Duties of a Company Director
Directors, whether they are formally appointed by a board or serve as de facto directors or shadow directors who are not formally named, must adhere to a number of duties to the company they control and direct. The duties of a company director are outlined in The Companies Act, 2006. Fully implemented in 2009, the legislation is the primary source for company law in the United Kingdom. Among common law principles for businesses codified in the Act are directors' duties. A significant change introduced with the Act was the emphasis on corporate social responsibility rather than corporate benefit where directors use their role for commercial benefit for the company and its members.
Overview of the Companies Act, 2006
The Companies Act, 2006 replaced principle common law and equitable duties of directors. The codified duties outlined in the legislation are not an exhaustive list and some duties for company directors remain in common law. For example, remedies for breaches of duty such as compensation for losses and restitution of illegitimate gains are not codified and common law applies. Duties of company directors focus on corporate social responsibility where directors ensure their actions contribute to some greater good for society beyond just benefits for the business. These could be benefits for the environment or a company's stakeholders, such as its employees and suppliers. Responsibilities and duties of a company director are outlines in sections 171 to 177 of The Companies Act, 2006.
Duty to Act Within Powers
Company directors are appointed by a board of directors and must act within their powers. They are required to abide by the terms of a company's memorandum and articles of association or constitution. Powers must only be exercised by company directors for proper purposes based on the company's constitution and in line with decisions made by shareholders.
Duty to Promote the Success of the Company
Directors are required to act in ways that benefit the company and shareholders. They must also consider the interests of the company's employees and impacts of their decisions on the broader community and the environment. Company directors are also required to consider the long-term consequences of their decisions and act fairly between members. They must also maintain a reputation for high standards of business conduct and build relationships with suppliers, customers and other stakeholders.
Duty to Exercise Independent Judgement
The Companies Act, 2006 requires directors to exercise independent judgement and they must use their own discretion to act. At the same time, their actions and judgement must be within the authorisation and guidance provided by the company's constitution and shareholder decisions.
Duty of Care
Under Section 174 of The Companies Act, 2006, a company director must exercise reasonable care, skill and diligence when performing their duties. This must be done within reason for a person charged with the position of company director. If an individual company director has special skills, knowledge or experience, even higher standards are expected.
Duty to Avoid Conflicts of Interest
Directors have a duty to avoid the possibility of a conflict of interest. A conflict of interest occurs when a company director's decisions may be influenced by other personal or professional interests. Any potential or existing conflicts must be disclosed to the board of directors or shareholders.
Duty to Reject Benefits from Third Parties
Company directors have a duty to not accept benefits from third parties. Where directors have an interest in a company transaction or relationships, regulations dictate how company directors should act. This duty ensures that directors do not pursue opportunities, for example a business transaction or relationship, related to a personal interest that could led to a personal benefit.
Duty to Disclose Self-Dealings
Directors are required to declare an interest for any proposed transaction with the company they control or direct. For example, if a business owner of a supplier is also the director of the purchasing company they must disclose this interest to the board of directors. The remaining members of the board who do not have an interest in the business transaction are then tasked with approving any deal where the director has an interest. If a self-dealing transaction has taken place, the board must disclose to shareholders or face criminal charges and fines.