1911 Encyclopædia Britannica/Directors
DIRECTORS, in company law, the agents by whom a trading or public company acts, the company itself being a legal abstraction and unable to do anything. As joint-stock companies have multiplied and their enterprise has extended, the position of directors has become one of increasing influence and importance. It is they who control the colossal funds now invested in trading companies, and who direct their policy (for shareholders are seldom more than dividend-drawers). Upon their uprightness, vigilance and sound judgment depends the welfare of the greatest part of the trade of the country concerned. It is not to be wondered at that in view of this influence and independence of action the law courts have held directors to a strict standard of duty, and that the parliament of the United Kingdom has singled out directors from other agents for special legislation in the Directors Liability Act 1890, the Larceny Act 1861, the Companies Act 1867 and the Winding-up Act 1890.
The first directors of a company are generally appointed by the articles of association. Their consent to act must now, under the Companies Act 1908, be filed with the registrar of joint-stock companies. Directors other than the first are elected at the annual general meeting, a certain proportion of the acting directors—usually one-third—retiring under the articles by rotation each year, and their places being filled up by election. A share qualification is nearly always required, on the well-recognized principle that a substantial stake in the undertaking is the best guarantee of fidelity to the company’s interests. A director once appointed cannot be removed during his term of office by the shareholders, unless there is a special provision for that purpose in the articles of association; but a company may dismiss a director if the articles—as is usually the case—authorize dismissal. The authority and powers of directors are prima facie those necessary for carrying on the ordinary business of the company, but it is usual to define the more important of such powers in the articles of association. For instance, it is commonly prescribed how and when the directors may make calls, to what amount they may borrow, how they may invest the funds of the company, in what circumstances they may forfeit shares, or veto transfers, in what manner they shall conduct their proceedings, and what shall constitute a quorum of the board. Whenever, indeed, specific directions are desirable they may properly be given by the articles. But superadded to and supplementing these specific powers there is usually inserted in the articles a general power of management in terms similar to those of clause 55 of the model regulations for a company, known as Table A (clause 71 of the revised Table). The powers, whether general or specific, thus confided to directors are in the nature of a trust, and the directors must exercise them with a single eye to the benefit of the company. For instance, in allotting shares they must consult the interests of the company, not favour their friends. So in forfeiting shares they must not use the power collusively for the purpose of relieving the shareholder from liability. To do so is an abuse of the power and a fraud on the other shareholders.
It would give a very erroneous idea of the position and functions of directors to speak of them—as is sometimes done—as trustees. They are only trustees in the sense that every agent is. They are “commercial men managing a trading concern for the benefit of themselves and the other shareholders.” They have to carry on the company’s business, to extend and consolidate it, and to do this they must have a free hand and a large discretion to deal with the exigencies of the commercial situation. This large discretion the law allows them so long as they keep within the limits set by the company’s memorandum and articles. They are not to be held liable for mere errors of judgment, still less for being defrauded. That would make their position intolerable. All that the law requires of them is that they should be faithful to their duties as agents—“diligent and honest,” to use the words of Sir George Jessel, formerly master of the rolls. Thus in the matter of diligence it is a director’s duty to attend as far as possible all meetings of the board; at the same time non-attendance, unless gross, will not amount to negligence such as to render a director liable for irregularities committed by his co-directors in his absence. A director again must not sign cheques without informing himself of the purpose for which they are given. A director, on the same principle, must not delegate his duties to others unless expressly authorized to do so, as where the company’s articles empower the directors to appoint a committee. Directors may, it is true, employ skilled persons, such as engineers, valuers or accountants, to assist them, but they must still exercise their judgment as business men on the materials before them. Then in the matter of honesty, a director must not accept a present in cash or shares or in any other form whatever from the company’s vendor, because such a present is neither more nor less than a bribe to betray the interests of the company, nor must he make any profit in the matter of his agency without the knowledge and consent of his principal, the company. He must not, in other words, put himself in a position in which his duty to the company and his own interest conflict or even may conflict. This rule often comes into play in the case of contracts between a company and a director. There is nothing in itself invalid in such a contract, but the onus is on the director if he would keep such a contract to show that the company assented to his making a profit out of the contract, and for that purpose he must show that he made full and fair disclosure to the company of the nature and extent of his interest under the contract. It is for this reason that when a company’s vendor is also a director he does not join the board until his co-directors have exercised an independent judgment on the propriety of the purchase.
A director must also bear in mind—what is a fundamental principle of company management—that the funds of the company are entrusted to the directors for the objects of the company as defined by the company’s memorandum of association and authorized by the general law, and that they must not be diverted from those objects or applied to purposes which are outside the objects of the company, ultra vires, as it is commonly called, or outside the powers of management given by the shareholders to the directors. This does not abridge the large discretion allowed to directors in carrying on the business of the company. The funds embarked in a trading company are intended to be employed for the acquisition of gain, and risk, greater or less according to circumstances, is necessarily incidental to such employment; but it is quite another matter when directors pay dividends out of capital, or return capital to the shareholders, or spend money of the company in “rigging” the market, or in buying the company’s shares or paying commission for underwriting the shares of the company except where such commission is authorized under acts of 1900 and 1907, incorporated in the Companies Act 1908. Directors who in these or any other ways misapply the funds of the company are guilty of what is technically known as “misfeasance” or breach of trust, and all who join in the misapplication are jointly and severally liable to replace the sums so misapplied. The remedy of the company for misfeasance, if the company is a going concern, is by action against the delinquent directors; but where a company is being wound up, the legislature has, under the Winding-up Act 1890, provided a summary mode of proceeding, by which the official receiver or liquidator, or any creditor or contributory of the company, may take out what is known as a misfeasance summons, to compel the delinquent director or officer to repay the misapplied moneys or make compensation. The departmental committee of the Board of Trade in its report (July 1906) recommended that the court should be given a discretionary power, analogous to that it already possesses in the case of trustees under the Judicial Trustees Act 1896, s. 3, to relieve a director (or a promoter) in certain cases from liability. This recommendation has been given effect to by s. 279 of the Companies Act 1908, which provides that, “If in any proceeding against a director of a company for negligence or breach of trust it appears to a court that the director is or may be liable in respect of the negligence or breach of trust, but has acted honestly and reasonably and ought fairly to be excused for the negligence or breach of trust, the court may relieve him either wholly or partly from his liability on such terms as the court may think proper.”
Directors who circulate a prospectus containing statements which they know to be false, with intent to induce any person to become a shareholder, may be prosecuted under § 84 of the Larceny Act 1861. They are also liable criminally for falsification of the company’s books, and for this or any other criminal offence the court in winding up may, on the application of the liquidator, direct a prosecution. As to the liability of directors for statements or omissions in a prospectus see Company.
In managing the affairs of the company directors must meet together and act as a body, for the company is entitled to their collective wisdom in council assembled. Board meetings are held at such intervals as the directors think expedient. Notice of the meeting must be given to all directors who are within reach, but the notice need not specify the particular business to be transacted. The articles usually fix, or give the directors power to fix, what number shall constitute a quorum for a board meeting. They also empower the directors to elect a chairman of the board. The directors exercise their powers by a resolution of the board which is recorded in the directors’ minute-book.
The court will not as a rule interfere with the discretion of directors honestly exercised in the management of the affairs of the company. The directors have prima facie the confidence of the shareholders, and it is not for the court to say that such confidence is misplaced. If the stockholders are dissatisfied with the management the remedy is in their own hands—they can call a meeting and elect a new board.
A company’s articles usually provide for the payment of a certain sum to each director for his services during the year. When this is the case it is an authority to the directors to pay themselves the amount of such remuneration. The remuneration, unless otherwise expressly provided, covers all expenses incidental to the directors’ duties. A director, for instance, cannot claim to be paid in addition to his fixed remuneration his travelling expenses for attending board meetings.
When a company winds up, the directors’ powers of management come to an end. Their agency is superseded in favour of that of the liquidator. (E. Ma.)