Directors’ Duties

The recent changes to the law on directors’ duties was well publicized. The Companies Act 2006 included a ‘statutory statement’ of duties which, by October 2008, became the basis of the law.

The new Act sets out seven duties which are designed to set the old law in stone.

In short, these are that directors must (1) act within their powers; (2) promote the success of the company; (3) exercise independent judgment; (4) exercise reasonable care, skill and diligence; (5) avoid conflicts of interest; (6) not accept benefits from third parties; and (7) declare all interests in proposed arrangements.

On the face of it, these criteria appear to mirror the old regime but there are some significant changes. In particular, the 2006 Act appears to move the goalposts in terms of defining the ‘interests’ of a company. Traditionally, acting in the company’s (i.e. the shareholders’) interests simply meant maximizing wealth. The new Act requires that, directors must “…promote the success of the company for the benefit of its members as a whole”. The Act goes on to say that, in doing this, directors must have regard to:- (a) likely long term consequences; (b) the need to foster business relationships with suppliers and customers etc; (c) the desirability of maintaining a reputation for high standards of business conduct; (d) the need to act fairly as between the members of the company; (e) the impact of the company’s operations on the community and the environment; and (f) the interests of the company’s employees. The principle has been dubbed ‘enlightened shareholder value’ and recognises that directors must take into account the effects of their decisions on any persons that may be affected by a company’s activities.

This creates uncertainty which is aggravated by the Act stating that the list is non-exclusive and that ‘other’ criteria must be considered. If directors fail to have regard to these criteria then they may be in breach of duty. Having to demonstrate regard to all relevant criteria also creates a significant bureaucratic burden; slowing down the decision-making process and arguably affecting the primary function of a business, generating income.

The potential problems created by the new law are unknown. Whilst it is widely accepted that companies are free to invest in a corporate responsibility programme as a means of raising profile, should it follow that directors are in breach of duty for failing to consider whether or not to invest in one? The Courts in 2009 even suggested that it may be reasonable to expect an employer to take into account the interests of the employees (when determining business need) even in a redundancy situation.

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