Enhancing good corporate governance in your business

Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. It essentially involves balancing the interests of a company’s many stakeholders, promoting the compliance of law in letter and spirit as well as demonstrating ethical conduct. The enactment of the new Companies and Other Business Entities Act [Chapter 24:31] (hereinafter “the COBE”) Companies Act is an effort by the legislature to create a favourable environment for incorporation and sustained existence of business entities. Corporate governance measures are also set out in the National Code on Corporate Governance Zimbabwe (ZimCode) which applies to all business entities regardless of the manner and form of their incorporation or establishment and whether the business entity is in the public or private sector or it is non-profit making.

Duties of Directors in the COBE

The COBE partially codifies the common law duties of directors that were not codified in the old Act. The duties are provided for in section 54 (“Duty of care and business judgment rule “), 55 (“Duty of loyalty”), and 57 (“Duty to disclose conflict of interest”). It is important to note that section 57 does not only apply to directors (in the common sense) but also applies to persons in manage­rial positions in the company who, amongst others, represent and bind the company in transactions. At common law, directors are subject to fiduciary duties requiring them to exercise their powers in good faith and for the benefit of the company. They must also display reasonable care, skill and diligence in carrying out their duties.

Duty to disclose conflict of interest

Section 57 of the Act provides that, a director of a com­pany will be required to disclose any “personal financial interest” that the director or an associate (of that direc­tor) has in a matter to be considered by the board of a company. In simple terms, a director (in the wide sense[1]) who is in any way interested in a transaction that the company is involved in, or is about to be involved in, must declare his or her interest before such a transaction is discussed and decided upon by the company. The nature of ‘interest’ contemplated in section 57 of the Act is that which relates to matters of a financial, monetary or economic nature, or to which a monetary value may be attributed. Once the director has made the disclosure, he or she is required to then recuse him or herself from the meeting and must not thereafter sign any document relating to the matter, unless he or she is specifically directed to do so by the board.[2]

Where the director acquires the personal financial interest after the company has concluded the agreement, the Act mandates the director concerned to promptly disclose to the board the nature and the extent of the interest.[3]  If a decision, transaction or agreement is approved by the board of directors after the director has disclosed his or her personal financial interest, such a decision remains valid.[4] It will also be valid even if the disclosure was not done but the decision was subsequently ratified by the shareholders, or if an interested person applies to a court for a declaration that such a decision is valid despite the non-disclosure.[5] However, unless the decision is subsequently ratified by the shareholders, the director concerned would be in breach of his fiduciary duty and will be personally liable for any loss, damage or costs that the company may suffer as a result of such failure to disclose.

Directors (in the wide sense) must be knowledgeable of these disclosure provisions as fail­ure to disclose a financial interest is a criminal offence punishable by a fine not exceeding level fourteen (ZWL$120 000,00)[6] or imprisonment for a period, not ex­ceeding two years or both such fine and imprisonment.

The Board of Directors in the ZimCode

In the discharge of its role and functions, every Board must conduct itself with honesty and integrity and, above all, must always act in the best interests of the company. When acting in the best interests of the company, directors should consider the interests of all shareholders and other stakeholders.[7] Every director must have time and energy for, and commitment to, the company by attending a minimum of seventy-five percent of Board and Board committee meetings, all annual general meetings and all-stakeholders meetings, and assisting the chairperson in answering questions raised at such meetings;[8]

At a minimum, two executive directors should be appointed to the Board, being the chief executive officer and the director responsible for finance. This will ensure that there is more than one point of contact between the Board and management. As a minimum, three non-executive directors should be appointed to the Board, the majority of them being independent.[9] Additionally, board members should not serve on more than six boards at the same time and should this threshold be exceeded, the Board members concerned should give good and sufficient reasons for that and demonstrate ability, availability and capacity to discharge their roles, functions and duties in ways that best serve the interests of the company, its shareholders and other stakeholders. Such reasons must be subjected to scrutiny and approved by a resolution of at least fifty percent of shareholders present at a meeting convened for that purpose.[10]

A person should not be appointed as chairperson of more than four boards if this threshold is exceeded, then the person concerned should offer good and sufficient reasons for that and demonstrate ability; availability and capacity to discharge their roles, functions and duties in ways which best serve the interests of the company, its shareholders and other stakeholders. Such reasons must be subjected to scrutiny and approved by a resolution of at least sixty percent of shareholders present at a meeting convened for that purpose.[11]

Register of Beneficial owners

Section 72 of the COBE introduces a novel obligation that was not part of the old Companies Act for every company to maintain an accurate and up-to-date register of the beneficial owner or owners of the company, to be known as the register of beneficial owners. The Act defines a ‘beneficial owner’ as individuals who directly or indirectly hold more than twenty percent of the company’s shares or directly or indirectly hold more than twenty per centum of the company’s voting rights; or directly or indirectly hold the right to appoint or remove a majority of the company’s directors; or otherwise exercise significant influence or control. This means that a company must identify and record all individuals who own or control the company. This information must be filed with the Registrar and any changes to the information must be updated and be filled within seven days.

Companies must take note that the register for beneficial owners is public information and may be inspected by the public, financial institutions and by the Financial Intelligence Unit or by a law enforcement agency. Failure to comply with the requirements constitutes an offence and a fine not exceeding level 14 or imprisonment for a period not exceeding five years or both may be imposed.[12] Therefore companies must ensure that they put in place appropriate measures to comply with these requirements.

Solvency and Liquidity Test

The new companies Act also introduces the solvency and liquidity test in Section 102.  In terms of the Act, a company satisfies the solvency and liquidity test if after consideration by the company of all reasonably foreseeable financial circumstances, to determine whether the aggregate of the assets of the company, fairly valued, equals or exceed the liabilities of the company, as fairly valued, at a particular time.[13] If it appears that the company will be able to pay its debts as they become due in the ordinary course of business, for a period of 12 months after the date on which the test is considered, or in the case of distribution, 12 months following that distribution, then the company will pass the test.[14]

The test prohibits a company from disposing of its material assets or incurring excessive liabilities to the detriment of creditors. It also seeks to ensure that a company pays its creditors timeously. The test is applied several times for example; when a company offers financial assistance for the purchase of its own shares or shares of its holding company[15], when a company authorises dividends[16] and before a company incurs a debt or other obligation for the benefit of one or more of its shareholders. Non-compliance with the test means that the directors of the company will be held personally liable.[17] Therefore, company directors must familiarise themselves with the test and when it is to be applied.

Company Secretary

The new Companies Act requires every company to appoint at least one company secretary who is ordinarily resident in Zimbabwe.[18] They was no specific mention of the functions of a company secretary in the old Companies Act. The new Companies Act states that the functions of a company secretary include;

a) acting as custodian of the company’s records including shareholder records;[19]

(b) ensuring that notices of all shareholder meetings, board meetings and board committee meetings are given in accordance with the Act;[20]

(c) ensuring that minutes of all such meetings are recorded in accordance with the Act;[21]

(d) advising the directors as to their duties and powers under the Act;[22]

(e) making the directors aware of other laws relevant to or affecting the company[23] and

(f) certifying in the company’s annual financial statements whether the company has filed required returns and notices in terms of the Act.[24]

The ZimCode also provides similar duties of a company secretary. It states that a company secretary should strive to achieve the realization of good corporate governance principles by:

(a) assisting the nomination committee in ensuring that the procedure for the appointment of directors is complied with;[25]

(b) assisting in the proper induction, orientation, ongoing training and education of directors and assessing their individual training needs and those of executive managers in their fiduciary and other governance responsibilities;[26]

(c) assisting and guiding directors in appreciating their role, responsibilities and duties, and discharging them in the best interests of the company;[27]

(d) providing a central source of advice to the Board and within the company on matters of good corporate governance, law and any developments or changes thereto;[28]

(e) having a direct channel of communication with the chairperson and being available to provide comprehensive practical support and advice to chairpersons of the Board and Board committees;[29]

Conclusion

A strong, transparent corporate governance leads a company to make ethical decisions that benefit all of its stakeholders, allowing the company to place itself as an attractive option to investors. Bad corporate governance leads to a breakdown of a company, often resulting in scandals and bankruptcy. It is recommended that compa­nies carefully consider these provisions to enhance their good corporate governance.

The concept of corporate governance is becoming increasingly important in companies. JPLP wants to assist you in enhancing your companies’ processes, operations and policies.

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1. persons in manage­rial positions in the company who, amongst others, represent and bind the company in transactions.
2. Section 57 (1) (d-g) Companies and Other Business Entities Act [Chapter 24:31]
3. Section 57 (2) Companies and Other Business Entities Act [Chapter 24:31]
4. Section 57 (3) Companies and Other Business Entities Act [Chapter 24:31]
5. Section 57 (4) Companies and Other Business Entities Act [Chapter 24:31]
6. Statutory Instrument 57 of 2020.
7. Section 57 First Schedule:  National Code on Corporate Governance Zimbabwe [CHAPTER 10:31]
8. Section 59a First Schedule: National Code on Corporate Governance Zimbabwe [CHAPTER 10:31]
9. Section 97 First Schedule: National Code on Corporate Governance Zimbabwe [Chapter 10:31]
10. Section 98 First Schedule: National Code on Corporate Governance Zimbabwe [Chapter 10:31]
11. Section 99 First Schedule: National Code on Corporate Governance Zimbabwe [Chapter 10:31]
12. Section 72 (10) Companies and Other Business Entities Act [Chapter 24:31]
13. Section 102 (1)(a) Companies and Other Business Entities Act [Chapter 24:31]
14. Section 102 (1)(b) Companies and Other Business Entities Act [Chapter 24:31]
15. Section 123 Companies and Other Business Entities Act [Chapter 24:31]
16. Section 138 Companies and Other Business Entities Act [Chapter 24:31]
17. Section 197 Companies and Other Business Entities Act [Chapter 24:31]
18. Section 198(1) Companies and Other Business Entities Act [Chapter 24:31]
19. Section 198(3)(a) Companies and Other Business Entities Act [Chapter 24:31]
20. Section 198(3)(b) Companies and Other Business Entities Act [Chapter 24:31]
21. Section 198(3)(c) Companies and Other Business Entities Act [Chapter 24:31]
22. Section 198(3)(d) Companies and Other Business Entities Act [Chapter 24:31]
23. Section 198(3)(e) Companies and Other Business Entities Act [Chapter 24:31]
24. Section 198(3)(f) Companies and Other Business Entities Act [Chapter 24:31]
25. 137 a First Schedule: National Code on Corporate Governance Zimbabwe [Chapter 10:31]
26. 137b First Schedule: National Code on Corporate Governance Zimbabwe [Chapter 10:31]
27. 137c First Schedule: National Code on Corporate Governance Zimbabwe [Chapter 10:31]
28. 137d First Schedule: National Code on Corporate Governance Zimbabwe [Chapter 10:31]
29. 137e First Schedule: National Code on Corporate Governance Zimbabwe [Chapter 10:31]