What are the duties of directors?
The duties of directors are set out in the Companies Act 2006 and include promoting the success of the company for the benefit of its members as a whole, exercising independent judgment, exercising reasonable care, skill and diligence, avoiding conflicts of interest, and disclosure of interests in transactions.
The duties are owed to the company, not to individual shareholders. This means that directors must make decisions in the best interests of the company as a whole, rather than in the interests of any particular shareholder or group of shareholders. However, these duties are not absolute and directors may have some discretion when making decisions.
Understanding Duties of Directors
The duties of directors are set out in the relevant legislation and case law. They fall into two broad categories: statutory duties and fiduciary duties.
Statutory duties are those set out in the Companies Act 2006 and other legislation, such as the Health and Safety at Work, etc, while fiduciary duties are those that arise from the common law. Board meetings are the main forum in which directors can fulfill their duties.
They manage the company’s business relationships and exercise independent judgement in the best interests of the company. This means making decisions in good faith and for a proper purpose, with due care, skill, and diligence, and without conflicts of interest.
They are also responsible for safeguarding the company’s assets and ensuring that they are used for legitimate business purposes. This includes ensuring that the company complies with all relevant legislation and regulations.
Some of their duties also include managing the company’s assets, being transparent in corporate governance, and acting in the best interests of shareholders. They should also avoid any conflicts of interest and make sure that they do not benefit from any proposed or existing transactions.
To discharge duties effectively, a company director must be a reasonably diligent person and have a good understanding of the company’s business. They should also be familiar with the relevant legislation and case law.
Legal Duties and Responsibilities of Directors
The duties of directors are set out in the Companies Act 2006 and it refers to the following duties
1. Act within powers
The directors must comply with the company’s constitution and only exercise their powers for the purposes set out in the constitution. If they act outside of their powers, they may be liable to the company and its members.
2. Promote the success of the company
The directors must promote the success of the company for the benefit of its members as a whole. This duty requires directors to have regard to a range of factors when making decisions, including the long-term interests of the company, the interests of employees, the need to foster relationships with suppliers and customers, and the impact of the company’s activities on the environment.
3. Exercise independent judgment
The directors of the company must be independent in their decision-making and act with good faith to advance only the best interests of the organization. This means that they must not be influenced by any external pressure when making decisions.
4. Exercise reasonable care, skill, and diligence
The directors must exercise reasonable care, skill, and diligence when carrying out their duties. This includes ensuring that they are properly informed about the company’s affairs and making decisions in a considered and deliberate manner.
5. Avoid conflicts of interest
The directors must avoid conflicts of interest, which means situations where their interests conflict with the interests of the company. For example, a director should not enter into a financial transaction with the company if they stand to benefit from the transaction.
If a conflict of interest does arise, the director must disclose the conflict to the other directors and take steps to ensure that they do not take part in any decision-making about the matter.
Some of the examples that may give rise to conflicts are-
- Multiple directorships: A person who is a director of more than one company may find that their duties to each company conflict with each other. For example, if one company is considering making an acquisition that would be bad for the other company, the director would have to choose which company’s interests to promote.
- Personal interests: A director may have interests that conflict with the interests of the company, such as a financial interest in a supplier or customer of the company.
- Advisory positions: A person who holds an advisory position with a company (such as a legal or financial advisor) may find their duties to the company conflict with their duties to their client. For example, if the firm is considering a course of action that would be harmful to the client, the advisor must decide which duty to advance.
- Other profits: A person who derives income from sources other than their director’s fees may find that their duties to the company conflict with their duties to themselves. If a firm is considering an action that would be detrimental to its other commercial interests, it must prioritize which duty to promote.
- Connected persons: A person who is connected to a director (such as a spouse or family member) may find that their duties to the company conflict with their duties to the director. Furthermore, if the company is debating a decision that would be detrimental to the director, they would have to prioritize which duty to follow through with.
6. Not accept benefits from third parties
The directors must not accept benefits from third parties that could reasonably be perceived as an inducement to act in a way that is not in the best interests of the company.
This duty is designed to prevent directors from being unduly influenced by third parties, such as suppliers or customers when making decisions about the company.
7. Declare interests in proposed transactions
The directors must declare any interests they have in proposed transactions with the company.
This duty is designed to ensure that directors are not unduly influenced by their financial interests when making company decisions.
8. Disclose information to shareholders
The directors must disclose material information to shareholders, which means information that would reasonably be considered to be important to a shareholder when deciding on the company.
This duty is designed to ensure that shareholders are fully informed about the affairs of the company so that they can make informed decisions.
9. Act in good faith in the best interests of the company
The directors must act in good faith in the best interests of the company.
This duty is designed to ensure that directors act in the interests of the company as a whole, rather than in their own interests or the interests of any particular group of shareholders.
10. Comply with company law
The directors must comply with the company law.
This duty is designed to ensure that directors follow the rules and regulations that govern companies.
11. Duty of care & duty of loyalty
The directors must exercise a duty of care and loyalty when making decisions about the company.
This duty is designed to ensure that directors act in the best interests of the company and do not put their interests ahead of the company’s.
What to do when Directors think may be in a Potential Conflict Situation
1. Seek approval
When in doubt, always seek approval from the shareholders or the board of directors. This is the safest course of action and will help to avoid any potential conflicts of interest.
2. Check the articles of association
The articles of association may contain provisions that regulate conflicts of interest. For example, the articles may require directors to disclose their interests in proposed transactions.
3. Regulate your behavior
Even if there are no specific provisions regulating conflicts of interest, directors should always regulate their behavior to avoid any potential conflicts. For example, directors should not vote on matters in which they have a personal interest.
The Role of the Board
When you join a board of directors, you assume a slew of additional obligations. You will collaborate with your fellow board members to establish the company’s strategy. The following are some of the most important responsibilities that go along with being a director-
- Determining the company’s strategic objectives and policies: The board of directors is responsible for determining the company’s strategic objectives and policies. The board should establish what the company’s long-term goals are and how they will be achieved.
- Monitoring progress towards achieving the objectives and policies: The board of directors is responsible for monitoring progress towards the achievement of the company’s strategic objectives and policies. The board should regularly review the company’s performance to ensure that it is on track to achieve its goals.
- Appointing senior management: The board of directors is responsible for appointing senior management, such as the CEO, CFO, and other executive positions. The board should carefully consider who is best suited to lead the company and help it achieve its objectives.
- Accounting for the company’s activities to relevant parties: The board of directors is responsible for accounting for the company’s activities to relevant parties, such as shareholders. The board should provide regular updates on the company’s performance and progress towards its objectives.
What Powers do Directors Have?
Directors have a number of powers that they can use to help the company achieve its objectives. The following are some of the most important powers that directors have
- The power to make decisions on behalf of the company: Directors have the power to make decisions on behalf of the company. This includes decisions about the company’s strategy, operations, and finances.
- The power to bind the company contractually: Directors have the power to bind the company contractually. This means that they can enter into contracts on behalf of the company.
- The power to raise capital: Directors have the power to raise capital for the company. This includes the power to issue new shares, borrow money, and secure investment from third parties.
- The power to issue shares: Directors have the power to issue new shares of the company. This can be done to raise capital or to provide incentives for employees.
- The power to appoint officers: Directors have the power to appoint officers, such as the CEO, CFO, and other executive positions. The board should carefully consider who is best suited to lead the company and help it achieve its objectives.
Additional Duties of a Company Director
1. Following the company’s constitution
Directors are responsible for following the company’s constitution. This includes ensuring that the company is run by its articles of association.
2. Promoting the success of the company
Directors are responsible for promoting the success of the company. This includes acting in the best interests of the company and its shareholders.
3. Exercising independent judgment
Directors are responsible for exercising their independent judgment. This means that they should not be influenced by any external factors when making decisions on behalf of the company.
4. Exercising reasonable care, skill, and diligence
Directors are responsible for exercising reasonable care, skill, and diligence. This includes ensuring that they have the necessary skills and knowledge to make informed decisions about the company.
5. Maintaining filing and reporting obligations
Directors are responsible for maintaining the company’s filing and reporting obligations. This includes ensuring that the company files its annual return and other required documents with the relevant authorities.
6. Complying with additional legislation and regulations
Directors are responsible for complying with any additional legislation and regulations that may apply to the company. Some of such legislations and regulations are
- General Data Protection Regulation (GDPR)
- Consumer rights
- Health and Safety laws
- Licensing laws
- Employment law
- Trade descriptions
- Environmental regulations
- Competition law
- Legal requirements related to regulated professions
- Equality and diversity
- Food safety and hygiene
- Intellectual property
- Industry-specific laws and regulations
- Product Safety
7. Reporting personal income
Directors are responsible for reporting their income to the relevant authorities. This includes declaring any dividends or other payments received from the company.
The Duties of Directors are important to the function of a company. Without the Duties of Directors, a company would not be able to make important decisions or protect its assets. The Duties of Directors are necessary for the proper operation of a company.
Statutory duties directors need to fulfill include attending board meetings, having a direct or indirect interest in a proposed transaction, and protecting company assets. While fiducial duties are not required by law, they are important for the proper functioning of a company. These fiduciary duties include the duty of care, the duty of loyalty, and the duty of obedience.
A director of a company must always act in the best interests of the company. This includes making decisions that are in the best interests of the company, and not making decisions that would benefit the director personally.
What are your thoughts on the Duties of Directors? Do you think they are important? Let us know in the comments!