Directors are more accountable for their actions than many realise; Kyri Papantoniou, partner at city law firm Fletcher Day, examines directors’ duties.
Corporate governance and directors’ duties may not be on top of the agenda for a startup busy with the daily demands of growing a new business. It may have slipped off radar or it may feel like an additional and irrelevant administrative burden.
You might wonder is it necessary to focus attention on it? Do decisions really need to be made formally at board meetings when the board are generally relaxed and informal in their approach to other matters concerning the business? And is it really necessary to record and minute this process?
The answer is yes. Directors need to be on top of their game when it comes to knowing and applying the law to which they are subject and this article will explore why.
What are directors’ duties?
Around ten years ago, directors’ duties became codified in company law legislation. The impact of this is that directors are now more accountable for their actions and also open to increased litigation. The company itself can take enforcement action against the directors and shareholders have the ability, in certain circumstances, to sue company directors.
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These duties are owed by the directors to the company and apply to any person occupying the position of director including shadow directors, executive and non-executive directors and, in certain cases, to former directors.
The key duties (in brief) are as follows:
- To act within powers;
- To promote the success of the company for the benefit of its shareholders. In connection with this a director must, among other things, have regard to the following which are essentially social responsibility factors:
i) the longer term
ii) the interests of the company’s employees
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iii) the need to foster the company’s business relationships with suppliers, customers and others
iv) the environment
v) the impact of operations on the wider community
vi) the desirability of the company maintaining a reputation for high standards of business conduct and the need to act fairly between members;
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- To exercise independent judgment;
- To exercise reasonable care, skill and diligence;
- To avoid conflicts of interest;
- Not to accept benefits from third parties; and
- To declare an interest in a proposed transaction or arrangement.
There are also other obligations contained in company law which are owed by directors over and above those referred to above (for example, a duty to prepare and circulate accounts) and also in other legislation such as anti-corruption and insolvency legislation.
So what does this mean in practice?
Companies need to make sure that all directors are aware of their duties. They should be briefed at the time of their appointment and it is advisable for any service agreements to refer to these. Company policies, for example those relating to HR or compliance, should also be prepared with these duties in mind.
It is essential to hold regular board and other management meetings and to ensure that these are clearly minuted to evidence the steps that directors have taken and why. For example, if the purpose of the board meeting is to authorise entry into a commercial agreement, the board should consider the benefits or impact of the agreement in the context of promoting the success of the company and therefore ensure that the commercial arrangement is beneficial for shareholders by reference to the matters referred to above.
The minutes should also record that certain other formalities and duties have been complied with (for example, a quorum being present and all interests in the business of the meeting being declared). It is important that the approach taken to minuting the meetings and consideration of directors’ duties is consistent at each meeting as inconsistency could raise a question as to whether or not the duties were fully considered.
If a particular director does not agree with his/her fellow board members on any particular matters, or suspects any wrongdoing, the concerned director should ensure that their particular concerns are raised and minuted also.
Given that directors may face personal liability for breach of duties in certain circumstances, it is important for directors to ensure that the company has taken out suitable directors’ and officers’ liability insurance to cover potential exposure.
Poor corporate governance could be hugely detrimental to a company long term so take heed of your director duties, prioritise good corporate governance and hopefully that insurance policy won’t ever need to be called upon.