For company directors, a once flimsy set of guidelines has over the decades evolved into more concrete duties. If these are contravened, they can lead to personal liability. It’s the price directors pay for the towering influence they exert over organisations whose fortunes can make or break livelihoods (and the economy). However the Companies Act 2006, which came fully into force in October 2009, manifests a very modern need for greater transparency and shareholder-cooperation among directors. The 2006 Act updates pre-existing duties and includes new ones which directors must observe. These duties are briefly summarised below:
- Duty to act within their powers
A director can only act within the remit of the company’s constitution and only exercise those powers for the purposes for which they are conferred. Typically, the ‘constitution’ is the company’s ‘Articles of Association’.
- Duty to promote the success of the company
Directors must, in good faith, act in a way which will most likely promote the success of the company, having regard to a non-exhaustive list of factors which include: the likely long-term consequences of decisions made, the interests of the employees, and the impact of the company’s operations on the community and the environment.
- Duty to exercise independent judgment
Directors may consider the opinions of others, or may even emulate another’s opinion, but must have used their own independent judgment in making decisions pertaining to the company.
- Duty to exercise reasonable care, skill and diligence
Directors must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with: (i) the knowledge, skill and experience we can reasonably expect of a person carrying out the same functions as the director in relation to a company, and; (ii) the knowledge, skill and experience that the director has. Thus, a director with more experience/greater knowledge (eg one who is also an accountant or lawyer) will need to meet a higher standard to satisfy this duty.
- Duty to avoid conflicts of interest
Directors must avoid situations in which they have, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company; directors should be particularly mindful of this duty in transactions with third parties.
- Duty not to accept benefits from third parties
Directors must not accept any benefit, be it monetary or non-monetary, from a third party by virtue of their directorship, or by doing (or indeed not doing) something as a director. However, this duty doesn’t apply if the benefit is unlikely to create a conflict of interest.
- Duty to declare interest in any proposed transaction or arrangement with the company
Directors with an interest in a proposed transaction with the company must declare the nature and extent of that interest to the company board. For example, if a company plans to purchase commercial property in which a director of theirs has a stake, the director must disclose this interest to the board.