What are the new duties for company directors?
Directors have always had a duty to act in good faith in the best interest of the company, avoid conflicts of interests, not profit from their offices, plus a duty of care and skill. But from October 2007 directors have a new clear code of conduct with seven specific duties outlined below. Directors should seek professional advice if at all uncertain how the new code will affect them, particularly in the early days of this legislation when guidelines are in short supply and the rules have not yet been tested through the courts.
These seven specific duties are:
1. Duty to act within their powers
A director’s powers are normally derived from the company’s memorandum and articles of association.
2. Duty to promote the success of the company
This includes long term consequence of decisions, interests of staff, relationships with suppliers, customers and the impact on the community and environment. It also covers maintaining high standards of business conduct and the need to act fairly. This duty introduces wider corporate social responsibility for directors’ decisions – it remains to be seen how this will actually work in practice – but directors should keep detailed minutes as evidence to show they have taken their duties in this area seriously.
3. Duty to exercise independent judgment
This is confusing, but the government has agreed that a director will not be in breach of this duty if he or she exercises his own judgment in deciding whether to follow someone else’s judgment on a particular matter!
4. Duty to exercise reasonable care, skill and diligence
The more experience, knowledge and skill a director has the higher the threshold in discharging this duty.
5. Duty to avoid conflicts of interests
The Act has simplified the old complex provisions from 1985 and made them more accessible and relevant to today’s changing business practices. It is now easier for directors to enter into transactions with third parties when directors’ interests conflict with company’s interests. Instead of shareholder approval being needed before directors can enter into transactions with third parties, transactions can be authorized by the non-conflicted directors on the board an s long as certain requirements are followed.
6. Duty not to accept benefits from third parties
A director is not permitted to accept a benefit from a third party by reason of either his being a director, or his doing – or not doing anything – as a director. This could range from non executive directorships to corporate entertainment. But a director will be OK if the acceptance of such benefit will not give rise to a conflict of interest. This aspect is likely to cause worries for many directors and many may take advice.
7. Duty to declare interest in proposed transaction or arrangement with the company
A director must declare the nature and the extent of the interest to other directors and also extends to a person connected with the director, for example family.
The reaction to these seven general duties will be fascinating. Clarity will help new directors but there will also be confusion and uncertainty, particularly in the duty to promote company’s success. Directors really must continue to seek advice if they are at all uncertain.