Directors of corporations in developed common law countries are bound by certain legal duties. These duties include the duty to act carefully, the duty to act loyally, and the duty to act legally.
This article focuses on the first of the three general legal duties mentioned above, i.e., the duty to act carefully and juxtaposes it with what pertains in present-day corporate Ghana.
The Concept of the ‘Duty of Care’
The concept of ‘duty of care’ is an age long legal principle that has attracted much attention over the years. This concept has been used by the courts as a device in regulating the types of wrongs that should be considered actionable in negligence.
In the English case of Heaven v Pender (1883) 11 QBD 503, in the Court of Appeal, the Master of Rolls, William Brett, suggested that there was a duty to be responsible in a tort to those who might be injured if ordinary care and skill was not exercised.
The seminal case of Donoghue v Stevenson (1932) established the general principles of ‘duty of care’ and in particular, Lord Atkin enunciated the importance of proximity between persons, and the concept of neighbourliness.
It was however in the case of Caparo Industries Plc v Dickman (1990) UKHL 2 that the House of Lords set out a three-fold test for establishing a ‘duty of care as:
A. the reasonable foreseeability of harm as a result of the defendants conduct
B. proximity between the persons concerned, and
C. whether or not it was fair, just and equitable to impose liability, in establishing a duty of care in negligence
Like all laws, the concept of duty of care reflects moral, policy and experiential considerations
Moral Obligation & Negligence of Duty
The moral consideration underlying the law of negligence is that, where a person assumes a role, the performance of which involves the risk of injury to others, then that person is under a moral obligation to perform that role carefully.
This moral obligation to exercise care in the performance of one’s role is imposed on corporate directors and officers by virtue of the authority they exercise over the resources entrusted to their care on behalf of others.
This moral obligation imposed on directors comprises four relatively distinct duties, namely;
- the duty of directors to reasonably monitor or oversee the conduct of the corporation’s business, and to take reasonable steps to keep abreast of the information that flows to the board as a result of monitoring procedures and techniques.
- the duty to follow up reasonably on information that has been acquired and should raise cause for concern.
- the duty to employ a reasonable decision-making process
- the duty to make reasonable decisions.1
The Case of Corporate Directors in Ghana
This duty of care has been expressed under Section 203 (2) of the Companies Act 1963 (Act 179) of Ghana where directors are expected to:
“act at all times in what he believes to be the best interests of the company as a whole so as to preserve its assets, further its business, and promote the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skillful director would act in the circumstances.”
Despite this elaborate provision imposing a legal obligation on directors to exercise diligence and care in promoting the purposes for establishment of the business whose affairs they steer, corporate Ghana remains raft with instances where this duty is breached by directors.
The recent series of suspensions and de-listings of companies listed on the Ghana Stock Exchange (GSE) due to the failure of certain Issuers to meet some reporting obligations of the GSE, the revocation of the banking licenses of certain banks and the black-listing of some non-bank financial institutions by the Bank of Ghana, the placing on watch-list of some institutions licensed by the Securities and Exchange Commission, all point to the fact that the role of a corporate director is something that is being taken quite lightly in corporate Ghana.
Corporate directors charged with the directing and controlling the affairs of entities which they oversee must understand the weight of trust and the reliance placed on them by all interested parties. There can and have been devastating consequences when corporate directors failed to employ all the necessary resources at their disposal to ensure that the companies that have been entrusted unto them are effectively and efficiently coxswained to achieve the optimum benefit for all stakeholders.
More Regulatory Burden if Directors Become Increasingly Negligent of their Duty of Care
The duty of care must be an essential underlying component of Ghana’s corporate governance mechanism as it includes measures that combine accountability with minimal government and regulatory intervention.
In this regard, any significant contraction of those mechanisms of accountability will result, sooner or later, in increased intervention by regulatory bodies.
The Bank of Ghana, for instance, has taken steps in addressing this concern when in March of 2018 it issued the Banking Business Corporate Governance Directive (2018) for banks and specialized deposit-taking institutions regulated under the Banks and Specialized Deposit-taking Institutions Act 2016 (Act 930). One of the key objectives for the issuance of the Directive is the “minimization of the possibility of regulated financial institution failures that are usually rooted in poor corporate governance practices.” The apex regulatory body of Ghana’s capital markets, the Securities and Exchange Commission, is also reviewing its rules and regulations to further strengthen the governance practices in the securities industry.
The Bank of Ghana, under the interpretation section of the Bank of Ghana’s 2018 Directive, defined the ‘duty of care’ to mean, “to act in an informed and prudent basis in making decisions.”
The import of this definition is that corporate directors and officers must employ appropriate and adequate mechanisms for making decisions. The decisions resulting from the employment of appropriate mechanisms must also be reasonable, given the context within which they are made.
Additionally, corporate directors and officers must consider factors such as current economic conditions, effects of inflation or deflation, tax consequences, the nature of closely-held business interests, alternative investments, expected returns on income and capital, the need for liquidity versus preservation of capital, diversification of investments, amongst others.
Liability of Negligent Directors & Officers
Directors and officers should, by all means, have the right protection against the imposition of liability for intrepid decisions that happen to turn out badly, and against the imposition of liability that is disproportionate to fault.
However, they also must be subject to the general rule that, if a private individual assumes a role whose performance involves a risk of injury to others, he or she is under a moral and legal obligation to perform the role with due care and must be made to face the full rigours of the laws following a breach of this duty.
All views expressed here are that of the Author alone and does not in any way imply that it represents the views of his employer.
Additional References: The Duty of Care of Corporate Directors and Officers by Melvin A. Eisenberg, Berkeley La