The responsibilities and duties of a company director

You must act in accordance with the company’s constitution, and only exercise your powers for the purposes for which they were given.

The company’s constitution includes its articles of association and resolutions and agreements of a constitutional nature (for example, shareholder or joint venture agreements). It will be important for you to be familiar with the terms of the relevant documents forming the company’s constitution.

You must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

This is a key duty and is often the focus of discussions around directors’ duties. It is typically referred to as the “section 172 duty”.

“Success” in the context of this duty will generally mean a long-term increase in the value of the company but fundamentally it is up to each director to decide, in good faith, whether it is appropriate for the company to take a particular course of action.

When considering what is most likely to promote the success of the company, the legislation states that a director must have regard to:

• The likely consequences of any decision in the long term.
• The interests of the company’s employees.
• The need to foster the company’s business relationships with suppliers, customers and others.
• The impact of the company’s operations on the community and the environment.
• The desirability of the company maintaining a reputation for high standards of business conduct.
• The need to act fairly as between members of the company.

This list is not exhaustive but is designed to highlight areas of particular importance to responsible business behaviour. These factors should be properly considered – directors should not treat them as just a box-ticking exercise. Other relevant factors should also be properly considered.

The significance of this duty in the context of stakeholders’ interests is reflected in its link to various reporting obligations placed on many companies. Those companies (size dependent) required to prepare a strategic report must use it to provide shareholders with information to help assess how the directors have performed this section 172 duty. For large companies, things are taken a step further with an obligation to include a specific statement in the strategic report describing how the directors have had regard to the listed matters when performing this duty.

There is some debate around how directors should document their compliance with this duty, in particular their consideration of the listed factors. In practice, it is typical for board minutes to state that the directors have taken the factors into account in carrying out their duty, without detailed discussion of each individual factor. Where a factor is particularly key to a decision it may be prudent to minute the discussion around it. Likewise, where a decision is controversial or significant, or the company’s reporting obligations call for it, it may be helpful if board papers capture a more detailed consideration of the listed and other relevant factors. Consistency may be the best approach generally – a detailed record of how the factors were considered for one decision and a lack of detail for another may suggest that no, or inadequate, thought was given to the factors in the latter.

As referred to in more detail below, this duty may be modified when a company is insolvent or at risk of insolvency to include an obligation to have regard to the interests of creditors.

You must exercise independent judgment and make your own decisions.

This does not prevent you from acting in accordance with the company’s constitution or an agreement which the company has entered into. This does not prevent you from taking professional advice but if you do, you should use your own judgment as to whether to follow it.

You must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:

• the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company
• the general knowledge, skill and experience that you actually possess.

The expected standard is measured against both objective and subjective yardsticks. A director’s actual understanding and abilities may not be enough if more could reasonably be expected of someone in his or her position.

You must avoid a situation in which you have, or could have, an interest that conflicts, or may conflict, with the interests of the company.

This duty applies, in particular, to the exploitation of any property, information or opportunity, regardless of whether the company could take advantage of it.

This duty is not infringed if:

• If the situation you are in cannot reasonably be regarded as likely to give rise to a conflict of interest. On a proper analysis of the circumstances, consider whether there will actually be a conflict or potential for conflict with the interests of the company.
• If the situation has been pre-authorised. Authorisation may be given in the articles of association, by specific shareholder resolution or, in certain circumstances, by the other directors who do not share the same conflict.

Examples of conflict situations

There is no convenient set of rules to determine which situations will or will not give rise (or potentially give rise) to a conflict of interest. The following are examples of arrangements which may potentially give rise to a conflict situation:

• Multiple directorships – you are also on the board of a major shareholder, the pension scheme trustee company, a competitor or a customer or supplier of the company.
• Personal interests – you are a major shareholder, a competitor, a customer or supplier of the company or you own property adjacent to the company’s property which could be affected by the company’s activities.
• Advisory positions – you have another hat as an advisor (for example, accountant or consultant) to the company or to a competitor of the company.
• Other profits – you make personal use of the company’s information or opportunities, want to take up an opportunity declined by the company or are in any situation where you can make a profit as a result of your directorship.
• Connected persons – if any of the above situations apply to a person connected with you (for example, a spouse, partner, parent, child or other close family member).

Steps to take

If you think you may be in a potential conflict situation you should:

Seek approval – potentially a conflict situation can be approved by the other members of the board. If the board does not have the power to authorise conflicts or is otherwise unable to approve the conflict situation it could refer the matter to the shareholders for approval.

Check the articles of association – the company’s articles might contain provisions relating to conflicts of interest, including:

• “Pre-authorised” common conflict situations – these might list a limited set of circumstances allowing you to put yourself in a situation which could otherwise give rise to a potential conflict of interest without obtaining specific approval. Typical examples include cross-directorships of group companies or positions relating to the company pension scheme.
• Conduct provisions – these might set out how you are expected to conduct yourself in relation to an authorised conflict and might also confirm that you will not be in breach of other duties to the company if you act accordingly. These typically deal with:
  • protecting the confidential information of the company and the third party;
  • inclusion or exclusion from board meetings and receipt of board papers;
  • any benefit received as a result of the authorised conflict.

Regulate your behaviour – even if a potential conflict situation has been authorised or is permitted by the articles of association you should still act appropriately, remembering your obligation to promote the success of the company. You must take care to act in accordance with the articles of association and any terms and conditions attached to the authorisation.

You must not accept a benefit from a third party given because you are a director or because you do (or do not do) anything as a director.

This duty is not infringed if your acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest.

If you are in any way, directly or indirectly, interested in a transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors.

In the case of a proposed transaction you must make this declaration before the transaction is entered into. In the case of an existing transaction you must do this as soon as reasonably practicable.

This duty is not infringed if:

• your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest; or
• an interest has not been declared because you are unaware that you have the interest or the other directors are already (or ought reasonably to be) aware of it.