Introduction

Throughout history, corporate form has functioned as the most appropriate

medium to organize and distribute huge capital.1 Since its birth, corporations

have offered some vital features such as limited liability, transferability of shares

and separate legal entity. These features have distinguished corporations from

other forms of business such as partnership or joint stock company. Perhaps this

is better said by M. M. Blair,

“... [A]nother critical feature of the corporate form that made it the preferred way of

organizing large, complex businesses was that a corporation is a separate legal entity

with potentially perpetual life, and is the legal owner of the assets used in the business.

Holding the property in corporate form rather than in a partnership or joint stock

company made it easier to commit resources to long-lived, specialized business

enterprises.”

Part one of this coursework, will justify the above statement by examining how

separate legal entity made incorporated companies the best form of business.

And because in every society, corporations play a significant role in creating

wealth,2 the best way to manage it has been a focal point of reform for many

years. However, the separation of ownership and control of corporations has

created obstacles in terms of operational efficiency of a company. Adam Smith in

his book The Wealth of Nations described the divergent interest between owners

and managers as the obstacle to an efficient operation of a company.3 He wrote,

directors

’’being the managers of the other people’s money rather than own, would

never watch over this money with the same anxious vigilance with which

partners in a private copartnery frequently watch over own’’4

This means that managers of a company may not jealously protect the interest

of the shareholder even though they are entrusted with the management and

control of the corporation. In addition, because the control of the corporation has

passed from the shareholders to the directors, the shareholder being a holder of

right in the corporation’s wealth suddenly becomes a mere supplier of capital

with little power to participate in the management of the corporation.5

1 Robert Sprague, ‘’ Beyond Shareholder Value: Normative Standards For Sustainable Corporate Governance’’ (2010) 1 W. M. B.. L. Rev. 47 p492 Arden Dde, ‘’UK corporate governance after Enron’’ (2003) 3 J. C. L. S. 269 p 2693 Harwell Well, ‘’The birth of corporate governance’’ (2009-2010) 33 S. U. L. R. 1247 p12514 ibid5 Robert Sprague, ‘’ Beyond Shareholder Value: Normative Standards For Sustainable Corporate Governance’’ (2010) 1 W. M. B.. L. Rev. 47 p49

In the second part of this coursework, I shall examine the fiduciary duties of

directors in the management and control of corporation in the modern corporate

governance with a particular interest in the UK and US system of corporate

governance. And in addition, I shall comparatively look at where the modern

corporate governance has placed shareholders in these countries.

Corporate Legal Personality

The most distinguishable legal element of a corporation whether in the United

Kingdom or the United States, is its legal personality.6 This means that the

company is separate from its members. The well-known case on the cornerstone

of separate legal personality of a company is Salomon v Salomon,7 Mr Salomon

was carrying out a business as a sole trader. As the business flourished, he

decided to sell the business to a company he registered called A Salomon & Co

Ltd whose shareholders were Salomon himself and his wife and five children.

Salomon was issued debentures for the unpaid part of the purchase price and a

floating charge on the company’s asset as security for the debt. Upon liquidation

of the company, the creditors sued Salomon in his personal capacity for the

company’s unpaid debt but he argued that limitation of liability has protected

him.8 At the court of first instance and the court of appeal, it was held that the

company was acting as an agent of Salomon and therefore he should be liable

for all debts incurred by the company. On appeal, the House of Lord held that

’’ the company is at law a different person altogether from the subscribers to the

memorandum; and, though it may be that after incorporation the business is precisely

the same as it was before and the same persons are managers..’’

This means that a company is a juridical person having the legal rights, duties,

obligations and liabilities resulting from legal relationships.9 And these legal

rights, duties, obligation and liabilities cannot be shared by any other person

except where the company is acting as an agent of the other person.10 In

Salomon v Salomon, the court further held that where the company’s objectives

6 In the UK, for instance, s15(1) CA 2006, provide that on registration of a company, the registrar must give a certificate that the company is incorporated7 (1897) AC 228 Ron Harris, ‘’the transplantation of the legal discourse on corporate personality theories; from German codification to British political pluralism and American big business’’ (2006) 63 W. L. L. R. 1421 p14659 In the UK, s16(3) CA 2006, provide that a registered company is capable of exercising all the function of an incorporated company.10 See J.H Rayner (mincing lane) ltd v. Department of trade and industry (1990) 2 AC 418

of entering into a legal relationship is to benefit it shareholders, is not sufficient

to construe that the company is an agent of the shareholders. Therefore, as a

separate legal person from its members, a corporation can enter into a contract,

be a party to a proceeding and own properties.11

This concept of separate legal personality of a company had been strongly

embraced by the US12 when the court in Southern Railway v. Greene13 held that

corporations are persons under the law with the same rights as a natural person

with few exceptions.14 One of these exceptions is aggravated damages which is

awarded as a compensation for injury to feelings and a company has no feelings

to be injured.15

Separate legal entity is a principle of commercial convenience16 which allows

corporations to organize large and complex businesses as oppose to other form

of business such as partnership or Joint Stock Company. These benefits are

derived from the distinct effects of separate legal entity which may include

1. Limited liability

Arguably, the rationale behind separate legal entity is the limitation of personal

liabilities of members towards creditors.17 This is an essential feature of

corporate form which limits the liability of shareholders to their interest in the

corporation.18 In other words, the shareholders are not responsible for the

corporation’s debt or torts. For instance, a judgment creditor can only enforce

the judgment against the asset of the corporation and not on the personal asset

of the members.19 The separation of the company’s liabilities from its members

allows the corporation to organize large and complex businesses as oppose to

general partnership which offers an unlimited liability on its members.20 Without

limited liability, the efficiency of businesses may be compromise as unlimited

liability imposes higher costs on economic production and an increase in capital 11 Derek F., et al. Company Law (26 edn, Oxford University Press Inc., New York 2009-2910) p12212 Philip I. Blumberg, ‘’The Corporate Personality Of American Law’’ (1990) 38 A. J. C. S 49 p5313 216 U.S 400 (1910)14 Philip I. Blumberg, ‘’The Corporate Personality Of American Law’’ (1990) 38 A. J. C. S 49 p5815 Collins Stewart ltd v financial times lid (2005) EWHC 26216 Daniel T. C. Song, ‘’the Salomon orthodoxy: unralling the metaphorical myth’’ (2001-2002) 21 S. L. R. 199 p20717 Marc Moore, ‘’a temple built on faulty foundation: piercing the corporate veil and the legacy of Salomon v Salomon’’ (2006) J. B. L. p118 R. C. Riddle, et al. ‘’Choice of Business Entity in Texas’’ (2004) 4 H. B. T. L. J. 298 p300 see also, s3 Company Act 200619 ibid20 Robert W. Hamilton ‘’corporate entity’’ (1970-1971) 49 T. L. R. 981 p 982

cost.21 The development of capital market depends on limited liability because

large and complex businesses require capital beyond the means of a single

entrepreneur, thereby requiring investment from the outsiders.22 Granting

Limited liability companies has encouraged capital investment because investors

can invest without risks to their personal net worth.23 Although some investors

may risk their entire worth to invest in a company which they operate but the

risk is very enormous as they stand to get, they stand to lose everything. Limited

liability allows investors to invest in different business without having to incur the

cost may be necessary to monitor the business.24

2. Perpetual succession

Another practical benefit of separate legal entity which made it a preferred

way of organizing complex businesses is its immortality. The company being

a juridical person, even if all the members died, the company still survives

until it is wound up or struck off the registrar.25 Partnership does not offer this

luxury as it is technically terminated on the retirement or death of a partner

but a company is not easily dissolved.26 This perpetual succession has made it

easier for companies to commit resources to long time businesses.

3. Business of the company

Another reason that made separate legal entity a preferred way of organizing

large and complex businesses is the fact that the corporation’s business is

carried out by the corporation as a separate person.27 In partnership for

instance, there is no clear division between the partnership and the business

and this has expose the partners to high risk which may affect their personal

asset. The company being a separate person conducting its own business, the

rights and liabilities belong to the corporation as a separate entity and not its

21 Robert J. Rhee ‘’Bonding limited liability’’ (2009-2010) 51 W. M. L. R. 1417 p142022 John H. Matheson ‘’the limitation of limited liability: lessons for entrepreneurs (and their attorneys)’’ (2003) 2 M. J. B. L. E. 2 p323 ibid24 John H. Matheson ‘’the limitation of limited liability: lessons for entrepreneurs (and their attorneys)’’ (2003) 2 M. J. B. L. E. 2 p325 Daniel T. C. Song, ‘’the Salomon orthodoxy: unralling the metaphorical myth’’ (2001-2002) 21 S. L. R. 199 p202 26 Albert M. Lehrman, ‘’should you incorporate?’’ (1976-1977) 4 T. S. U. L. R. 66 p6827 Derek F., et al. Company Law (26 edn, Oxford University Press Inc., New York 2009-2910) p124

members28; therefore, the members cannot sue on its behalf or be sued.29 The

members have no locus standi to claim remedies for any wrong done against

the company’s business. For instance, where a defamatory remark is made

against the company’s business, only the company may sue for libel or

slander.30

4. Capacity to hold property

Another special feature of separate legal entity is the capacity of the

company to hold property as a separate person in its own name and the

members have no direct proprietary right over the property.31 In Ayton Ltd v.

Popely32 it was held that the fact that a member stand to benefits from the

company’s property does not make him a beneficial owner of the company’s

property. This feature allows the company to explore the company’s property

exclusively towards the purpose of the company which may include

organizing large and complex businesses.

5. Corporation may contract with its members

A corporation being a separate person from its members may enter into a

contract with its members. In Lee v. Lee’s Air Farming Ltd,33 it was held that a

corporation can contract with its member under the contract of service.

Partnership does not enjoy this feature as there is no clear division between

the partners and the business.

However, it is pertinent to note that whether in the US or the UK, the separate

legal entity cannot be relied upon for any purpose other than the furtherance of

the company’s objectives. The court will not respect the sanctity of corporate

entity where the officers of the company use the corporate entity as a sham to

commit fraud.34 In United States v. Milwaukee Refrigeration Transit Company35

The court held that ’’

28 Alberto Ferrer, ‘’comparative study of the doctrine of juridical personality’’ (1949-1950) 19 R. J. U. P. R. 79 p9829 Foss v. Harbottle (1843) 2 Hare 46130 Jameel v wall street journal Europe (2006) UK HL 4431 Derek F., et al. Company Law (26 edn, Oxford University Press Inc., New York 2009-2910) p125 32 (2005) E.W.H.C. 81033 (1961) AC 1234 Robert W. Hamilton ‘’corporate entity’’ (1970-1971) 49 T. L. R. 981 p 98235 142 F.247 (1906)

“A corporation will be looked upon as a legal entity as a general rule but when the

notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or

defend crime the law will regard the corporation as an association of persons.”

This means that all the consequence of separate legal personality will be ignored

and the members or officers will be personally liable.36

The Modern Corporate Governance

The Cadbury committee defined corporate governance as ’’the system by which

companies are directed and controlled’’.37 This means that corporate

governance set out an easier system to balance what managers do with what

shareholders desire.38 In other words, the directors and officers have the proper

machineries to carry out their duties and avoid conflicts of interest while working

on behalf of the shareholders and the shareholders are adequately informed

about the activities of the officers and directors.39

In spite of the fact that the concept of corporate governance is not a new

phenomenon, it has generated serious attention in the last decade in the wake of

major corporate breakdown in some part of the world especially the US and the

UK.40 As a result, there was renewed interest by government and stakeholders in

many countries to have a laws and codes to regulate corporate behaviour.

In achieving this, the approach to corporate governance in the US differs from

the UK even though both countries have unitary board system of directors as

oppose to Germany’s two tiered boards.41 The UK approach is a creation of

flexible Combined Code by the London Stock exchange. The combined code is

principle based and managers are expected to comply and where they do not

comply, they should publicly explain why.42 Even though the UK principle based

corporate governance is optional, there is pressure to conform to it so as to meet

up with international best practices. This is important because the international

36 Peter Ziegler & Lynn Gallagher ’’Lifting the corporate veil in the pursuit of justice’’ (1990) 292 J.B.L.313 p337 Arden Dde, ‘’UK corporate governance after Enron’’ (2003) 3 J. C. L. S. 269 p 26938 Harwell Well, ‘’The birth of corporate governance’’ (2009-2010) 33 S. U. L. R. 1247 p125139 ibid40 Angus Young, ‘’Rethinking the fundamentals of corporate governance: the relevance of culture in the global age’’ (2008) 29 C. L.168-174 p141 Allison D. Garrett ‘’a comparison of united kingdom and united states approaches to board structure’’ (2007) 3 C. G. L. R. 93 p9342 John V. Anderson, ‘’regulating corporations the American way: why exhaustive rules and just deserts are mainstay of U.S. corporate governance’’ (2008) 57 D. L. J. 1081 p1090

business community will not invest in a country where the risk of investment is

high, owing to bad corporate governance.43

However, the US rule-based approach was brought about by legislation

(Sarbanes –Oxley Act 2002) after the collapse of Enron, and the Sarbanes- Oxley

rules granted the SEC and private persons to enforce its provision through

litigation.44 Sarbanes-Oxley among other things adopted new accounting

standard for public companies by providing for the independence of auditors. It

also provides in s303 that it shall be unlawful for directors or officers to mislead

the company.45

Fiduciary duties of directors in the US and the UK

Directors are under fiduciary duties to act in the best interest of the corporation

whose affairs have been entrusted in them by the shareholders.46

The term “fiduciary” comes from a Latin word ‘’fiducia’’ meaning trust or

confidence.47 Directors of a company occupied a position of trust and confidence

to promote the interest of the company and its shareholders. These fiduciary

duties of directors are duties which provide protection to non-fiduciary duties of

directors.48 In other words, it seeks to avoid the violation of non-fiduciary duties.

The non-fiduciary duties of directors can be owed simultaneously with the

fiduciary duties, this is because the two are distinct and the proof of the violation

of fiduciary duties does not depend on the proof of the violation of non-fiduciary

duty.49 The assertion that the aim of fiduciary duty is to protect the proper

execution of non-fiduciary duties is best demonstrated in the prohibition of

directors from acting where there is a conflict of interest between his duty and

his personal interest.50 For instance, Section 175(1) of the UK Companies Act

2006 provides that directors must

“avoid a situation in which he has, or can have, a direct or indirect interest that

conflicts or possibly may conflict with the interests of the company”.

43 Angus Young, ‘’Rethinking the fundamentals of corporate governance: the relevance of culture in the global age’’ (2008) 29 C. L.168-174 p144 Elias Mossos ‘’Sarbanes-Oxley goes to Europe: a comparative analysis of united states and European union corporate reforms after Enron’’ (2004) 13 C. I. T. L. J. 9 p945 Peter V. Letsou, ‘’ the Changing Face of Corporate Governance Regulation in the United States: The Evolving

Roles of the Federal and State Governments’’ (2009-2010) 46 W. L. R. 149 p18546 Regina F. Burch, ‘’director oversight and monitoring: the standard of care and the standard of liability post Enron’’ (2006) 6 W. L. R 482 p48647 James Edelman, ‘’ When do fiduciary duties arise?’’ (2010) 126 L. Q. R. 302 p148 Matthew Conaglen, ‘’ The nature and function of fiduciary loyalty’’ (2005) 121 L.Q.R. 452-480 p249 ibid50 Ibid p4

In Aberdeen Railway Co. V. Blaikie Bros51 the court held that no one in a fiduciary

position would be allowed to engage in any transaction where his personal

interest may likely conflict with the interest of whom he is bound to protect.52

Another fiduciary duty mentioned in the Act is ‘’good faith.’’ s172(1) provides

that ‘’director must act in the way he considers in good faith, would be most likely to

promote the success of the company for the benefit of the company and it members as a

whole’’

The directors are to also consider the interest of stakeholders and the

community at large but it can be argue that these considerations is only to the

extent of the duties imposed on the directors. Nevertheless, the provision of

s172 C.A. 2006 does not reflect the ambivalence nature that characterises the

formulation of the fiduciary duties of directors.53 I will like to argue here that;

s172 has extended the director’s fiduciary duties of good faith to the entire

community. That is, any decision that will affect the interest of the community

must be considered in good faith. But the question which is yet to be answered is

whether the community can sue the directors for breach of this duty.

In the US for instance, the duty of care and the duty of loyalty are seen as the

fiduciary duties of directors while the court and legislatures stated that directors

must also carry out their duties in good faith but it is still undetermined whether

the duty of good faith is within duty of care or duty of loyalty.54 Unlike the duty of

loyalty or care, the duty of good faith does not define action instead it defines a

state of mind. A director may easily be told to be ’’careful’’ or ’’loyal’’ but is

difficult to say be ’’good faith’’.55 Furlow C. W., wrote that good faith being a

state of mind consisting

’’(1) honest in belief or purpose,(2)faithfulness to one’s duty or obligation,

(3)observance of reasonable commercial standards of fair dealing in a given trade or

business, or (4) absence of intent to defraud or to seek unconscionable advantage’’56

51 (1854)1 Macq 461 at 47152 ? Matthew Conaglen, ‘’ The nature and function of fiduciary loyalty’’ (2005) 121 L.Q.R. 452-480 p253 Christopher M. Bruner, ‘’ Power and Purpose in the Anglo-American Corporation’’ (2010) 50 V. J. I. L. 3 p60554 Regina F. Burch, ‘’director oversight and monitoring: the standard of care and the standard of liability post Enron’’ (2006) 6 W. L. R 482 p48655 Clark W. Furlow, ‘’Good faith, fiduciary duties and the business judgment rule in Delaware’’ (2009) 2009 U. L. R. 1061 p106356 Clark W. Furlow, ‘’Good faith, fiduciary duties and the business judgment rule in Delaware’’ (2009) 2009 U. L. R. 1061 p1069

Good faith statutorily comes to light after the decision in Smith v Van Gorkom,57

where the court held that the violation of the duty of care would generate

personal monetary liability against directors who may believe to be acting in

good faith and in the best interest of the company and the shareholders.58 As the

result of this decision, directors insurance become so expensive and a growing

concern whether companies can hire qualified directors.59 Consequently, the

Delaware legislature adopted s102(b)(7) which shielded the directors from

personal liability for the violation of their duty of care but provided few

exceptions which include a breach of duty of loyalty and a breach of an act or

omission not in good faith.60 However, in Stone v Ritter,61 the court held that

fiduciary duty of good faith is a part of fiduciary duty of loyalty.62

Therefore, directors’ duty of good faith demands that decision making must be

intended to benefit the company and its shareholders.

Good faith and careless decision making

In Caremark63 it was held that failure to act where there is need to do so is a

proof of bad faith. Therefore, the failure of directors to excise care in decision

making will expose them to liability. In Disney III, the plaintiff a shareholder of

Walt Disney Corporation instituted a derivative action against the board of

directors for the approval of Michael Ovitz as Disney president and his

termination which entitled him to $140 as severance package. The defendants

argued that complaint only showed that the directors have failed to exercise

their duty of care in decision making, which they were protected from personal

liability under s102(b)(7). But the court disregarded this argument and held that

’’that the Disney directors failed to exercise any business judgment and failed to

make any good faith attempt to fulfil their fiduciary duties to Disney and its

shareholders’’64 Therefore, intentional disregard of fiduciary duty of care in

decision making may be construed as an act or omission in bad faith. This is a

landmark decision in terms of holding directors responsible for their decision. I

align myself with the judgment of the court. The director’s action in this case 57 488 A2.d 85858 Clark W. Furlow, ‘’Good faith, fiduciary duties and the business judgment rule in Delaware’’ (2009) 2009 U. L. R. 1061 p106359 ibid60 Ibid p1065 61 911 A.2d 362,370 (Del.2006)62 Andrew S. Gold, ‘’ the new concept of loyalty in corporate law’’ (2009-2010) 43 U. C. D. R. 457 p45963 Caremark int’l inc, derivative litig. 698 A.2d 959 (del ch. 1996)64 Clark W. Furlow, ‘’Good faith, fiduciary duties and the business judgment rule in Delaware’’ (2009) 2009 U. L. R. 1061 p1076

surely re-echoed what Adam Smith said, that managers would never watch over

other people’s money with the same diligence they would watch their own.

Bad Faith

The Delaware supreme court find it easier to define ‘’ bad faith’’ than ‘’good

faith’’. The court has stated four categories of bad faith which are (1) actions

motivated by reasons that are not in the best interest of the company, (2)action

motivated by bad faith, (3) actions that involve deliberate violation of law (4)

dereliction of duty.65 Fiduciary duty of loyalty demands that the directors’

conduct be motivated by good faith that their action will better the interest of

the company and; therefore, any conduct not motivated by any reason other

than the best interest of the company will violate the fiduciary duty of loyalty.66

However, I will like to point out here that the definition of bad faith as “action

motivated by bad faith’’ is still too ambiguous as this does not describe bad faith.

The role of shareholders in the UK and the US corporate governance

Some authors argued that shareholders ‘’ are the owners of the corporation and,

as such, are entitled to control it, determine its fundamental policies, and decide

whether to make fundamental shifts in corporate policy and practice."67

ZAKLAMA68 argued that since a company is treated in law as a separate legal

entity, shareholders cannot be considered as owners of the company.

No matter the your angle of view, I am of the opinion that the shareholders’

interests make up the company and no matter what we call it, these interests

can be translated into ownership. This is no mistake that the UK and the US

corporate governance tends emphasize the shareholders interest because they

are the investors and these shareholders are dispersed, none of whom has a

voting control. But the roles of shareholders in corporate governance in these

countries are substantially different.

Unlike the position of shareholders in the US, the UK corporate governance

system allows the shareholders to intervene directly in corporate governance. UK

65 Ibid p107166 Ibid p107167 ’ Beyond Shareholder Value: Normative Standards For Sustainable Corporate Governance’’ (2010) 1 W. M. B.L. Rev. 47 p70

68 Nicholas A. S. Zaklama, ‘’devident: shareholders’right, directors privilege’or companies’curse?’’ (2000) 32 B.L. 22 p25

shareholders can unilaterally amend by a special resolution the company’s

constitution which is quite different from the position in Delaware which require

that any amendment to the charter be suggested by the board after which the

shareholder may approve.69 In addition, the UK shareholders have greater power

to replace any director. Shareholders having five per cent of the voting right can

demand a meeting where a director may be removed by simple majority of an

ordinary resolution.70 It is also important to mention that the UK shareholders do

not face the regulatory challenges that the US securities regulation imposes on

coordinated action. The UK model article provides that ‘’the directors are

responsible for the management of the company’s business, for which purpose

they shall exercise all the powers of the company.’’71

Nonetheless, as in the US, it is clear that the board is ‘’ the most important

decision making body within the company’’72. However, differences exist. The UK

model article empowered the shareholders to ‘’direct the directors’’ by special

resolution ‘’to take, or refrain from taking, specified action.’’73 This system of

directing directors is not familiar to Delaware law though it placed the

shareholders in a strong position in discussion with the management. The UK

shareholders have leave governance to the board but when the company is in

trouble, they have greater power to influence the future of the company.74

The UK shareholders power of ‘’direct the directors’’ is an important one because

it illustrates the extent of board powers. The directors in the UK get their powers

from “delegation via the article and not from a separate and free grant of

authority from the State.’’75 Because shareholders suit is a developed

mechanism for redress in the US than anywhere else, perhaps it may be safe to

say that the greater power of the US shareholders to sue, either a derivative

action or class action has covered the gaps between the US and the UK

shareholders role in corporate governance.76 In the UK, the fact that the directors

owed their duties to the company, coupled with the rules on derivative actions

and the fact that directors are to pursue (in good faith) the interest of the

shareholders, makes it difficult for the shareholders to institutes actions.77 What

69 Christopher M. Bruner, ‘’ Power and Purpose in the Anglo-American Corporation’’ (2010) 50 V. J. I. L. 3 p60570 ibid71 ibid72 ibid73 ibid74 ibid75 ibid76 ibid77 ibid

is pertinent to mention here however, is that the UK shareholders having the

power to remove any directors who does not adhere to their interest has

overshadowed any advantages possess by the shareholders in the US, which

may proof as to why there is limited reliance on litigation in the UK.78

Conclusion

No doubt that the separate legal entity of a company is an outstanding feature of

an incorporated company. Showcasing its ability to organise large and complex

businesses through its distinct features of limited liability, perpetual succession,

capacity to hold property in its corporate name and ability to sue and be sued

among others. As shown above, partnership or Joint Stock Company does not

enjoy these features that made the corporate form a preferred medium of

transacting business.

Corporate form being the best form of business, its management has been of

interest to the government and stakeholders as well. This has prompted different

approach to good corporate governance system. The UK considers that, having a

good level of communication between the board and the shareholders is

necessary to achieve healthy corporate governance. Therefore, the shareholders

and the companies have the responsibility to ensure ’’comply or explain’’

principles is effective and a better approach than the US rules based system.79

All aimed at checking the powers of the directors. Subject to some constraint,

directors have the power to pursue business strategies and these constraints

have retained investors’ confidence.

As we have seen, directors are in a position of fiduciary to act in good faith on

behalf of the company and in the interest of the company and its shareholders.

He must exercise his duties with care and loyalty and his personal interest must

at all times not be in conflict with the company’s interest. Where he fails, he

cannot be exempted from personal liability. Although the shareholders using

their voting power can displace any director with whom they are displeased. We

have also seen that to operate a company successfully, a balance between the

shareholders and the managers is essential. This is because of the diverse

interests of the shareholders and the directors which, if it is left unchecked, can

bring down any successful enterprise.

78 ibid79 Elliot Shear, et al, ’’Corporate governance in financial institutions’’ (2010) 74 C.O.B.1-28 p8