Leading from the Top – Directors’ Duties

With the implementation of the Senior Managers and Certification Regime (SM&CR) imminent, there is increased emphasis from the regulator on improving conduct at all levels within the financial services sector. SM&CR aims to increase personal accountability, strengthen market integrity and reduce harm to consumers. To achieve this, there needs to be leadership and commitment at the highest level within firms to reasonably ensure compliance with the new regime.

Whilst SM&CR increases individual accountability throughout the sector, overall decision-making within a firm remains with the governing body, acting collectively. Therefore, company directors should strive to set the right standards and make sure that the firm’s governance arrangements remain fit for purpose. Directors must therefore fulfil their wider legal duties as directors and manage the firm appropriately.

Directors have a key role to play in shaping a positive organisational culture and promoting effective corporate governance. Directors are in a position of trust and, most importantly, have a legal and ethical relationship of trust with their company. As such, directors have considerable personal liabilities. If they breach their duties, they can face prosecution, fines, disqualification or up to ten year’s imprisonment. By meeting their legal and ethical duties, directors can help engender an effective and positive corporate culture. But what are the responsibilities of directors?

Directors’ legal duties include acting in the best interests of the company (both short term and long term), acting fairly between members of the company (i.e. not favouring the interests of certain shareholders over others), and acting as a trustee of the company’s assets. Directors must declare any interests and act reasonably and honestly. They must also exercise the best degree of skill and care depending on personal knowledge and judgement and reasonably ensure compliance with relevant laws.

Directors’ duties exist in statute, as well as case law. The Companies Act 2006 provides seven explicit duties that directors must abide by. It is good practice for directors to remind themselves of the seven duties on a regular basis. The seven duties are as follows:

1. Directors Must Act Within Their Powers (s.171)

Directors should be familiar with the company’s governing document – i.e. the articles of association of the company. These set out the rules, powers, obligations and limitations that company directors must adhere to.

2. Directors Must Promote the Success of The Company (s.172)

Directors must act in the best interests of the company’s members and consider the interests of stakeholders and the consequences that the company’s decisions may have. Stakeholders include the shareholders, employees, customers, suppliers, creditors, society and the environment. Directors should consider the long-term impacts that their decisions may have, including how they will affect business relationships and the reputation of the business.

3. Directors Must Exercise Independent Judgement (s.173)

Directors must apply their own judgement to situations and vote in accordance with their own views. Even if their decision is unpopular or against the opinion of their fellow directors, they should vote according to their own judgement or belief and should not be unduly influenced by others. A director has the right to have their dissent, and the reasons for it, recorded in the minutes.

4. Directors Must Exercise Reasonable Care, Skill and Diligence (s.174)

Directors must act with the care, skill and diligence that would be experienced by a diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and the general knowledge, skill and experience that the director has.

5. Directors Must Avoid Conflicts of Interest (s.175)

A director of a company must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. Directors shall not be in breach of this duty if lawful authorisation has been given by their fellow directors. The Companies Act 2006 (s.182) requires directors to declare an interest and under section 184, directors are required to bring interests to the attention of the other directors.

6. Directors Must Not Accept Benefits from Third Parties (s.176)

Benefits can only be accepted where they do not create a conflict of interest. It is wise that benefits from third-parties, even where they do not create a conflict of interest, be included in a register of directors’ interests.

7. Directors Must Declare Any Interest in Proposed Transactions with the Company (s.177)

These interests must be declared except in cases where the interest is unlikely to create a conflict of interest.

Beyond these seven explicit duties, directors have a much wider range of responsibilities and accountabilities in a business, including duties of care (e.g. Health and Safety at Work); the development of strategy, policies and procedures; risk management; reporting; expenditure control and many other duties. Good governance is essential in setting the right organisational culture in which compliance and positive conduct is embraced. Directors, as the most senior people within a company, should lead by example.