THE Companies Act 2016 (CA 2016) defines “directors” as any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directors or instructions the majority of directors of a corporation are accustomed to act and an alternate or substitute director.
This means that alternate directors are acknowledged and allowed under the CA 2016. But their presence may be a relic of the past.
With the prevalence of virtual meetings (including board meetings), surely the need for an alternate director is redundant. The principal director can attend board meetings virtually by audio or video conferencing.
What is telling is that the director, who has an alternate director, has given the game away by signalling that he may not have enough time to attend board meetings regularly – hence the need for an alternative.
Food for thought
Boards should not allow for the appointment of alternate directors as the distinct personalities of the principal and alternate director could cause numerous issues.
Firstly, they may have different opinions on some issues. They may not have completeness of knowledge as they split their attendance between themselves – they will not have the complete thread of discussions at board meetings.
Besides, alternate directors may not have the benefit of understanding context (including the history of previous discussions) nor would they take ownership of past decisions. The principal director would be aware of the key agenda of those meetings he attended but the alternate director would not and vice versa.
Then there is the issue of ascribing liability when things go wrong – whether both should be sanctioned or should sanction be apportioned. Then again, the principal director can blame the alternate director, claiming that the alternate did not brief him adequately and vice versa.
The permutation and combination of issues and problems almost seem limitless.
The definition of “director” under the CA 2016 includes alternate or substitute director. An alternate director is subject to the same directors’ liabilities under the CA 2016 when carrying out his/her functions as an alternate.
Also, the effectiveness of the board is in doubt as the alternate director may not have the same level of commitment given his role as an alternate. Chances are he may end up attending fewer meetings compared to the principal director.
Shareholders must ask the board about the rationale behind the appointment of alternate directors. Why was it necessary for the appointment of the alternate director?
Would the board’s effectiveness be compromised during their tenure? Will the appointment of alternate directors be prolonged? And lastly, considerations on the skill of the alternate director and other relevant issues.
Cautious stance
From a good corporate governance point of view, while the practice is allowed, MSWG tends to take a precautionary view on the appointments of alternate directors. We urge shareholders to question companies about their appointments.
Anyone who consents to act as an alternate director should also understand the implication of doing so. They are subject to the same statutory and fiduciary duties as a director when carrying out their functions as an alternate.
After all, the alternate is still a director and owes the duties required of a director and will be subject to the sanctions that may be imposed on a director.
An alternate director is entrusted with the powers, rights, duties, and responsibilities only when they are acting in place of the director for whom they are an alternate. At other times, when they are not acting as an alternate, they may not have such power and rights.
This creates interesting scenarios. After a board meeting, could both the director and alternate ask for information from management? The alternate will phrase the request by a preamble that pursuant to the last board meeting that they attended, they needs information from management.
Also, it is interesting to note that there are no specific provisions in the CA 2016 on the appointment of an alternate director. No alternate director may be appointed unless the authority to appoint is provided in the company’s constitution.
Seeking explanation
No shareholders’ approval is required for the appointment of an alternate director. As such, the alternate director is not shareholders’ choice but the choice of the principal director who in turn is approved by the board.
Directors are required to seek re-election if they retire at the upcoming annual general meeting (AGM). But this is not the case with alternate directors. The alternate director avoids the vote of the shareholders they claims to represent.
The alternate remains the choice of the principal director duly endorsed by the board – never the shareholders’ choice.
Boards should do away with the practice of appointing alternate directors. If a director cannot commit the time to be a director, then they should retire – not appoint an alternate.
Ultimately, the boards play a powerful role in dissuading the appointment of alternate directors. And if the appointment of alternate directors is enshrined in the constitution, it is time for the shareholders to pass the special resolution to remove such a clause.
Ideally, the board should get this done hand in hand with the shareholders. Presently, there is inconclusive case law as to how much liability will be imposed on the alternate director.
Maybe, the alternate director should think twice also before accepting an alternate-director position. – May 30, 2022
Devanesan Evanson is CEO of the Minority Shareholders Watch Group (MSWG).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
