Do directors owe fiduciary duties to shareholders?
The current immensely distasteful stewing rhubarb between BBS’ board and its top executives and the recent poignantly comic but fiery bickering between LLR’s board and its former CEO cannot be cavalierly dismissed as acts of isolated and inconsequential corporate ignominy. Given the alarming ingrained pattern of boardroom feuds in this country, the BBS and LLR scandals are profoundly illustrative of the inherent and astounding fragility of corporate governance in organisations held to ransom by rough-edged directors.
To the boards’ dismay, the executives refused to twitch and trill to the self-glorifying trappings of the manipulative mystique and mythic power of their ‘masters’. Like Renaissance men would do, despite their underrated war chest, the executives handled the tests of resolve with a touch of intellectual rigour, unsophisticated but lustrous up-tempo elegance, epic grit and unprecedented gumption.
Nothing is more frustrating than dealing with a board that is in an ever-critical trenchant mood. Often described by management with a string of indelicate asterisks. Feuds between boards and executives often come at a huge cost. Whose cost? Hold your horses! Not shareholders’ cost. But the company’s cost. Simply because from a legal perspective, the company is a legal person. Not owned by shareholders. Shareholders do not have the power to directly hold directors accountable for their acts of commission, omission or gross negligence.
When corporate Godzillas masquerading as directors mess up, the need for corporate hygiene would force them to hold frequent meetings to mop away their unsanitary dross. For each meeting convened to clear the very mess they created, directors will unashamedly walk away with board fees. Smart shareholders would be irked by this and would be tempted to sue the directors. Hence the question, do directors owe fiduciary duties to shareholders?
Economists would respond in the affirmative. Without batting an eyelid, most levelheaded judges of courts of law would say no. This would even apply to a situation where a director, with a sloppy and perhaps louche work ethic, commits corporate heresy by fecklessly appending a signature to a document that legally binds the company to grant an undeserved astronomical bonus to the executive team. Not for hitting performance targets. Not for generating value. Simply for counting up as they jovially behold turnover of directors. Could it be true that a powerful stroke of serendipity often lands some clueless individuals in positions of directorship?
The two fiduciary duties of directors which normally excite shareholders are the duty of loyalty and duty of care. The former duty bars directors from engaging in self-serving activities detrimental to the organisation’s interests. The latter binds directors to make reasonably prudent business decisions. One would assume that where it can be proved beyond reasonable doubt that driven by ulterior motives or stupefying negligence, directors breached their fiduciary duties, or willfully acted in bad faith, shareholders can sue them as individuals or as a collective. Not quite! This holds even in countries with statutes that prescribe that directors cannot ward off fiduciary duties through favourable clauses in board charters or seemingly watertight contracts of indemnity.
Regarding the LLR saga, inquisitive shareholders can’t help but wonder; if the board had publicly excoriated the former CEO, dismissing him as a fraudster, voluntarily reporting him to the police, and gleefully hauling him before a disciplinary committee, what on earth brokered the declaration of a truce between the wrangling parties? At what and whose cost? Is this unanticipated ‘detente’ symbolic of an uncanny admission of wrongdoing by the board? Were shareholders not given the impression that the directors had resolved to squeeze the former CEO’s treacherous heart till it lost its last droplet of blood?
Directors are not at liberty to reverse engineer facts to achieve an unchaste motive. If it’s true that the new chairperson said the seemingly hefty out of court settlement “avoids the expense burden and uncertainty of litigation,” could that be an acutely insouciant, uninspired and euphemistic way of acknowledging the board’s culpability? Where does the scepticism of winning the case stem from? What, if any route, can be pursued to hold the culprits accountable?
Imagine the number of board meetings held by the BBS board, solely for clinging to directorship beyond their legally sanctioned tenure. And the confusing Oxbridge style missives and counter-missives, scattergun strikes and counter-strikes as well as preemptive strikes! How much money was spent onboard fees, procurement of legal opinions and lodging of cases before the courts? Who bears the brunt of the loss of income? Is the misfiring of the board in an attempt to fire the CEO and the board secretary predicated on the pair’s failure to deliver in line with their performance contracts or motivated by some unforgivable breach of contractual obligations? Or is the pair vilified for blocking directors’ access to a bottomless treasure-house of board fees for another board term? Is this just another crass example of brinkmanship that would result in one of the parties tumbling down a winding bumpy corporate corniche? Who will smile away with the je ne regrette rien moment?
The laws of most sovereign states don’t hold directors ‘accountable’ to shareholders. Directors are accountable to a company. A high-profile case that was considered in a South African court drives this point home; the Steinhoff case. The applicant, a pensioner and shareholder named Dorethea de Bruyn was confident of a favourable verdict after suffering a whopping 62% diminution in the value of her shares. She sued Steinhoff directors along with the company’s auditors. Was it sufficient to prove that directors had acted in bad faith and had failed to apply “the requisite degree of care, skill and diligence?” No.
While the court acknowledged the reflective loss suffered by the aggrieved shareholder, it was clear that such loss was the company’s loss. It was the company, not the shareholders, that could sue for loss. Judge David Unterhalter ruled, “The diminution in the value of shares caused by the impact of the directors’ conduct…is simply one of many risks assumed by investors when they acquire risk assets in a market…The application is dismissed.” There is good reason for the proverbial expression; the law is an ass, simply referring to the donkey-like stubborn and uncompromising disposition of the law.
Directors owe fiduciary duties to the company, not shareholders. Don’t ever be shocked when, despite unambiguous actions or inactions of gross negligence, rogue directors get off the hook with a limp slap on the wrist, pressured to resign by fellow directors or their employers. If some of the directors of LLR and BBS have gone rogue, the remaining directors and the executive management can take the initiative to sue the culprits for damages. If they don’t, astute shareholders can encourage them to consider that.