Pursuit of Business Excellence through Corporate Literacy: Understanding the Duties and Responsibilities of Shareholders and Directors

Starting and running your own business can be the dream for many people especially those who believe that the rewards for entrepreneurship are more than the rewards for being someone else’ employee but however, an understanding of what is a company is a prerequisite in such pursuits.

Such an understanding helps you to make informed decisions which can protect you from blindly navigating the business terrain which is infested with challenges that can haunt you if you lack at least basic insights on the relation between a company and its shareholders and directors.

As such, in running a business enterprise, it is important for every aspiring business person or even existing entrepreneurs to ask and get answers to the following questions.

What is a shareholder? Is a shareholder, a holder of shares or an owner of shares? What is and ought to be the legal relationship between shareholders and directors?

Do directors have a duty to shareholders? If so, why should directors be personally liable for the conduct of the affairs of a company?

Can a company have two centers of power as in directors and shareholders? Is the relationship between directors and a company not absolute and fiduciary?

In responding to these questions, the following conversation between Mutumwa Mawere and Brian Tawanda Manyati helps to promote life transforming literacy on corporate matters.

Dubbed the Brian and Mutumwa’s Chat Room, these conversations are a Connections2Communities (C2C) initiative towards creating a shared understanding on business issues in order to promote a collective approach in taking advantage of opportunities and in solving business problems.

Please read the following thread and learn the valuable lessons hereunder:

[12/12, 6:48 AM] mdmawere1: BUSINESS LEADER v PERSON IN BUSINESS

A question has arisen as to whether the duty of care in relation to a company is vested in directors or split between directors and shareholders.

It is a fact that a company is a creature of law?

[12/11, 11:15 AM] Brian Manyati: If I am a director, the shareholder of a company is my principal in that he or she has part or full control of the affairs of the company. Though I as a director have fiduciary duties owing to the company, I have no control over it out of mere appointment as a director [unless through a performance based share option scheme I (as a director) eventually become a part owner just as the shareholder is].

The agent-principal principle flows from the shareholder part or fully controlling a company. A share certificate or subscription to the memorandum is evidence of such share based control of a company. Appointed or nominated directors serving as executives or NEDs on the board tend to have no such control of a company that the shareholder has. So they participate on the board at the whims of the shareowner who controls the company they unarguably owe fiduciary duties directly to, thus making them agents directly or indirectly.

Indirectly only in the sense that even if it is to be said they owe fiduciary duties to the company not the shareholder, it remains a fact that the shareholder no matter at law he or she is a separate persona from the company, he or she has control or part control of the company through the share purchase act.

[12/12, 6:40 AM] mdmawere1: Can a company have two centers of power? Is the relationship between directors and a company not absolute and fiduciary?

[12/12, 7:55 AM] Brian Manyati: You ask can a company have two centers of power.

From my continued discussion with you and others on the first question you asked yesterday, it is now coming out as a possibility that we have shareholder paper power as evidenced by a share certificate giving part or full control, and directors’ silent but highly likely the effective power by the virtue of being in charge of the day to day running of the business at a distant from the remote shareholders due to the agent principal principle or due to the separate persona principle which separate shareowner from a company he or she created

[12/12, 8:01 AM] Brian Manyati: You secondly ask, is the relationship between directors and a company not absolute and fiduciary?

Fiduciary duties flow owed by directors to the company flow from our common law. Absolute relationship which is a rigid line flows from the statutory duties of the directors owed to the company flowing from the Companies Act. E.g. directors may pay employee bonuses, a constructive obligation, or keep jobs stable, however, the interest of surviving the company comes first statutorily.

[12/12, 8:05 AM] mdmawere1: What is the shareholder paper power?

How does a certificate like a birth certificate give any party control over anything?

The sperm may be mine and the certificate of birth may show my relationship with the reproductive consequence of sex, but that does not mean that the father whose name is on the certificate has control?

Life is pregnant with examples of single parent situations to provoke you from relinking the sperm from control.

The law vests directors as the address of control and once appointed, the have a duty to the company.

[12/12, 8:12 AM] Brian Manyati: I have done what I have done to cement the argument that the sperm is mine but the consequences of the new life aren’t the sire’s. With whatever I did yesterday I simply reached out other people to argue exactly that in their own words

[12/12, 8:14 AM] Brian Manyati: This is an example of one such strong case in point or argument raised in support of “the sperm is mine but the consequences of what I sired aren’t mine (only)”

[12/12, 8:15 AM] Brian Manyati: When shareholders’ part or full control only is on paper, a share certificate, it is rendered ineffective

[12/12, 8:19 AM] mdmawere1: What legal paper gives control and direction of a moving car to a title order?

Do you agree that a vehicle has no power to resist a reckless driver and that one does not need to be a title holder in order to benefit from a vehicle?

[12/12, 8:28 AM] Brian Manyati: I get it the share certificate gives title to company ownership as does the vehicle registration book

[12/12, 8:29 AM] Brian Manyati: A vehicle recklessly driven by management, namely, the directors, them being a hired driver, veers off the road no matter the registered vehicle owner cares

[12/12, 8:32 AM] Brian Manyati: In other words, if the directors and management recklessly drive a corporate entity, it fails, no matter the controlling shareholder as registered on paper on a share certificate as documented evidence, cares

[12/12, 8:33 AM] mdmawere1: Is the vehicle controlled by the title holder or the driver?

[12/12, 8:36 AM] Brian Manyati: The vehicle is controlled by the hired driver during the process of movement from place A to B. That is stewardship. The title holder cannot seat on the steering wheel at the same time.

[12/12, 8:36 AM] mdmawere1: Nothing stops a title holder from being a driver?

[12/12, 8:39 AM] Brian Manyati: Only when hiring a driver is what is justifiable as with all entities that are not owner managed e.g. due to size

[12/12, 8:40 AM] mdmawere1: Why insert an exception?

[12/12, 8:41 AM] mdmawere1: Does the motion of a car need a driver? Y or N

[12/12, 8:42 AM] Brian Manyati: Because corporate governance is mainly for public limited companies where there is separation of ownership from management

[12/12, 8:43 AM] Brian Manyati: Y

[12/12, 8:45 AM] mdmawere1: Do you agree that a company is a creature of law?

[12/12, 8:55 AM] Brian Manyati: I do, I agree that it is a creature of the Companies Act Chapter 24:03 if in Zimbabwe at present

[12/12, 8:58 AM] mdmawere1: Do you agree that once created, a company remains one throughout its life?

[12/12, 9:05 AM] Brian Manyati: No. It is capable of changing its identity, that being the name.

If the word one carries meaning like it is with human beings, that even if you change your birth name to another name you remain you then the answer becomes Yes.

[12/12, 9:08 AM] mdmawere1: If you agree that in terms of identity, you and I belong to the human identity as indivuals, then it must follow that a company belongs to the identity of legal persons?

[12/12, 9:09 AM] Brian Manyati: You have a point yes

[12/12, 9:10 AM] Brian Manyati: Even if a company changes a name, even if it shifts to a new identity, the corporate veil can be lifted to find out it is the same old identity made new

[12/12, 9:11 AM] mdmawere1: Do you agree that a natural person has the inherent power of causation and agency but juristic entities don’t?

[12/12, 9:12 AM] mdmawere1: I am not talking about unveiling a cheating husband for instance because identity of a male is not altered by mischief.

[12/12, 9:21 AM] Brian Manyati: In the sense of a director (a natural person) being an agent to a shareowner (another natural person) I agree humans having inherent power of causation and agency. I am not sure if in directors owing fiduciary duties directly to the company, there is power of causation or agency on the company’s part. I am asking self, does not a promoter (creater) of a company, at company formation stage, owe duties that are similar to an agent’s. Him or her being an agent to a baby not yet born, a company not yet formed, but him or her required to account faithfully to it, and it with the power of assenting or ratifying his or her acts at its first meeting. If this means the agency relationship stops there between a company and the creator, then once it’s existing, there surely may be no causation and agency between the company and its subscribers or shareholders as it is now acting in its own right and name, in its identity.

[12/12, 9:21 AM] Brian Manyati: Okay thanks

[12/12, 9:26 AM] mdmawere1: You seem determined not to learn that a director is not an agent of a shareholder but a principal whose duty of care is to the company he serves.

A shareholder is a holder of shares and not an owner of shares. What does the power of causation and agency mean to you?

[12/12, 9:28 AM] Brian Manyati: Power of causation and agency is power to act on someone’s behalf. It flows from stewardship

Mutumwa Mawere is an accomplished business man and Brian Tawanda Manyati is a Chartered Governor and an Accounting Technician. They are both members of the Connections2Communities (C2C) initiative.

There are various literacy initiatives on Corporate, Legal and Civic issues under the C2C banner.

In order to become a member of C2C and participate in these conversations and get exposure to many other related business opportunities, please register on the following link: https://zonfulenergy.com/membership/