What are the duties and responsibilities of a company director? Here we investigate what the Companies Act says a director should bear in mind when exercising their duty.
Many of you reading this will already be company directors, while some of you may be thinking about setting up a company and becoming a director of it or appointing a director. The starting point for any company director is to understand the director’s responsibilities and duties. These might seem obvious – run the company well, make money, keep the shareholders happy, don’t be a crook – but it is worth looking at the spirit in which company directors’ responsibilities are enshrined in law, rather than just agreeing to whatever the ‘jargon’ says.
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Company directors’ responsibilities were codified in the Companies Act 2006 with an emphasis on corporate social responsibility. It is still a director’s responsibility to drive the success of the company, as it was previously under common law, but they are now expected to do so with the wider social good in mind.
Directors’ responsibilities are defined so as to have them look beyond short-term returns and consider the effects of their actions on stakeholders other than the company’s own immediate shareholders and directors: suppliers, employees, customers and others affected by its activities.
Company directors’ responsibilities were codified in the Companies Act 2006 with an emphasis on corporate social responsibility.
A buzzword linked to the new directors’ duties is ‘Enlightened Shareholder Value’. Rather like the concept of sustainability in industry and farming, it advocates the creation of stakeholder wealth over the long term by paying responsible attention to the full range of stakeholder interests.
While a company’s shareholders own the company, they delegate its running to the directors (although in a lot of cases the directors and shareholders will be the same people). Clear and fair responsibilities for the directors are important both to protect the interests of shareholders and so the directors themselves know what is expected of them, what they can do and what they can’t.
If directors fail in their responsibilities, the consequences can be severe. Shareholders can vote for their removal, and in some cases directors can find themselves barred from being company directors for a considerable time. Therefore, it is sensible for a company director to have a good working knowledge of their powers and responsibilities as laid out in the company’s articles of association.
The Companies Act 2006 lays down several general duties that apply to all directors:
A duty to act within their powers
The directors may generally exercise all the company’s powers. However, the company’s Articles of Association may place restrictions on directors’ powers in certain areas. Common examples are limitations on the directors’ borrowing on behalf of the company and restrictions on the allotment of new shares in the company. As an example of the latter, it is common for the directors to have to offer new shares to existing shareholders before being able to invite applications more widely.
The details of directors’ powers are laid out in the company’s Articles of Association.
A duty to promote the success of the company
While it has no privileged status in law, the duty to promote the success of the company lies at the heart of a director’s duties. Other directors’ responsibilities, whether or not specified in UK legislation, could be seen as following from that. In promoting the success of the company for the benefit of its shareholders as a whole, the Companies Act says that directors should consider the impact of decisions on the company’s reputation and the interests of other stakeholders as well as the wider community.
A duty to exercise independent judgement
A director must have autonomy in their own assessments of the company’s activities. They should exercise independent judgement and not delegate too much of their decision-making to other directors or experts.
A director will be restricted in what they can do by various contractual obligations, the need to consult others before acting, board meetings, votes, and other provisions in the company’s constitution. However, directors are obliged to form their own personal opinions of the company’s current position and activities, and use these opinions to inform their decision-making.
A duty to exercise reasonable care, skill and diligence
This provision is an attempt to reduce the number of companies who have ‘figurehead’ directors with considerable fame or reputation but who are not expected to actually do any work in the running of the company. Any company director is now expected to have the knowledge, skill and experience that can reasonably be expected of a director of that company.
It is worth noting that there is something of a ‘sliding scale’ when it comes to forming subjective assessments of whether a director has fulfilled their duties adequately or been negligent. The question tends to be whether a director has exercised all the skill and judgement which they possess.
This means that a more experienced director, and/or one with specialised knowledge and expertise, will be held to a higher standard than a less experienced, non-expert director. In cases where a subjective judgement is required on whether or not a director has performed to the best of their knowledge and ability, their length of service and experience will be taken into account.
A duty to avoid conflicts of interest
A director faced with a conflict of interest must declare it to the other board members. The latter can then decide how best to handle the situation, assuming that they are free of the same conflict that affects the former.
A conflict of interest might be, for example, when a director has a business or personal relationship with a party who is within the company’s sphere of influence, where their loyalties could be divided by such a situation. Another case would be when a director acts so as to benefit personally from information or property belonging to the company.
Directors have the additional duty not to accept benefits from third parties where they represent a threat to their independent judgement. They also have a duty to disclose interests in a proposed transaction or action of the company which they stand to benefit from, directly or indirectly.
The duty to promote the success of the company lies at the heart of a director’s duties.
The articles will also define how decisions must be made. While limited company directors will act collectively as a board to bind the company, the articles usually empower the board of directors to delegate powers to individual directors as they consider appropriate. An individual director’s specific responsibilities within a company may differ based on the size of company, the number of directors and the nature of the company’s business. A director’s own role, experience and expertise will also influence their areas and scope of responsibility.
Directors’ responsibilities should always be agreed and documented.
Given these variations and to support accountability and transparency, directors’ responsibilities should always be agreed and documented. In that way, unnecessary duplication and “gaps” in directors’ responsibilities can be avoided.
There are other specific requirements placed upon directors by case law and other legislation, including:
- the Company Directors’ Disqualification Act 1986;
- the Insolvency Act 1986; and
- the Corporate Manslaughter and Corporate Homicide Act 2007.
More generally, obligations are placed on directors by health and safety legislation. We look elsewhere at a company’s health and safety responsibilities.
When considering appointing a director, you need to be aware of who can and can’t act as directors as well as the process of appointing them.
This article was originally published in January 2013 and has been completely revised and updated for accuracy and comprehensiveness. It was republished on the 17th of May 2022.
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