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Implications of the codification of directors' duties
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| (Wednesday, 14 November 2007) Written by Margaret Cassidy |
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Why a statutory statement of directors’ duties?
“There are two ways of looking at the statutory statement of directors’ duties: on the one hand it simply codifies the existing common law obligations of company directors; on the other […] it marks a radical departure in articulating the connection between what is good for a company and what is good for society at large.” Rt. Hon Margaret Hodge MP MBE
“[…] the main purpose in codifying the general duties of directors is to make what is expected of directors clearer and to make the law more accessible to them and to others.” Lord Goldsmith
Directors' duties: overview
Duties owed to the company: only the company can enforce them, or members acting on behalf of the company
Duties owed by every person who is a director of a company
Statutory statement provides a code of conduct on how directors are expected to behave, not a list of things to do
Where duties overlap, cannot rely on one duty to act in breach of another: must comply with every duty that applies in any given case
Not an exhaustive list of responsibilities of a director: other laws and regulations must also be followed
Consequences of breach are same as those that would apply had the corresponding common law duty applied
Directors' duties: initial considerations
No hierarchy of duties
No distinction between FTSE 100, substantial private groups orowner/managed
No distinction between executive and non-executive directors
Company by company
Parent/subsidiary relationship
Directors' duties: the seven general duties
to act within powers
to promote the success of the company
to exercise independent judgement
to exercise reasonable care, skill and diligence
to avoid conflicts of interest
not to accept benefits from third parties
to declare interest in proposed transaction or arrangement Directors’ duties: promoting the success of the company
Duty to promote the success of the company (s.172)
“act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”
and in doing so have regard (amongst other matters) to:
the likely consequences of any decision i n 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 as between members of the company
Directors’ duties: key practical implications
Board to carry out risk assessment
interpretation of the duties
review of articles
D&O review
The Business Review and other external communications
consistency between external messages and internal decision making
Managing conflicts of interests in group situations
duties owed to which companies?
who needs to know of the changes?
what steps need to be taken?
policies/processes/training/delegated powers
Evidencing board decisions
changes in terms of reference
board papers
minute taking
Directors’ duties: GC100 - best practice guidelines
“The GC100 is of the view that directors are not currently, and should not be, as a result of this legislative codification, forced to evidence their thought processes whether that is with regard to the stated factors or any other matter influencing their thinking” (para 4)
No “one size fits all” solution
Awareness of duties under CA 2006
Board papers, rather than minutes, are the appropriate medium
“We should remind ourselves that being a company director is a wonderful thing for the person who is a company director. But it is a position of great responsibility which involves running the affairs of a company for the benefit of other people. It is a heavy responsibility we should not water down.” Lord Goldsmith
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