New company law - Directors' duties

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30 January 2009

The Companies Act 2006 codifies directors’ duties in statute law for the first time. There are 7 statutory duties for directors which are:

  • to act within their powers
  • to promote the success of the company
  • to exercise independent skill and judgement
  • to exercise reasonable care, skill and diligence
  • to avoid conflicts of interest
  • not to accept benefits from third parties
  • to declare interests

However, this is not a complete list of directors’ duties as other common law duties still apply. Also these statutory duties reflect the existing common law and will be interpreted in accordance with existing case law and principles.

The new duty to promote the success of the company (and not that of a third party) requires consideration. This duty is:

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

In performing the duty to promote the success of the company, directors should now have regard to the following factors:

  • likely long term consequences of decision
  • interests of employees
  • need to foster business relationships with suppliers, customers and others
  • impact of the company’s operation on the community and the environment
  • company’s reputation for high standards of business conduct
  • need to act fairly between members of the company

This is the new concept of “enlightened shareholder value”, where success for a commercial company will mean “long-term increase in value”. The duty to promote success replaces the common law duty of directors to act in good faith in the best interests of company as a whole.

Is this duty to promote the company’s success and the concept of “enlightened shareholder value” relevant to charitable guarantee companies with no shareholders, but only non-owning members?

Section 172(2) of the Act states:

Where the purposes of company consist of or include purposes other than the benefit of its members, it has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

So the success of a charitable company can be measured in broader terms than financial profit and assessed with reference to the achievement of its charitable purposes. But how is that success to be measured? There is no guidance within the Act on how to weigh up and assess the different factors listed in the Act, and no enforcement mechanism beyond the company members holding the directors accountable.

Government guidance says decisions are for the directors’ “good faith judgement” – it is not sufficient to pay lip service to factors, positive action may be needed to comply. The duty to exercise reasonable care, skill and diligence still applies.

The boards of charitable companies should now assess and review the outcomes of their decisions in the context of the above factors as well as the furtherance of the charity's objects.

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