In our previous post, we have made it clear that a company have its own legal personality that is separate from its shareholders from the day it first incorporated. We also stated that shareholders cannot act on behalf of the company unless they are authorised to do so by the company.
A company is an artificial person and does not have physical body. Therefore, this raises a question. Who acts for the company then?
Who Is The Company?
A company is basically an association of individuals and/or business entities who contributed capitals to the company’s business in return of profit in the form of dividends. Since a company may have a number of individuals and/or entities as its shareholders, it is not practical for all shareholders be involved in the management of the company. Having too many persons involved in the management will surely cripple the company’s operation.
Because of the above, the shareholders have to appoint directors to manage and administer the company. Under the law, any persons who are appointed by the shareholders to manage and administer the affairs of the company are deemed to be directors regardless of whatever title is given to them.
Why Appoint Director?
Section 122 of the Companies Act 1965 requires every company to appoint at least two (2) directors. In addition to the legal requirement, logic dictates that shareholders must appoint directors to manage and administer the company. Imagine a hypothetical situation where the shareholders do not appoint directors and manage the company themselves.
If the company have to make a decision regarding the operation of the company, then which shareholder shall have the right to make a decision? What if the other shareholders do not agree with the decision? What if some of the shareholders do not have business skills or knowledge to make such decision? Or what if the said shareholder made a decision that is only beneficial to himself but not the company?
Therefore, logically, the appointment of a director is necessary:-
- To ensure that the company’s business is conducted for the best interest of the company as a whole without prioritising the interest of any shareholder over another shareholder;
- To make business decision in daily affairs of the company (except for business decision which requires shareholders sanction);
- Where a director is appointed due to him having a special skills in any trade or industry, to manage and administer the company using such skills;
- To represent the company in its dealing with outsiders.
Defining The Powers Of Directors
From the above, it is clear that directors play an integral part to the success and sustainability of a company. Having occupied such position, it goes without saying that directors will also have many opportunities to abuse his power to the detriment of the company.
However, shareholders are able to define the manner of appointment and removal of directors and their scope of duty and powers in the Articles of Association. The directors, in managing and administering the company must act in accordance with the rules and regulation provided in the Articles of Association.
Therefore, it is important for the shareholders, with the help of a corporate secretary, to adopt an Articles of Association where the directors’ scope of duties and powers are defined so as to give the directors flexibility to execute his duty and at the same time, proper mechanisms are set in place to minimise the risk of abuse of power by the directors.