The Duties of a Director

I have looked at international law and there are three key principles that are found in the legislation of every country around the world when it comes to directors’ duties:

1. A duty of trust, which means that a director must focus on what is best for the company they serve.
2. A duty of care, which means that a director must be mindful of their conduct, decisions and judgement.
3. A duty to exercise independence by avoiding conflicts of interest and maintaining their integrity.

The UK was one of the first countries in the world to establish rules setting out how companies should be operated. Today, our system of company law and corporate governance provides the framework within which all business is conducted. Our primary source of company law in this country is The Companies Act 2006, which sets out how companies must be formed and run. It has 1,300 sections and the list of contents alone runs to 59 pages.

Directors appointed to the board in UK companies have seven key duties in law, set out in sections 171 to 177 of the Act.

The seven codified duties of directors

1. S 171 to act within their powers: The first director’s duty, under section 171, is to follow the company’s constitution and abide by the terms of the company’s memorandum and articles of association. Directors are required to only exercise their powers for the ‘proper purpose’. They cannot go beyond the reason for which they are given their powers. This stops directors doing such things as taking company assets to line their own pockets.
2. S 172 to promote the success of the company: Under section 172 directors must ‘promote the success of the company’. When the Act was going through Parliament on its way to becoming law, this phrase prompted a lot of discussion. It hinges on the idea that a director must act in the way he considers, in good faith, would be most likely to promote the success of the company as a whole. To help clarify this concept, the Act lists six things that directors should bear in mind when making decisions and taking action:

• the likely, long term consequences of any decision,
• 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.

In the annual Director’s Report, companies must explain how they have complied with their duties to stakeholders and shareholders.

So you can see that directors have to bear the best interests of a lot of people in mind. To help remind you of who all those people are, I use the acronym GTS MOLES, which stands for government, traders, suppliers, management, owners, lenders, employees, and society.

 

1. S 173 to exercise independent judgment: There is a duty under section 173 to exercise independent judgment.
2. S 174 to exercise reasonable care, skill and diligence:  The duty of care in section 174 applies to the decision-making process of a director having regard to the factors listed in section 172. Directors must display the care, skill and competence that is reasonable for somebody carrying out the functions of the office and if a director has any special qualifications an even higher standard will be expected. However, under section 1157 courts may, if directors are negligent but found to be honest and ought to be excused, relieve directors from paying compensation. Cases under the Company Director Disqualification Act 1986, such as the Barings bank scandal, show that directors will also be liable for failing to adequately supervise employees or have effective risk management systems, as where the London directors ignored a warning report about the currency exchange business in Singapore, where a rogue trader caused losses so massive that it brought the whole bank into insolvency.
3. S 175 to avoid conflicts of interest:  Section 175 specifies that directors must avoid situations where they could have a direct or indirect business or financial interest that conflicts, or could conflict, with the interests of the company. This applies in particular to information they come across in the role as a director. It is immaterial whether the company could take advantage of the same information or opportunity or not. This duty has been consistently reaffirmed since the economic crisis following the South Sea Bubble in 1719!
4. S 176 not to accept benefits from third parties: The purpose of the section 175 ‘no conflict’ rule is to ensure that directors carry out their roles as if it was their own interest at stake. Beyond corporate opportunities, section 176 requires that directors do not accept benefits from third parties.
5. S 177 to declare interest in proposed transaction or arrangement: Under section 177, when directors are on both sides of a proposed contract, for example where a person owns a business selling products to the company of which he is a director, it is a default requirement that they disclose the interest to the board, so that disinterested directors may approve the deal. Failure to disclose an interest is a criminal offence. Sometimes, depending on the company’s articles of association the approval of shareholders may be needed for some transactions with directors, perhaps depending on the size of the deal.

The duties of a Trustee under the Charities Act

Trustees have the overall legal responsibility for a charity and are answerable for making sure it’s doing what it was set up to do. They may be known by other titles, such as: directors, board members, governors or committee members, but whatever they are called, they are the people who lead the charity and decide how it is run.

You must be at least 16 to be a trustee of a charity that is a company or a charitable incorporated organisation (CIO), or at least 18 to be a trustee of any other charity. You must be appointed to your role in line with the procedures and any restrictions in the charity’s governing document.

You cannot be a trustee if you are disqualified under the Charities Act, including if you:

• have an unspent conviction for an offence involving dishonesty or deception,
• are bankrupt or have entered into a formal arrangement with a creditor,
• have been removed as a company director or charity trustee because of wrongdoing

There are more restrictions for charities that help children or vulnerable people.

The main legal responsibilities of a trustee are:

1. To ensure that your charity is doing what it was set up to do. To do this you need to:

• ensure that you understand the charity’s purposes, as set out in its governing document,
• plan what your charity will do, and what you want it to achieve,
• be able to explain how all of the charity’s activities are intended to further or support its purposes,
• understand how the charity benefits the public by carrying out its purposes.

2. Comply with your charity’s governing document and the law. Trustees must ensure that the charity complies with its governing document, with charity law requirements and any other laws that apply to your charity.

It is your responsibility to take reasonable steps to find out about the legal requirements, for example by reading relevant guidance or taking appropriate advice when necessary. Registered charities must keep their details on the register up to date and ensure they send the right financial and other information to the commission in their annual return or annual update.

3. Act in your charity’s best interests: Echoing the duties of company directors, charity trustees must take decisions and act in a way that best enables the charity to carry out the purpose for which it was created. To do this, trustees need to make balanced and informed decisions, thinking about the long term as well as the short term. This duty also includes ensuring that your duty to your charity does not conflict with other personal or business interests. Trustees must not receive any benefit from the charity unless it’s properly authorised and is clearly in the charity’s interests; this also includes anyone who is financially connected to the trustee including a spouse or partner, a child or a business partner.

4. Manage your charity’s resources responsibly: Trustees must always act responsibly, reasonably and honestly. This involves ensuring that the charity’s assets are only used to support or carry out its purposes and that no inappropriate risks are taken with the charity’s assets or reputation. The charity must not be over-committed and any rules and restrictions on how funds are spent must be followed. Special care should be taken when borrowing or investing money. Trustees should put appropriate procedures and safeguards in place and take reasonable steps to ensure that these are followed.

5. Act with reasonable care and skill: As a trustee you must make best use of your skills and experience and give enough time, thought and energy to your role, for example by preparing for, attending and actively participating in all trustees’ meetings.

6. Ensure your charity is accountable: Trustees must comply with all statutory accounting and reporting requirements and be able to demonstrate that their charity is complying with the law, is well-run and effective.

As a charity trustee, you too can remember the acronym GTS MOLES – for government, traders, suppliers, management, owners, lenders, employees, and society – as you need to consider the involvement of all these people to carry out your duties in line with the law and the charity’s regulations.

 

Until next time…