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Directors are persons appointed by the shareholders of a company to direct and manage the affairs of the company on their behalf. Since the provision of services should be compensated, most companies pay their directors (usually non-executive directors), remuneration in the form of annual fees and/or sitting allowances (for every meeting attended) as compensation for their service. Most companies also pay travelling, hotel and other expenses properly incurred by their directors in the course of carrying out their duties.
Section 267 of the Companies and Allied Matters Act Cap C20 Laws of the Federation of Nigeria 2004 regulates the payment of remuneration to directors and provides that a company shall not be bound to pay remuneration to its directors unless it is expressly provided for in its articles of association. Save for the remuneration of a Managing Director which is determined by the Board of directors, the remuneration of directors is determined and must be approved by the shareholders at a general meeting. Any remuneration provided for in a company’s articles of association can only be altered by a special resolution of the shareholders. Where a company agrees to remunerate its directors, such remuneration becomes a debt due from the company to the directors and the directors can sue the company for the debt.
In line with good corporate governance practice, companies which decide to pay remuneration to their directors are encouraged to develop an effective remuneration policy and establish a Board remuneration committee to advise the Board on its oversight responsibilities on this matter. Additionally, companies which pay directors remuneration are statutorily required to disclose the total remuneration paid to directors, including remuneration waived, in their annual financial statements.
The remuneration of directors is a principle of good corporate practice and if properly utilised can be an effective incentive that will ensure that directors remain focused on ensuring the company’s sustainability and are motivated to improve their performance. However, the decision to pay or not to pay remuneration must be carefully evaluated taking into consideration the company’s profitability and liquidity, the size of the Board and the directors’ performance, amongst others.
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