The role of the director is one of the most important within a company. The formation of a suitable board of directors can ultimately determine the success of your business. Therefore, when you set you set up a company, you must ensure that your fellow directors share your vision of the company’s direction.
If you are seeking information about stepping up into the role of director, then here is some guidance to help ensure that you get it right.
Under the Companies Act 2006 (Sections 171-177), a company director has 7 general duties, which are based on certain common law rules and equitable principles. Below I provide an overview of these duties, and my tips for any new or prospective director to check out.
A director’s duties are:
1. To act within your powers
A director must act in accordance with the decision-making powers defined in the company’s Memorandum and Articles of Association (‘constitution’). This is the governing document that outlines the rules and regulations for running the company.
The powers of a director can vary significantly from business to business, depending on whether the company adopts model Articles of Association, or altered or bespoke Articles. It’s therefore important to understand exactly what you can and can’t do in your company.
My tip – get hold of a copy of the Memorandum and Articles of Association – most SME’s will just adopt the standard ones, but it’s always worth checking, as odd rules can be in there that can trip you up. Also ask for any Shareholders Agreement that is in place, as this can hold other rules that you need to be aware of.
2. To promote the success of the company
A director must act in good faith, and in a manner that he/she considers most likely to promote the company’s success for the benefit of its members as a whole.
In doing so, a director must have regard for the consequences of his/her decisions on other stakeholders. These include employees, creditors, suppliers, customers, and communities. They must also consider the impact of their actions on the environment, the reputation of the company, and the long-term success of the business.
My tip – you need to know where the company is going and know its Vision, Values and Purpose. In addition, you must know what success looks like and be aware of the budgets and targets. Finally, you must be aware of your Corporate Social Responsibility to the wider world.
3. To exercise independent judgement
A company director must exercise independent judgment by developing an informed view on the activities of the business. He/she must not simply carry out the demands of majority shareholders or other beneficial parties.
My tip – you need to be fully aware of what is going on in the company, and be prepared to challenge anything you think isn’t right. Pleading ignorance or just going along with the other directors does not excuse you from your duty of independent judgement. All directors are treated equally. You must have the confidence to speak your mind and expect to be listened to.
4. To exercise reasonable care, skill, and diligence
Company directors must exercise reasonable care, skill, and diligence whilst carrying out all functions of the role. That means that you are expected to have the general knowledge, skill and experience that could be reasonably expected of somebody who has been appointed to carry out the functions of a director within your company. Appointments should not be made purely based on your name or reputation.
My tip – again, ignorance is not an excuse. If you are feeling out of your depth, ask for help and make sure you are constantly learning and improving your skills.
5. To avoid conflicts of interest
Company directors must avoid or manage all situations in which they have, or may have, conflicts of interest that could affect their objectivity and loyalty to the company. Examples of such conflicts of interest include:
- Holding an advisory position (e.g. as consultant or accountant) in a firm that is a competitor of the company;
- Acting as a director and/or holding majority shares in a company that is, or could be, affected by the activities of the company (e.g. a supplier, client, or competitor of the company);
- Other business or personal relationships with individuals or other entities that are, or could be, affected by the activities of the company;
- Taking advantage, for your own personal gain, of property, information, or opportunities belonging to the company, even if the company does not take advantage of these opportunities.
My tip – this one should be easy for you to comply with if you are stepping up, as you will unlikely be in a position of conflict. But if you do have any potential conflict, then you have a duty to inform the board and the shareholders. They may see it as insignificant and allow it. But make sure you get this decision recorded in the board minutes, for future reference.
6. To refuse to accept benefits from third parties
A director must not accept any benefits from third parties that are given because he/she is a director, or as a result of them doing (or refraining from doing) anything in their role as director. In this context, the Companies Act 2006 defines ‘third parties’ as:
“a person other than the company, an associated body corporate, or a person acting on behalf of the company or an associated body corporate.”
This basically means that the director must not accept bribes or any personal gains, whether or not the company benefits from it.
My tip – there are always grey areas around this duty, such as attending corporate events etc. The key is to ensure you keep it business related. If there is any fuzziness in the line between business and pleasure, then get the issue discussed and agreed by the board, and recorded in the minutes.
7. To declare an interest in a proposed transaction or arrangement
If a director is directly or indirectly interested in any proposed transactions or arrangements with the company, he/she must declare the nature and extent of such interest to the other company directors. An example is where a contract or transaction is proposed with another business in which the spouse or family member of a director has a senior role.
My tip – buying or selling from the business should be done on an arm’s length basis and under no more favourable terms than are available to any employee of the company. Again, if it is a bit of a grey area, cover your back by getting board approval and ensure the discussion is minuted. The onus of proof will always be on you.
Key skills needed as a director
What surprises me is how general these legal duties are. This means that they leave a lot of questions unanswered, and rely on you as a director to always act reasonably. You have to see these rules as the real basics that are there to prevent unscrupulous individuals taking advantage of their position. There is much more to being a director than just following these 7 rules!
My view is that every company director should be able to demonstrate the following 7 Key Skills/Attributes before they can consider themselves competent to undertake the role:
- Finance – know how a business keeps score in every area;
- Communication – be able to communicate with and delegate to others;
- Time – successfully manage their time;
- Goal setting – know where the company is going and have a plan to get there;
- Leading and managing – getting the team to be fully engaged in their work;
- Decisive – make quick and effective decisions;
- Responsible – demonstrating a responsibility to the people within and outside of the business and the environment in which it operates.
If you do these 7 things, the company will be successful and you will not fail in your legal duties as company director.
If you are thinking of moving up to a director role, or are already in role and would like some help accelerating your learning to become the kind of director your team deserves, your shareholders respect, and you can be proud of … then we’d be happy to help.
Please get in touch with me personally: email@example.com