A CRITICAL ANALYSIS OF THE DIRECTOR’S DUTY TO ACT IN WHAT

HE BELIEVES TO BE THE BEST INTERESTS OF THE COMPANY: A

PROPOSAL FOR AMENDMENT*
1.1 Introduction
The corporation1 is an artificial person. But its directors, subscribers and customers, usually

are not. In the case of directors, they represent “the directing mind and will of the company,

and control what it does,”2 since the company is said to be “a mere legal fiction that exists

only in the eyes of the law.”3 Corporate law seeks to curtail the enormous powers available to

these human agents. Part of the strategy employed by law is the imposition of duties on

directors. In law, „duty‟ is described as “a legal obligation that is owed or due to another and

that needs to be satisfied; an obligation for which somebody else has a corresponding right of

enforcement.4 Therefore, duties are usually couched in the tone of obligation, using any of

the modal verbs „shall,‟ „must,‟ „shall not‟ or „must not.‟

The duties directors owe are broadly categorised into two: duties of care and skill and

fiduciary duties of loyalty and good faith. While the one is an aspect of the common law tort

of negligence, the other has equitable connotations pertaining to trustees and agents. In that

light, a fiduciary has been described as “a person who is required to act for the benefit of

another person on all matters within the scope of their relationship; one who owes to another

the duties of good faith, trust, confidence and candour”.5 Evidently, the company director fits

this description in relation to the company. Section 279(3) and (4) require the company

* Hannatu Adamu, LL.M, LL.B., B.L., Lecturer, Department of Commercial Law, Faculty of Law, A.B.U. Zaria.
mamahannatu@gmail.com. This work was first published in the Ahmadu Bello University Journal of
Commercial Law, Vol. 7 (No.1) 2014 & 2015, pp. 166-184.
1
In this work, company and corporation are used interchangeably to refer to the same thing.
2
Per Lord Denning, Bolton Engineering Co. Ltd. v. Graham and Sons (1957) 1 Q.B. 159. See also section 63(1),
(3) and (4) of the Companies and Allied Matters Act Cap C20, Laws of the Federation of Nigeria 2004 (CAMA).
Unless otherwise stated, all sections cited refer to this law.
3
Ladejobi v. Odutola Holdings Ltd. (2002) 3 NWLR (Pt.753) 121 C.A at p.153.
4
Garner, A.B. (ed.). (2004). Black’s Law Dictionary. 8th edition, West Publishing Co., United States, p. 543.
Generally in jurisprudence, duty is considered the correlative of right so that wherever there exists a right in
one, there also rests a corresponding duty upon some other. See The Law Dictionary, accessed July 4, 2015 at
http://thelawdictionary.org/duty/.
5
Ibid. at p. 658. This definition was adopted in Bristol and West Building Society v. Mothew (1998) Ch. 1, at 11.

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director to act in the best interests of the company, so as to preserve its assets, further its

business, and promote the purposes for which it was formed, and also regard the interests of

employees and members. For some time now, the question has been debated: in whose

interests does the company exist or, for whose benefit should its directors serve it? This was

the theme of the famous Berle-Dodd debate of the early 20th century between two parties: one

insisting on shareholder primacy and the other proposing a stakeholder approach.6 The

debate—which continues to this day between proponents of the two groups—was an attempt

at finding the proper object of the director‟s fiduciary duty in practical terms.

There have been calls in recent times for the review of the CAMA regarding various

aspects of the law,7 with one writer even describing it as “stagnant and unprogressive”.8 Yet,

none of these calls addressed the area of directors‟ duties, even though that area is not

without problems. A few writers in the past have observed defects, including drafting and

printing errors, pertaining to that area.9 Some10 have particularly observed a problem with

section 279(4) on the interests of employees because of the obvious lack of enforceable

mechanism, since all the duties under section 279 are enforceable only by the company. A

cursory look at section 279(3) and (4) suggests that the two subsections raise other issues.

First, the law therein concedes to the director his business judgment, yet proposes to instruct

6
See discussion in 1.2 infra.
7
See for example Ogwu, M.S. (2014, April 18). We Encourage Quoted Firms to Have More Women Directors.
Daily Trust. Business, p.22; Adamu, H. (2013). Towards Easing the Incorporation Process. ABU Journal of
Commercial Law, 6(1): 205-219; Akume, A. A. (2012). The CAMA 1990, 20 Years On: The Need for Some
Review. ABU Journal of Commercial Law, 5(1): 28-39; Ekwere, U. (2010, November 1). Former SEC DG Calls for
Amendment of CAMA. Punch. Retrieved December 6, 2015, from www.allianzeglobal.com.
8
Aina, K. (2013). Board of Directors and Corporate Governance in Nigeria. International Journal of Business
and Finance Management Research, 1: 21-34, at p.23.
9
See Osunbor, A.O. (1992). The Company Director: His Appointment, Powers and Duties. In: Akanki, E.O. (Ed)
Essays on Company Law. University of Lagos Press, Lagos, pp.130-152, at p.141 and Ali, H.L. (1996). The Powers
of Directors in Nigerian Company Law: An Analysis of the Dynamic of Directors Dominance in Modern
Companies. LL.M. thesis (unpublished) Faculty of Law, Ahmadu Bello University Zaria, pp. 168-169.
10
Such as Ogbuanya, N.C.S. (2010). Essentials of Corporate Law Practice in Nigeria. Novena Publishers Ltd.,
Lagos, p.337; Bhadmus, Y.H. (2009). Bhadmus on Corporate Law Practice. Chenglo Limited, Enugu, p. 193, and
Ali, H.L. ibid. at p. 185. See also Keay, A. (2007). Tackling the Issue of the Corporate Objective: An Analysis of
the United Kingdom’s ‘Enlightened Shareholder Value Approach. Sydney Law Review. Vol. 29, 577-612, at
p.593, commenting on a similar provision in the 1985 UK Companies Act.

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him on how he may arrive at every business judgment. Second, members are lumped into the

same category with employees, rather than with the company, in the matter of entitlement to

the director‟s attention. Third, employee interests are entitled to the director‟s consideration

without any means of enforcement. Finally, the statement of the director‟s fiduciary duty is

compounded with that regarding his duty of care and skill in the same breath, in spite of the

fact that each of these is measured by a different standard. The net effect of all this is to

render the law misleading with regards to both employees and members, and ambiguous by

compounding the director‟s fiduciary duty with the duty of care.

In that light, this work is intended to highlight irregularities observed regarding

section 279(3) and (4) with a view to proposing amendments towards ensuring that the law

therein is clearer and more aligned with the rest of the CAMA. To achieve this, the paper

starts with a background on the Berle-Dodd debate in order to set the theme for a discussion

of the issues raised in the said subsections. The paper is concluded with a summary of the

findings and recommendations for amendment.

1.2 Background: The Berle-Dodd Debate

Early in the 20th Century, Berle11 and Dodd12 got embroiled in a debate regarding the ultimate

objective of the company: in whose interests and for whose benefit is it to be managed? 13 The

question was important because the answer pointed the company director towards the interests

he was supposed to be serving; effectively, the “person” to whom he owed his duties, or the

“object” of his services. Companies have come to be set up for various objects, pecuniary or

11
Adolf Berle, author of Berle, A.A. (1931). Corporate Powers as Powers in Trust. Harvard Law Review, 44:
1049; Berle, A.A. (1932). For Whom Managers are Trustees: A Note. Harvard Law Review, 45: 1365; and co-
author of Berle, A.A., and Means C.G., (1932). The Modern Corporation and Private Property. The Macmillan
Company, New York.
12
Merrick Dodd, author of Dodd, E.M. (1932). For Whom are Corporate Managers Trusties? Harvard Law
Review, 45: 1145; and Dodd, E.M. (1935). Is Effective Enforcement of the Fiduciary Duties of Corporate
Managers Practicable? University of Chicago Law Review, 2: 194.
13
Berle and Means considered this essentially the question: “who should receive the profits of industry?” See
Berle, A.A., and Means C.G., op.cit. (footnote 11) at p.333.

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altruistic. However, the majority of companies, as always, are profit driven and it is on these

that the following discussions are especially centred.

The company has special attributes that set it apart from any other type of business

arrangement. The decision in Salomon v. Salomon & Co. Ltd.14 has already established the

distinctive identity of the company as separate from those of its members or shareholders or

any persons associated with it for that matter. The question is: who, in fact, is the “owner” of

the corporation? It was decided in Macaura v. Northern Assurance15 that “the corporator,

even if he holds all the shares, is not the corporation...”16 Conclusively, therefore, the

company has no owner as even the shareholder or member, does not own the company, but at

the most, only has a transferable interest in it.17 And it is a fact that company law often

requires directors to act “in the best interests of the company.”18 But since the company is an

abstract entity—and in order to lend some practicality to the rule—it has often been held that

the interests of the company is akin to the interests of all its members together.19

Berle likened the corporation to the private property of its shareholders.20 According

to him, “all powers granted to a corporation or to the management of a corporation are

necessarily and at all times exercisable only for the ratable benefit of all the shareholders as

14
(1897) A.C., 22.
15
(1925) A.C. 619.
16
Ibid. per Lord Wrenbury, at page 633.
17
See more in Short v. Treasury Commissioners (1948) 1 KB 116 at 122 where Lord Justice Evershed of the
English Court of Appeal also refused the supposition that shareholders are the owners of the company.
18
See for instance section 8.30(a) of the United States Model Business Corporation Act; section 166(1) Indian
Companies Act 2013; section 181(1) Australian Corporations Act 2001; section 122(1) (a) Canada Business
Corporations Act 1985; section 172(1) UK Companies Act 2006; and section 279(3) CAMA.
19 th
See Birds, J., et al. (2011). Boyle and Birds’ Company Law. 8 edition, Jordan Publishing Limited, Bristol, at
pp.634 and 636. In Brady v. Brady (1988) B.C.L.C. 20 at 40, C.A., Nourse L.J pointed out that “the interests of a
company as an artificial person cannot be distinguished from the interests of the persons who are interested in
it,” referring to shareholders. See also Gaiman v. National Association for Mental Health (1971) Ch. at 330.
20
See Berle, A.A., and Means C.G., op.cit. (footnote 11) at p.334. The authors believed that owners ought to
receive the profits of the corporation because they acquired ownership of the corporate venture and are the
rightful benefactors of all corporate economic surplus to the exclusion of all non-owners. See also Stewart, F.
(2011). Berle’s Conception of Shareholder Primacy: A Forgotten Perspective for Reconsideration During the
Rise of Finance. Seattle University Law Review, 34: 1457-1499, at 1470.

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their interest appears.”21 Berle further argued that directors should not, as managers of

companies, have any responsibilities other than to the shareholders of their companies, for

whom money was to be made.22 In essence, shareholders are like owners of the corporation,

while directors managing the corporation are trustees and agents for the owners. In the words

of Berle and Means,

Wherever one man or a group of men entrusted another

man or group with the management of property, the
second group became fiduciaries. As such, they were
obliged to act conscionably, which meant in fidelity to the
interests of the persons whose wealth they had undertaken
to handle. In this respect, the corporation stands on
precisely the same footing as the common law trust.23

Dodd,24 on the other hand, saw it differently, arguing that the managers‟ duty ought to

be extended to other stakeholders. From his perspective, managers were granted many

freedoms, whether through law or factual circumstance, to conduct business in a manner that

would not necessarily maximize profits.25 He conceded to Berle that managers owed a

fiduciary duty to the shareholders, although not qua individuals but only to shareholders as

one of many groups.26 Yet, management must be seen to be serving the best interests of the

corporation as a whole. Thus, although the sole function of the corporation was still profit

making for its investors, managerial discretion must be liberal enough to take into

consideration the interests of other groups such as employees, customers, creditors and others,

even at the expense of maximizing profits.27 Dodd saw Berle‟s conception of the fiduciary

duty of the directors solely to the shareholders as having the potential to create a serious

obstacle to achieving socially responsible managers.28 He further argued that, to promote

21
Berle, A.A. (1931). Op.cit. (footnote 11) at p. 1049.
22
Ibid.
23
Berle, A.A., and Means C.G., op.cit. (footnote 11) at p. 336.
24
Dodd, E.M. op.cit. (footnote 12).
25
Dodd, E.M. (1932). Op.cit. (footnote 12) at p.1147.
26
Ibid. at p.1146.
27
Ibid. at pp.1147-1148.
28
Ibid. at p.1162.

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socially responsible behaviour, corporate managers (directors) needed to be the guardians of

all interests that the corporation affected, not just those of the shareholders.29

Berle later countered this corporate responsibility argument as being naively trusting

of corporate managers. He conceded to Dodd that managers did wield immense government-

like power over society, but argued that they did not thereby regard themselves as stewards of

society and did not assume social responsibility.30 Besides, no mechanism existed to enforce

the applications of what he called Dodd‟s “pseudo-theory of the corporation.”31 He further

countered that if the exclusive fiduciary obligation of mangers to shareholders were to be

ignored, then the management and control would become “for all practical purposes

absolute,” resulting in greater corporate irresponsibility. Therefore, until such time as Dodd

(or any others who sympathized with the idea of the noble manager) was prepared to offer a

“clear and reasonable enforcement scheme of responsibilities,” Berle held that emphasis

would have to be placed on the fact that the corporation‟s sole purpose was to make profit for

its shareholders because there existed no other legal control over corporate power, however

imperfect it may be.32

In the end, Dodd conceded the debate to Berle, admitting

I was rash enough to suggest that our law of business

corporations. . . might develop a broader view which
would make the proposition that corporate managers are,
to some extent, trustees for labour and for the consumer
more than meaningless rhetoric. The legal difficulties
which were involved were clear enough, as Mr. A. A.
Berle was quick to point out.33

Two prominent competing management ideas later emerged from the foregoing

discourse: the shareholder primacy theory and the stakeholder theory. Shareholder primacy

29
Ibid. at p.1161.
30
Stewart, F. op.cit. (footnote 20) at 1482, citing Berle, A.A. (1932). Op.cit. (footnote 11) at p.1367.
31
Ibid.
32
Ibid.
33
Ibid. at p.1490, citing Dodd in a book review in 1942 E. Merrick Dodd, Book Review, 9 U. CHI. L. REV. 538, 546
(1942) (reviewing Dimock, M.E. and Hyde, K.H. (1940). Bureaucracy and Trusteeship in Large Corporations.

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refers to the idea of putting the interests of the shareholders first before any other group or

factors, so that the corporation served no public purpose, unless such purposes furthered the

financial interests of the shareholders.34 According to the proponents of this theory, the social

responsibility of business is “to use its resources and engage in activities designed to increase

its profits, so long as it...engages in open and free competition without deception or fraud.”35

Shareholder primacy norm (SPN) allows the director to focus on shareholder interests,

thereby resulting in shareholder value maximization (SVM).36

Bowen, LJ of the English Chancery court once famously remarked that “the law does

not say that there are to be no cakes and ale, but there are to be no cakes and ale except such

as are required for the benefit of the company.”37 Thus, the company cannot be charitable or

benevolent unless that gesture could ultimately lead to some gain. In Dodge v. Ford Motor

Co.,38 Justice Orlander of the Supreme Court of the United States State of Michigan gave

what to date is considered the most direct and explicit endorsement of shareholder primacy in

legal records:39

A business corporation is organized and carried on

primarily for the profit of the stockholders. The powers of
the directors are to be employed for that end. The
discretion of directors is to be exercised in the choice of
means to attain that end and does not extend to a change
in the end itself, to the reduction of profits or to the non-
distribution of profits among shareholders in order to
devote them to other purposes.40

34
Byrne, P.T. (2010). False Profits: Reviving the Corporation’s Public Purpose. UCLA Law Review Discourse, 57:
25-49, at p.36.
35
Friedman, M. (1962). Capitalism and Freedom. University of Chicago Press, p. 133. The popular U.S. court
decision in Dodge v. Ford Motor Co. (1919) 170 N.W. 668 clearly supported this ideology.
36
Ronnegard, D. and Smith, N.C. (2011). Shareholders vs. Stakeholders: How Liberal and Libertarian Political
Philosophy Frames the Basic Debate in Business Ethics. Faculty and Research Working Paper, Insead Social
Innovation Centre, France, pp. 3-4.
37
Bowen L.J. in Hutton v. West Cork Railway (1883) 23 Ch. D. at 673
38
(1919) 170 N.W. 668
39
Ralph, G. (2012). BCE and the Shareholder Primacy Paradox: A Theory at War with Itself. (LL.M. thesis
University of Toronto, Canada) p. 15. Retrieved September 23, 2015 from https://tspace.library.utoronto.ca.
40
Dodge v. Ford Motor Co. supra at 685.

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 Evidently, courts in the past had a somewhat “capitalist” idea of what the corporation

was set to achieve and how it was to achieve it. It would seem that even today, the Anglo-

American jurisdiction, comprising the United Kingdom (UK), the United States of America

and a great number of countries in the British Commonwealth, including Nigeria, has its

corporate structure designed to ensure that corporations work primarily in the interest of

shareholders.41 However, it is pertinent to note that in none of the company laws of these

jurisdictions are directors tasked to specifically consider only the interests of the

shareholders:42 instead, it is the allocation of power and rights that result in a situation

amounting to shareholder primacy. In other words, corporate law is structured towards

shareholder primacy.43 This is obvious from the fact that the members in the general meeting

usually have the statutory power to appoint and remove directors; decide their remuneration

and withdraw their funds from the enterprise, thereby having the potential to influence

directors in their decision making. Thus, although directors are not mandated to consider only

the interests of members, the latter group has been statutorily armed to ensure that the

directors do just that.44 Conclusively, the legal power of members to vote for the board of

directors and their remuneration helps to perpetuate the SPN as a social norm, not necessarily

as a principle of law likely to be upheld in court.45

SPN advocates argue that this model enjoys the advantage of corporate law because

management is thereby more focused in achieving the main objective of the company and it is
41
See Anderson, M. et al. (2011). Evaluating the Shareholder Primacy Theory: Evidence from a Survey of
Australian Directors. Corporate Governance and Workplace Partnership Project, Faculty of Law, University of
Melbourne, Australia, p. 1. Retrieved September 6, 2015, from http://www.law.unimelb.edu.au. See also
Ronnegard, D. and Smith, N.C. op.cit. (footnote 36) at pp.6-7.
42
On the contrary, the directors are usually required to act “in good faith in the best interests of the company.”
Refer to footnote 18 above.
43
Ronnegard, D. and Smith, N.C. op.cit. (footnote 36) at p.7.
44
Conceded, in practice, the threat of the members voting power hardly materialises. See Benz, M. and Frey,
B.S. (2007). Corporate Governance: What Can We Learn From Public Governance? Academy of Management
Review, 32: 92-104. However, the fact still remains that, unlike “others” who are not members, at least the
latter have a voice under corporate law.
45
Ronnegard, D. and Smith, N.C. op.cit. (footnote 36) at p.8. The court would most likely let the directors get
away with any business judgment exercised in good faith in the interests of the company, regardless of the
outcome, unless discovered to have been arrived at mala fide.

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more difficult for directors to make excuses for poor performance when they are being held to

account by shareholders.46 But critics point out that it often results in directors focusing

mostly on share price maximization, consequently leading to short-term47—rather than long-

term—success, by neglecting the contributions of groups vital to the overall success of the

company (stakeholders).48

On the other hand, stakeholder theory proposes the idea that the corporation as an

entity, acting through its directors, owes a duty to consider the interests of all its stakeholders.

“Stakeholder” has been broadly defined as any group, individual or factor that can affect or be

affected by the realization of an organization‟s purpose.49 By this definition, therefore,

shareholders, the company, employees, customers, suppliers, creditors, the community, the

environment, all make the list. The theorists of this pluralist business ideology believe that

any business, large or small, is about creating value for “those groups without whose support

the business would cease to be viable” and since every business is concerned at some level

with relationships between financiers (including shareholders), customers, suppliers,

employees and communities, these groups can be considered the “primary” or “definitional”

stakeholders.50

Each of the stakeholder groups has a special “stake” in the company. 51 The stakes of

each are multifaceted and inherently connected,52 so that “competing stakes” require methods

46
Jensen, M.C. (2002). Value Maximization, Stakeholder Theory and the Corporate Objective Function.
Business Ethics Quarterly, 12: 235-256. Retrieved September 10, 2015, from www.hbs.edu.
47
Or “short-termism,” variously defined as “seeking short-term gain to the exclusion of long-term
achievement.” See Mullins, D. In: Jacobs, M. (1991). Short-Term America. Harvard Business School Press,
Boston; or “foregoing economically worthwhile investments with longer-term benefits in order to increase
reported earnings for the current period.” See Grinyer et al. (1998). Evidence of Managerial Short-Termism in
the UK. British Journal of Management, 12: 13-20, at p.15.
48
Colinger, D.O. (1995). Managerial Roles and Ethical Behaviour. Financial Practice and Education, 5: 50.
49
Freeman, R.E. et al. (2010). Stakeholder Theory: The State of the Art. Cambridge University Press, New York,
p. 26.
50
Ibid.
51
Ibid. at pp.24-25 and Freeman E.R. (2001). Stakeholder Theory of the Modern Corporation. General Issues in
Business Ethics, 38 at pp.42-43. Retrieved September 8, 2015, from http://academic.udayton.edu.
52
Freeman, E.R. et al, op.cit. (footnote 49) at p.27.

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of resolution.53 The most typical example is having to decide between the interests of

shareholders and the interests of employees. Thus, balancing is crucial, particularly since

stakeholder theory prohibits any undue attention to the interests of any single constituency.54

Importantly, if stakeholders are not equal in the eyes of management, one group would be

primary55 and this would simply result in another primacy norm.

Stakeholder advocates argue that even where management consults stakeholder

representatives in decision-making, unless these representatives are given real power, such as

an equal right to vote, ultimately it would still result in a situation of shareholder primacy.56

Thus, even if companies—as is the case in some jurisdictions, particularly Continental Europe

and Japan57—allow employee participation in corporate governance, the role they play would

be limited because of the absence of voting power.

There is logic in the proposition that managing the company strictly on shareholder

primacy principles would sooner bring the company down than assure its long-term success.

This is because the most obvious interests of shareholders is profit: if the directors were to

look only to achieving that, the overall business objective and long term success of the

company may be jeopardised in a bid to make shareholders happy by declaring a dividend at

every turn. But then on the other hand, if directors were to be required to consider a broad

picture of the various, albeit often conflicting, interests of the company‟s diverse stakeholders,

including those of the shareholders, there is the nagging problem of deciding whose interests

among all the stakeholders, should take precedence in the event of a clash in any particular

case. Finding a yardstick, or better still, a balance, when directors are faced with this situation,

53
Freeman, E.R. (2001). Op.cit. (footnote 51) at p.41.
54
Donaldson, T. and Preston, L.E. (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence and
Implications. Academy of Management Review, 20(1): 87.
55
Ronnegard, D. and Smith, N.C. op.cit. (footnote 36) at p.16.
56
See Mele, D. (2008). Corporate Social Responsibility Theories. In: Crane A. et al (Eds.) (2008). The Oxford
Handbook of Corporate Social Responsibility. Oxford University Press, Oxford, 47 at p.48 and Ronnegard, D.
and Smith, N.C., op.cit. (footnote 36) at p.16.
57
See Farrar, H.J. (2008). Corporate Governance: Theories, Principles and Practice. Oxford University Press,
England, pp.23, 34 and 35.

10

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is the one thing that seems elusive, even for stakeholder theorists. Should stakeholders as well

be armed with voting power within the corporation, this would significantly alter the whole

theory of capitalism58 and, by inference, the corporation, since companies would then be

obliged to play an active role in the pursuit of wider social policy goals, over and above their

own business objectives.59 The capital owner would cease to be “king,” so to speak because

outside parties could have a say regarding the way he used his capital. This may discourage

investors from using the corporate form. Importantly also, it would then be more difficult to

hold the director to account because he could always claim, whenever the consequences of his

decisions are probed, that he was acting in the interests of a particular stakeholder group.

Therefore, tying the director‟s duty to the company to the benefit of all the members,

would give the members better leverage to check the excesses of the director, than would be

the case where members are simply lumped together with other stakeholders. In this way,

there would be a permanent yardstick by which the director‟s performance may be gauged.

Thus, the members/shareholders could more precisely hold the directors accountable where a

particular action is not in their best interests as a whole and therefore, the best interest of the

company.

1.3 Section 279(3) and (4) of the CAMA

Section 279(3) and (4) of the CAMA appears to be the law‟s stance towards the question

raised in the debate just discussed. Therein, the law states thus:

(3) A director shall 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 skilful director
would act in the circumstances.

58
Which posits that the owner of capital has the sole right of control over its use and proceeds.
59
Davies, J. A Guide to Directors’ Responsibilities Under the Companies Act 2006, Certified Accountants
Educational Trust, (2007), p. 29. Retrieved from http://www.accaglobal.com/content, accessed March 27,
2015.

11

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 (4) The matters to which the director of a company is to
have regard in the performance of his functions include
the interests of the company's employees in general, as
well as the interests of its members.

The law here directs the director towards the main duty of his office and the factors to which

he must advert his mind when he makes his judgments. The notion of the best interests of the

company under the law includes preserving its assets, furthering its business and promoting

the purposes for which it was formed. This duty must be observed “at all times” in good faith

in what the director believes to be the best interests of the company and in the manner of a

faithful, diligent, careful and ordinarily skilful director. While carrying out this duty at all

times, the director is to regard the interests of employees and members. To “have regard”

means to appreciate the worth of something,60 or to show attention or consideration towards

something.61 Clearly, the tone of subsection (4) requires the director to actually advert his

mind to the interests of the two groups and allows the director no prerogative. Thus, he

cannot choose not to. Even though “include” suggests that the director may consider other

groups or matters he deems appropriate apart from those two—such as customers, creditors,

and the environment for example—any other matters are secondary to the ones mentioned.

While the act of “considering” is a mental activity, evidence that this has been done will

presumably manifest in improved conditions for the employees and members.

There are issues of irregularity, some of which are immediately apparent from the

provisions cited above. For a better analysis, the issues are mentioned and discussed seriatim.

1.3.1 Juxtaposing Members with Employees Rather than the Company

The first issue to be resolved is the shareholder/stakeholder question in relation to the

CAMA. In mentioning employees along with and even before members, the law seeks to

draw the director‟s attention to the importance of the former group. The Nigerian Law

60
Encarta Dictionaries, Microsoft Encarta Premium DVD, 2009.
61 th
Longman Dictionary of Contemporary English. (2005). 4 edition, Pearson Education Limited, England, p.
1380.

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Reform Commission, while proposing that provision, aimed at improving the plight of

employees and accommodating other stakeholders of the company apart from shareholders. 62

Still, the provisions of the law clearly place it under the Anglo-American model, and

therefore, shareholder oriented. This is because, although the law does not state here that only

the members‟ interests should be considered, the shareholders—as members of the general

meeting and the only other organ of the company apart from the board63—are the only ones

statutorily armed to ensure that the directors consider their interests as paramount.64 The rest

of the CAMA ensures that members are not only entitled to receive notices of, and attend

general meetings,65 appoint proxies,66 propose resolutions and requisition meetings,67 but also

appoint and remove directors68 as well as determine their remuneration.69 In other words,

although the interest of employees and other stakeholder groups may form part of the

director‟s concern, shareholders as members are the only group empowered by the law.

Generally, the provisions of the CAMA on directors‟ duties sought to codify common

law.70 Common law normally identifies the “interests of the company” with “the interests of

its members,”71 since the company is a mere legal fiction, having no eyes or brains of its

own.72 By mentioning “interests of the company” and “interests of the members” in different

subsections, CAMA implies that these are divergent. But then, juxtaposing employees and

members in the same category is misleading. Their rights, interests and risk pertaining to the

company, are clearly not similar. While employees await their wages which must come at the

62
See Report of the Reform of Nigerian Company Law Vol. 1, pp.212, 213 and 215.
63
See section 63 generally.
64
Whether or not they in fact exercise this power, is an entirely different issue.
65
See sections 219 and 227.
66
See sections 218(4) and 230.
67
See section 235 and 215(2).
68
See section 248(1).
69
See section 267(1).
70
See Report of the Reform of Nigerian Company Law Vol. 1, pp.208-233. See also Osunbor, A.O. op.cit. (11) at
pp.140-143.
71
See Greenhalgh v. Arden Cinemas (1951) Ch. 286; Re Smith and Fawcett Ltd. (1942) Ch. 304; Brady v. Brady
(1987) 3 BCC, 535 at 552 (CA) and Gaiman v. National Association for Mental Health (1971) Ch. at 330.
72
Ladejobi v. Odutola Holdings Ltd. (2002) 3 NWLR (Pt.753) 121 C.A.

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end of the month, members await dividends, which are dependent on the company‟s balance

sheet at the end of a financial year. Thus, members bear more risks at the end of the day

because, although the employee is sure to get his wages for work done, the shareholder is not

sure to gain on his shares and may even lose. Besides, directors are accountable to members

for how they run the company and they present their report for members‟ scrutiny at the

general meeting,73 whereas employees are not even entitled to receive notices of the meeting.

Furthermore, it is argued that the interests of the members, like the interests of the

company, would most likely also be to preserve the company‟s assets, further its business and

promote the purposes for which the company was formed which, ultimately, should result in

favourable returns. On the other hand, the interests of employees would tend towards keeping

their jobs, promotion opportunities and earning better pay. Evidently, therefore, the two

groups have diverse interests. Thus, the law ought to align members‟ interests with the

company‟s interests because the company‟s gain is ultimately for its members.

Moreover, if employees and members are to be considered co-equal, section 279(4)

leaves the director without a guide where the interests of employees clash with those of

members, as is bound to often be the case. How does the director decide in such a situation? A

good example here is a situation whereby directors are faced with a decision whether or not to

close down an ailing factory which employs a considerable number of workers. Any director

would invariably consider closing the factory, rather than continuing to utilize the company‟s

funds simply to keep it afloat. This decision in the interest of the company is ultimately in the

interest of the shareholders.

Conclusively, it is submitted that the director‟s duty to act in the best interests of the

company in subsection 279(3) cannot be practically isolated from his duty to have regard to

the interests of its members in subsection 279(4). Satisfying the interests of the company is

73
See sections 214 and 342.

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for the ultimate benefit of the members as a whole. Thus, the interests of members should

have been aligned with those of the company, rather than the employees.

Indeed, employees have not been entirely forgotten under the law. The CAMA has

provided for the issue of their welfare to be included in the directors‟ report, and they may

share in the company‟s profit and can even possibly be compensated upon cessation or

transfer of the business.74 However, nowhere does the law allow employees to even demand

these benefits as of right, unless it forms part of their employment contract. Thus, they are all

at the company‟s discretion.

1.3.2 Section 279(4) Not Enforceable by Employees

It was observed earlier in this work how enforceability is inherent in the concept of duty.

Thus, whenever there is a duty, there is an enforceable right somewhere. Section 279(9)

provides that the duties under the section are enforceable by the company. But it is hard to

imagine a situation whereby “the company” would attempt to enforce section 279(4) in

favour of employees. More to the point, who is the company? In line with section 63(1), “the

company” would more often be either the board of directors or members in a general

meeting. If the directors were to abandon the interests of “the company” in favour of the

interests of the shareholders—say, by declaring a dividend instead of recapitalizing to expand

operations or sponsoring employee training—who would check the directors on the matter of

the employees? Obviously, not the shareholders in whose ultimate favour the directors might

have acted, and surely not the directors themselves. Unfortunately, these are the only

“organs” through which the company might have acted to enforce the duty. Under the

circumstances, therefore, it is hardly surprising that there has been—to the best knowledge of

this writer—no report of an action to enforce the employees‟ aspect of section 279(4)

CAMA. Since it is unlikely that either group would come to the aid of employees against the

74
Sections 342(5), 384 and 566, respectively. In particular, Section 566 essentially rejects the decision in Parke
v. Daily News Ltd. (1962) Ch. 927, wherein the court held that the defendant company had no power to make
redundancy payments to its employees.

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director, it is regretful that employees themselves have no means of enforcing the subsection

in their favour. If the law intends for employee interests to be regarded only when they are in

the best interests of the company, and that only the company can enforce this duty of the

director, there is no apparent reason why employees should be given special mention.

For this reason, the mention of employees under section 279(4) is considered to be of

no practical use.75 This fact has earned the provision some very unpleasant names such as “a

mere pious declaration”76 and “a lame duck provision.”77 In fact, it has been suggested that

the provision has the effect to further dilute directors‟ accountability to shareholders, rather

than strengthen their accountability to employees because employees could not use the section

offensively, whereas directors could use it defensively when sued by shareholders by arguing

that a decision apparently unfavourable to the shareholders was unchallengeable because it

was taken in the interests of the employees.78

Besides, any rights employees may have are limited to their contracts of employment

with the company and generally any labour rights recognised by statute, as opposed to the

bundle of ownership rights available to members. Importantly also, unlike

members/shareholders who have the medium of derivative actions through which to enforce

the duties of directors albeit indirectly,79 the company‟s employees and any “others” have no

such means under the law for they are clearly ousted by section 279(9).

This writer subscribes to the view, as others,80 that the various stakeholders of the

company can more appropriately have their interests addressed outside of corporate law.

75
See Ogbuanya, N.C.S. op.cit. (footnote 10) at p.337; Bhadmus, Y.H. op.cit. (footnote 10) at p.193; and Ali,
H.L. op.cit. (footnote 9) at p.185.
76
See Ogbuanya, N.C.S. ibid.
77
See Keay, A. op.cit. (footnote 10) at p. 593, commenting on section 309 of the UK Companies Act of 1985
which is ipsissima verba with s.279(4) CAMA.
78 th
See Davies, L.P. and Worthington, S. (2012). Gower and Davies: Principles of Modern Company Law, 9
edition, Sweet and Maxwell, London, p.552.
79
See sections 301, 303 and 311.
80
See Keay, A. op.cit. (footnote 10) at p.610 and Copp, F.S. (2010). S172 of the Companies Act 2006 Fails
People and Planet? The Company Lawyer 31(12) 406-408, p.408. Retrieved May 23, 2015, from

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Contract, torts, labour, tax, consumer and environmental laws present great avenues for

addressing the interests of the company‟s respective stakeholders. Where these are

inadequate, perhaps, the respective laws should be reviewed. But importantly, the

stakeholders would not here be faced with the kind of impediment they would encounter

when attempting to safeguard their interests under corporate law—the issue of locus standi—

nor would the state on their behalf. In Nigeria, apart from the all-pervading contract law,

there is the Consumer Protection Council Act81 for consumers; the various labour and

industrial laws for employees; and many tax and environmental laws that host communities

can fall back on to, albeit indirectly, enforce any rights they may have against the company.

1.3.3 Tampering with the Director’s Subjective Judgment

Interestingly, the law in section 279(3) and (4) appears to be contradictory in the sense that it

gives and takes from the director the privilege of his subjective judgment. It concedes to the

director to act in what “he believes.” Therefore, his business judgment is measured by

subjective standards: his standard.82 However, after steering the director towards his primary

goal, which is to act always in the best interests of the company, and conceding his subjective

judgment to him, it is curious that the law further suggests to him the goals he is to achieve

and the matters to which he must have regard. Perhaps, if the law had merely permitted, or

encouraged the director to regard these varying interests, it would not have been so far off the

track. But the fact is that the law clearly mandates the director to do so “at all times.”

Directors are entrepreneurs. It is not the place of law to instruct them on the matters they must

consider in decision-making. In other words, the law cannot teach them how to arrive at

“good decisions.” This is often left to their good faith judgment. The implications of not

allowing the director the right to exercise his subjective judgment are enormous, considering

http://www.scribd.com. There, the writer posited that company law is not a vehicle for the promotion of
objectives outside of the company.
81
Cap C25, LFN 2004.
82
Re Smith and Fawcett Ltd. (1942) Ch. 304.

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corporations are usually business ventures and therefore, entrepreneurial. For this reason, the

law and the courts often seek to preserve this subjective judgment so as not to discourage

businessmen from trying new ideas or even taking up the post for fear that, should their

judgment result in any losses, they would be found to have acted in breach. 83 Besides, it is

said that risk is the essence of the director‟s work.84 Thus, the law recognises that the decision

of what is the best interest of the company is best left to the director.85

Every business decision is based on certain peculiarities, which vary for every

company. A company may find its objectives changing with circumstances. Clearly, it has

power to go into any business recognised by its memorandum, or at least, not contrary to it.86

At any point in time, a company may find that it needs to liquidate its assets, or it may not be

in its interests to further its business and it may even find itself changing its business or

selling off and merging with another. A company may be targeting ousting competitors,

opening new frontiers, achieving more fame or even simply “greening” its productions. This

is also bearing in mind that companies are set up for every kind of known lawful business.

For charitable or other such companies with altruistic motives, i.e. companies limited by

guarantee, it is conceded that their objects would take an entirely different dimension as

clearly defined by law.87 Thus, company law cannot dictate to the company what is best for

it. Therefore, to preserve its assets, further its business, and promote the purposes for which it

was formed, is not always what the director should aim for at every point in time. Indeed, it

83
See Davies, L.P. and Worthington, S. op.cit. (footnote 78) at p.552.
84
See Olawoyin, G.A. (1977). Status and Duties of Company Directors. University of Ife Press, Ile-Ife, p.7.
85
The test is not what the courts but what the director considers to be in the best interests of the company.
See Re Smith and Fawcett Ltd. (1942) Ch. 304; Howard Smith Ltd. v. Ampol Petroleum Ltd. (1974) A.C. 821;
Clemens v. Clemens Bros Ltd. (1976) 2 All ER 268, at 268-280; Regentcrest Plc (in liquidation) v. Cohen (2001) 2
BCLC 80, particularly at 120 and 123; Extrasure Travel Insurances Ltd. v. Scattergood (2003) 1 BCLC 598, at 90
and Brady v. Brady (1987) 3 BCC, 535 at 552 (CA). See also Report of the Reform of Nigerian Company Law Vol.
1, p.211
86
Refer to Section 39. Unlike in the case of a company limited by guarantee, the Act does not specify the type
of businesses a company not limited by guarantee may engage in. Thus, as long as a venture is lawful and not
illegal, a company is generally entitled to pursue it.
87
Refer to section 26.

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should not be for the law to state for the director what objectives he must achieve for the

company, nor for that matter, the matters to which he must have regard. As Hollignton

poignantly pointed out, this is the province of business schools and corporate codes of

ethics.88 This must be left to his good business judgment, after ascertaining that he acted in

good faith in the best interests of the company at the time, since the law allows him to “act in

what he believes.” With good reason, the court normally would not interfere with the

director‟s good faith judgment in the best interests of the company, as under common law, if

there is, prima facie, no reason to believe that he had acted mala fide, even where this results

in consequences which are not in the company‟s favour.89

Indeed, no reasonable director need be told to consider certain matters, where those

matters would ultimately be favourable to the company. For example, it is a well-known fact

that oil companies in the Niger-Delta area of Nigeria have had issues with host communities,

which have accused them of destroying their environment and livelihood. For as long as these

companies maintain production policies that are unfavourable to their host communities, they

continue to grapple with the kidnapping of their workers, and the sabotaging of their oil

installations, among other issues.

1.3.4 Compounding Fiduciary Duty with Duty of Care

Earlier in this work, it was observed that directors‟ duties are often categorised into two,

fiduciary duties and duty of care and that the two categories of duties have different origins.

Section 279(3) compounds the director‟s fiduciary duty with his duty of care and skill by

requiring the director to “act in what he believes...in such manner as a faithful, diligent,

careful and ordinarily skilful director would act in the circumstances.” Acting in “what he

88
See Hollington R. (2008, April 22). Directors’ Duties under the Companies Act 2006: Have the Lunatics Taken
Over the Asylum? A lecture delivered at Ian Fairbairn Lecture Theatre, University of Buckingham, p. 7.
Retrieved March 23 2015 from http://www.newsquarechambers.co.uk/files/Publications.
89
See Shepherd v. Williamson (2010) EWHC 2375, Ch; Extrasure Travel Insurance Ltd. v. Scattergood (2003) 1
BCLC 598, Ch.D.; Re Regentcrest Plc. v. Cohen (2001) 2 BCLC 80; Howard Smith Ltd. v. Ampol Petroleum Ltd.
(1974) A.C. 821; and Re Smith and Fawcett Ltd. (1942) Ch. 304.

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believes to be the best interests of the company,” already subjects the director to a subjective

standard. But acting in the manner of an ordinarily skilful director brings in the objective test.

It is therefore not clear from the wording whether the intendment of the drafters here is to

cede to the director his subjective judgment in business matters or still hold him to standards

of reasonability. Recall that the tradition of the courts is to cede to the director his business

judgment, as long as it was not arrived at mala fide. In any case, section 282 already requires

the director to show reasonable skill and care in the discharge of all his functions, so that his

actions would conclusively also be judged by those standards of reasonableness. Thus, if the

Act intends, by the second arm of subsection 279(3), to re-state the director‟s duty of care and

skill, this has simply resulted in ambiguity. The duty of care and skill is already separately

and appropriately captured in section 282 as the marginal note there reads.

Nigerian court decisions further explaining the subsections under consideration are

scarce, as is the case with the other provisions on directors‟ duties.90 The reasons are varied

and outside the purview of this work. However, the Supreme Court did mention section

279(3) while considering Artra Industries Nig. Ltd. v. Nigerian Bank for Commerce and

Industry.91 There, a loan agreement between the parties required the respondent to approve

any further mortgage of the property advanced as security under the loan. When the appellant

sought to make a third mortgage, after the respondent had approved a second one, the

respondent declined to give its consent. The apex court ruled that, in the light of section

279(3), the directors of the respondent were entitled to refuse to grant the permission for the

further mortgage, since the law requires directors to act in the best interests of the company.

Unfortunately, the court made no further pronouncements upon the contents of the subsection.

90
Authors of texts on Nigerian company law must have encountered this problem because their works are
replete with foreign decisions for illustrations. See generally Orojo, J.O. (2008). Company Law and Practice in
Nigeria. 5th edition, LexisNexis Butterworths, Durban, South Africa; Bhadmus, Y.H. op.cit. (footnote 10);
nd
Ogbuanya, N.C.S. op.cit. (footnote 10) and Emiola, A. (2008). Nigerian Company Law. 2 edition, Emiola
Publishers Limited, Ogbomosho.
91
(1998) 3 SCNJ, 97.

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1.4 Conclusion
From the foregoing, it is obvious that section 279(3) and (4) CAMA together result in

ambiguity. This is because therein the interests of the company and members are not aligned

as under common law. Rather, interests of employees and members are juxtaposed in the

same category in the matter of the entitlement to the director‟s consideration, without any

possible means of enforcement for employees. Added to that, the director‟s subjective

judgment is given to him and taken away in the same breath. Furthermore, the director‟s

fiduciary duty is complicated with his duty of care, each of which is judged by different

standards. The net effect of this is to render section 279(3) and (4) misleading and ambiguous

to a person of average acumen. The two subsections undoubtedly require clarifying in a

subsequent amendment. Therefore, it is recommended that the provisions be completely

abrogated and restated thus:

(1) A director of a company must act in good faith in what he believes is most likely
to promote the best interests of the company for the benefit of its members as a
whole.
(2) Where the company is limited by guarantee, subsection (1) has effect as if the
reference to promoting the best interests of the company for the benefit of its
members were to achieving its objects.

Important as other corporate stakeholders, including employees, are, their interests cannot be

adequately entertained under corporate law. Other laws pertaining to contract, torts, labour,

tax, consumer and environmental laws present great avenues for addressing the interests of

the company‟s respective stakeholders. The recommendation above cannot include their

interests because the rest of the CAMA does not support them.

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