Decision-making in a volatile environment

CORPORATE decision-making in a volatile environment has resulted in directors having to execute their duties with the threat of liability over their heads.

Uncertainty and potential litigation may pare the enthusiasm, resourcefulness and tenacity that normally drives corporate decision-making.

Zimbabwe is currently under economic distress and directors are making risky decisions daily, all in the hope of steering companies through these trying times. Such an economic environment has once again brought the laws of director’s liability and corporate governance into focus.

Directors may end up assuming personal liability for some of these decisions.

The economic environment has largely remained turbulent, characterised by significant policy reforms, high inflation and reduced aggregate demand across all economic sectors.

On the other hand, the unstable economy and policy environment has given rise to a lot of corporate maladministration, creating the need for a more robust legislative framework to tackle corporate malfeasance.

Government’s ambitious economic reform programme to promote and protect private enterprise, reduce the cost of doing business and encourage foreign direct investment has the potential for positive results, but its implementation is hamstrung by flawed governance practices across many sectors.

In such an environment, entrepreneurship, risk-taking and innovation is required at least from every director and company official.

In the wake of corporate bankruptcies and shareholder losses resulting from the economic challenges, it is likely that shareholders may be forced to turn to derivative suits in an effort to hold someone responsible for their financial losses.

Corporate directors stand in a fiduciary relationship of trust and confidence with the corporation and its shareholders.

The new Companies and Business Entities Act (Chapter 24:31), particularly Section 54 (4), introduces the “business judgement rule” (BJR) in our law.

BJR is a judicially created doctrine that protects directors from personal civil liability for the decisions they make on behalf of a corporation.

It is a standard of judicial review of corporate directors’ and or officers’ conduct.

As a herald of a developing global corporate law doctrine that seeks to protect directors from personal liability for decisions made in their capacity as a director, the BJR is a timely addition to our jurisdiction.

Directors can now enjoy immunity, so long as certain disqualifying behaviours are not established.

The rule protects officers and directors from liability where they have made decisions in good faith and using appropriate procedures, even if those decisions turn out to be poor or unwise.

Corporate officials eligible for protection under the BJR are not liable for breaching duties of care merely because they have made mistakes.

In simpler terms, the following may be the simplified requirements for protection under the rule.

A director or officer who makes a business judgment in good faith qualifies for protection under the rule if the director or company officer:

a) is not interested in the subject of his business judgment;

b) is informed with respect to the subject of the business judgment to the extent the director or officer reasonably believes to be appropriate under the circumstances; and

c) rationally believes that the business judgment is in the best interests of the company.

The challenges plaguing the Zimbabwean economy create the need to apply the BJR in a manner that balances between two somewhat competing concepts — provide immunity to corporate decision-makers and deterring corporate malfeasance.

Although this is a common challenge in most jurisdictions, the conflict is greatly amplified with the environment

Therefore, reality dictates that the legal system in Zimbabwe must apply the BJR in a manner that can mitigate these challenges.

It is recommended that in assessing the duty of care and skill that directors owe to a company, the courts should apply a strict and dominantly subjective approach. Whilst there already exists significant legal commentary in this regard, the courts should seek to capitalise on the new impetus granted by the introduction of BJR in Zimbabwe.

The aim should be to closely and narrowly assess compliance of these duties in a context-specific approach.

This assessment must be separate from the fiduciary duties that are based on a relationship of trust wherein directors exercise powers and perform functions in good faith and in the best interest of the company.

In the Zimbabwean context and particularly with regards to the application of the BJR in the derivative action scenario (for example, instances were personal liability is brought upon directors), courts must place a spotlight on what is in the best interests of the company criterion.

They must adopt a case-by-case approach where all facts are considered and weighed in assessing whether the directors have acted in the best interests of the company in arriving at any decision that may have been made.

It remains to be seen how the courts will choose to determine what is in the best interest of the company and what the courts are expected to consider in making this assessment.

Indeed, there is extensive international legal reasoning, where the best interests of the company requirement under both the BJR and the statutory derivative action have been jointly considered.

It would be advisable for our courts to incorporate and further develop this jurisprudence (legal philosophy).

From foreign jurisdiction, case law has provided some guidelines which will assist in clarifying the ambit and application of this feature in the BJR.

The legal position around the aspect of “best interests” of the company, where a director seeks to institute a derivative action and subsequently rely on the BJR, requires clarity.

It is, therefore, essential for directors and corporate officers, managers and so on to fully familiarise themselves with this new provision.

Should any decision made turn out not to be the best and pose a risk of personal liability, such director will have the BJR to rely on for protection.

In conclusion, the policy underpinnings of the BJR mirrors those of immunities, as does the practical impact.

This means that the BJR, properly construed, would require the director to establish entitlement to protection by proving that all preconditions for application of the rule are met.

The BJR is a crucial part in the balancing act between directorial autonomy, business risk-taking, entrepreneurship and accountability, which is especially timely given the current economic climate.

SIDEWAOS is an independent research consultancy firm. Send feedback to sidewaos@outlook.com