Strategy & Operations » Governance » Balancing directors’ responsibilities

When Sir Philip Green started facing further claims of sexual misconduct as well as allegations that matters were being hushed up with pay-offs and confidentiality agreements, one of the directors in his fashion business, Baroness Karren Brady, declared that she would not be leaving her directorship and asked “why should I?

She said that she had a duty to stay and look after the interests of the employees. However, around two weeks later and following many accusations of hypocrisy given her reputation for promoting women’s rights in the workplace, she seemingly succumbed to the public pressure and resigned from her board position. Her recent departure has thrown the subject of directors’ duties into the spotlight.

The duties owed by a director to their company are essentially all about trust, confidence and undivided loyalty. Such duties apply to all types of director in all companies, whether large or small, public or private.

The central duties were codified by the Companies Act 2006 and can be summarised as follows:

  1. To act within powers – basically meaning that the director must act in accordance with the company’s constitution (for example, its articles of association) and only exercise the powers for their proper purposes.
  2. To promote the success of the company for the benefit of the members as a whole – meaning that the director must act in good faith to protect all of the shareholders’ interests, bearing in mind a number of factors, including the possible long-term consequences, the interests of the company’s employees, the business relationships with suppliers and customers, the impact on the community and environment, maintaining the company’s reputation and acting fairly between the members.
  3. To exercise independent judgment – the director should not be unduly influenced by others but is permitted to take advice. However, the director must give proper consideration to decide whether such advice should be followed or not.
  4. To exercise reasonable care, skill and diligence – this is assessed both objectively and subjectively, meaning a Court will evaluate what can reasonably be expected of a person carrying out the functions of a director in the particular post in question as well as what qualities the particular director actually has.
  5. To avoid conflicts of interest – including both actual and possible conflicts, whether direct or indirect, and in particular in relation to the exploitation of any property, information or opportunity (regardless of whether the company could also take advantage).
  6. Not to accept benefits from third parties – any gifts or benefits that are received should be for the company, not the director personally.
  7. To declare an interest in a proposed transaction or arrangement with the company – even if the interest is indirect, the director needs to inform the other directors.

However, it is not just the Companies Act that is relevant. There are many other duties that apply to directors too, for example, in the anti-bribery, health and safety and insolvency legislation. A director might also wear other ‘hats’ too, as they might be a shareholder of the company, appointed by a shareholder or an employee. They therefore need to remain mindful of the differing obligations upon them in each of the roles they hold and be watchful for potential conflict situations.

If a director breaches their legal duties, there may be various personal repercussions. It might result in their removal from office or legal proceedings being brought, possibly leading to awards of financial compensation against them and, in rare circumstances, imprisonment. In some cases, they might also be disqualified for up to 15 years from acting as a director in the future.

Companies are not allowed to exempt directors from liability. However, they can provide indemnities in limited situations and arrange directors and officers liability insurance cover. Therefore, where possible, directors might want to consider negotiating these elements into their service contracts or appointment letters in order to get some protection.

Action Points:

For those who are already directors or who are about to be appointed as a director, it would be sensible to take the following actions:

  1. Ensure that you are aware of your legal obligations and, if necessary, seek some training or professional advice.
  2. Consider the various roles that you hold in your organisation. Be mindful of wearing the right ‘hat’ at the right time.
  3. Undertake any necessary actions to ensure compliance with your duties, if you have not already done so (for example, declaring potential conflicts of interest).
  4. If you have any doubts or concerns, seek professional advice about your situation or consult with fellow directors as appropriate.
  5. Check what protection, if any, is available to you (such as an indemnity or insurance cover).