holders. The company has an obligation to deliver reasonable returns to all capital providers and not merely the shareholders.

Of course, shareholders have the right to remove directors and appoint new ones; however, they cannot override the powers of management appropriated to the directors by the company’s constitution, nor can shareholders dictate what is in the company’s best interest by passing an ordinary resolution.

The Malaysian Code of Corporate Governance 2021 also makes it plain that board decisions are to be made by considering diverse perspectives and insights in the company’s best interest. There are many stakeholders in a corporation, including debt holders, creditors, government, employees, suppliers, and customers. This makes it essential for directors to take actions in the best interest of the company instead of any single stakeholder.

Some may claim this does not make any business sense and that the interest of the shareholders is paramount, but clearly, shareholders do not have a claim to the company’s entire assets. They have only a residual claim and their claims payoff resembles that of owning a call option.

It is the role of the board to steer the company into a successful business enterprise. The biggest recipients of the financial reward for this success are the shareholders. Shareholders enjoy the benefits of the board’s sound business judgement skills and the proper governance of the business.

Nevertheless, in practice, the apparent demarcation that exists between boards and shareholders is frequently blurred by the presence of shareholder-directors. This is evident in both private and public companies. In the case of listed companies the minority shareholders’ interest is addressed by having onboard outside directors in the form of independent directors. This often gives rise to the view that the primary objective of boards is to protect shareholders’ interests.

So far, our discussion above has been relevant to a solvent company. What is the case with an insolvent company? In such a case, the trite law is that the creditors’ interest becomes the board’s primary or overriding responsibility. The board of insolvent companies is obliged not to prejudice the creditor’s interest or increase the company’s debt in the course of conducting its business. To do so may expose directors to the risk of wrongful trading and can subject the board to unlimited personal liability.

The board has many other fiduciary duties, such as the reasonable exercise of care, skill, and diligence in discharging their duties, including making sound business judgement. However, the discussion here today in this article is limited to the intention of providing a broad general overview of the board’s primary responsibility.

Whilst board appointments are often regarded as the climax to an individual’s ascent up the corporate ladder, it can also be a double-edged sword if the risks associated with such appointments are not managed diligently.

In short, the risk with the appointment should be hedged and the residual risk weighted accordingly before accepting appointments.

The authors write in their personal capacities.

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