A director is legally responsible for the running of a company and in doing so must act in good faith, appropriately apply confidentiality and not misuse the company’s property. There are seven statutory duties set out within the Companies Act 2006.
COMPANIES ACT DUTIES
- To promote the long-term success of the company (considering the interests of all stakeholders).
- To act within the company’s constitution and articles of association (only do things the company has the ability and power to do).
- To exercise independent judgement (take on board advice from experts but make the final decisions yourself).
- To exercise reasonable skill, care and diligence (the expectation will increase with the more knowledge or experience you have).
- To avoid ‘situational’ conflicts of interest (situations where your loyalties are in more than one place).
- Not to accept benefits from third parties that are offered because you are a director (or because you carried out a certain action as a director).
- To declare any direct or indirect personal interest in any proposed transaction or arrangement to be entered into by the company (disclosure should be made to other members of the board at a meeting or in writing).
It is generally accepted that for a trading company to be considered a ‘success’ there will need to be ‘long-term increase in value’ within the company, however, it is ultimately for the directors to decide what constitutes success for their company. In making this decision it should be noted that when a court is reviewing action against a director for breach of duty, any judge will be reluctant to substitute the view of long term value increase, for different success criteria set out by the directors. In support of this the Companies Act provides further factors for the directors to consider in showing that they are promoting the success of the company:
- the likely consequences of any decisions 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 between members of the company
The shareholders have the ability to relieve the directors of many of their duties, in the articles of association, by authorising certain acts that would otherwise result in a breach. For example, situational conflicts of interest can be authorised by other independent members of the board who are not personally interested in a transaction or connected to someone who is.
DIRECTORS’ MANAGEMENT OF A COMPANY
The management of a company’s business is the responsibility of the directors with the duties being set out in the articles of association. The constitution usually entrusts powers to the board and prevents shareholders from interfering in the execution of directors’ duties.
In order to properly carry out their duties, directors have common law rights to inspect the books and records of the company, whereas this right is not extended to the shareholders. Directors can also exercise their powers over the management of the company even if it means acting against the wishes of the majority of the shareholders.
SHAREHOLDERS’ OWNERSHIP OF A COMPANY
Shareholders are the ultimate owners of a company so it is within their expectations that they can exert a certain degree of control over the directors. However, shareholders cannot exert direct control over directors while they are in office. This is the general reasoning for shareholders choosing, where practicable, to have board representation.
Ultimately though, shareholders can control the board of directors by their ability to appoint and remove directors from office. There may be other circumstances agreed by shareholders in the constitution of the company that further provide shareholder control. Shareholders may be required to give direction to the directors at general meetings or consent to the directors’ actions. Shareholders will also have authority to act where there has been a default of action by the directors or to ratify breaches of directors’ fiduciary duties.
Clear separation of roles enables directors to manage the day to day affairs of a company without interference from shareholders. Shareholders will generally benefit from this as the directors should run the company in the best interests of the shareholders. However, ultimate control will rest with the shareholders who have the ability to appoint or remove directors from office, any measures beyond this must be contained within the constitution of the company.
Further information on the roles and responsibilities of directors can be found here:
If you require any further assistance or would like more information then please get in touch with Sophie Parkhouse.