Exactly what should directors do?

August 26, 2014

For the first time in law, the 2006 UK Companies Act sets out what a company directors duties are

Companies Act 2014The 2006 Companies Act, which set out to streamline and simplify UK Company law, ended up being one of the largest pieces of legislation ever written!

However, it did, for the first time, specify exactly what a Company Director’s duties are (which apply equally to both Executive and Non-Executive Directors), as follows:

  1. To act within powers
  2. To promote the success of the company
  3. To exercise independent judgement
  4. To exercise reasonable care, skill and diligence
  5. To avoid conflicts of interest
  6. Not to accept benefits from third parties
  7. To declare interest in proposed transaction or arrangement with the company

To take them one by one – To act within powers – how does a director know what powers he or she is required to act within?

A good place to start is the Articles of Association (previously known as the Memorandum and Articles or ‘Mem and Arts’) – when was the last time you looked at these? When did your board last review them to make sure that they are still appropriate? These, together with any shareholder agreements, contracts, covenants and other items form the company’s constitutional documents which define your powers as a director.

If you haven’t looked at these for a while, or worse still, have never looked at them, then ask your Company Secretary for copies as soon as possible.

Next – To promote the success of the company – prior to the 2006 Act it used to be the case that company directors were responsible to shareholders and providing they endeavoured to ensure a decent return on the shareholders investment then they were complying with their duties.

Following the ‘unacceptable face of capitalism’ scandals of Lonrho and Slater Walker in the 1970s and the corporate failures of the ’80s leading to the Cadbury Report and the UK Corporate Governance Code it became clear that company directors had much wider duties which are now enshrined in the 2006 Companies Act, especially in respect of promoting the success of the company.

To promote the success of the company – having regard (amongst other matters) to:

  • The likely consequences of any decision in 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; and
  • The need to act fairly as between the members of the company

Clearly, the new act, which applies equally to Executive and Non-Executive company directors in the UK, establishes a legal duty for directors to avoid short-termism in their strategic decision making and take into account the legitimate interests of their staff, suppliers, customers, the community and the environment as well as their shareholders.

With regard to the need To exercise independent judgement – it is important that, regardless of job title or board role or independence, all directors come to the boardroom table as equals, with joint and several liability for the decisions that they make and that they are not unduly swayed or influenced in making those decisions.

All directors are expected To exercise reasonable care, skill and diligence – which means that they should devote sufficient time to their role (which limits the number of directorships any individual may hold) and come to every board meeting well prepared, having read all the board papers and where possible, having had off-line conversations with fellow directors about key strategic matters.

Turning up to board meetings late and trying to read the papers during the meeting for the first time is unlikely to lead to an effective contribution to decision making or a satisfactory discharge of your duties as a company director.

Holding more than one board position or running your own business whilst serving on the board of another company are likely to compromise your legal duty To avoid conflicts of interest – whilst it is not always possible to avoid conflicts of interest, you should be aware of the possibility and alert the board when conflicts are likely to occur.

A well run board will have a Register of Interests, which will be reviewed annually, containing a list of all directors’ outside interests. The standing agenda for each board meeting should include an item for Declarations of Interests, at which point directors should declare if they have an interest in an agenda item. Often, if this is the case, the director will formally leave the meeting whilst the matter is being discussed and will only re-join once a decision has been made.

All directors should be aware of the requirement Not to accept benefits from third parties – compliance with this aspect of the act can be demonstrated by maintaining a Gifts and Hospitality register and ensuring that there is a company-wide policy on entertainment paid for by third parties.

Finally, directors need to comply with the requirement To declare interest in proposed transaction or arrangement with the company – most commonly this covers property transactions or contracts with businesses that a director has an interest in. The sphere of interests that need to be declared also usually includes the director’s spouse, children and immediate family.

If you are a company director and you have been aware of your duties under the 2006 Companies Act and you have been complying with them then you can be satisfied that you are acting within the law – if not, then you should review how you and your board operates to make sure that you are discharging your director’s duties correctly.


All company directors need to have a basic understanding of financial matters

November 3, 2012

How well do you understand your company’s financial accounts?

As a company director, regardless of whether you are an executive or non-executive director, you have a legal obligation to exercise reasonable care, skill and diligence in the execution of your board duties. This is particularly true when it comes to the financial affairs of the business.

The two main financial questions a director needs to understand and be able to answer are:

  1. Is the business solvent or is it trading whilst insolvent?
  2. Are the published annual accounts a true and accurate representation of the financial state of the business?

If you are a company director and you do not have a financial background then you need to ensure that you have the basic financial skills and knowledge to address these important issues. The law governing your director’s duties, principally the 2006 Companies Act is very clear on the requirement for all directors to have a basic understanding of financial matters. This Institute of Chartered Accountants in England and Wales made the following references to director’s duties in the statement issued in October 2008:

‘Executive’ and ‘non-executive’ directors have the same duties in law. An ‘executive director’ is merely a director who has specific delegated responsibilities within the company, as an executive. Directors are not required to give continuous attention to company affairs unless their executive position so requires. However, all directors, including non-executive directors, should familiarise themselves with the company’s affairs, including its financial position, and should attend meetings of the board, and of any committee of the board of which they are members, whenever they are reasonably able to do so

In performing their duties, directors must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (sometimes called the objective test) and the general knowledge, skill and experience that the director has (sometimes called the subjective test) (Companies Act 2006, section 174). Under the objective test, in general more would be expected of a director with an executive function (particularly a specific function such as finance director), whereas under the subjective test more would also be expected of a director having specifically relevant knowledge, skills and experience (such as a member of a recognised Accountancy body in respect of financial matters).  

In relation to financial and accounting matters, directors have extensive, specific duties. Put shortly, directors are required to maintain accounting records and to prepare accounts. A company must also prepare a directors’ report containing a business review (not required of a certain size of company) and quoted companies must prepare a detailed directors’ remuneration report. Subject (principally) to a size-based exemption, these accounts and reports are subject to audit. The audited accounts and reports must be sent to members and filed on public record; there are however provisions facilitating the sending to members of a summary document and the filing, for certain sizes of company, of cut-down or abbreviated versions of the accounts. Where these accounts and reports are found to be defective, the Act facilitates revision. In addition to these duties under company law, other requirements can arise in relation to accounts and reports by virtue of market or regulatory rules, such as in relation to corporate governance codes or half-yearly reports.

The message is clear – all company directors, no matter what size the business, or sector, or whether they are executive or non-executive, need to have a basic financial understanding.

As a company director, how well do you understand:

If you have difficulty with any of the above financial items or terms then you should brush up on your financial skills and knowledge to ensure that you are discharging your duties as a company director in line with the law.

Finance for Non-Finance Directors

are running a 1-day course – Finance for Non-Finance Directors on Thursday 6 December 2012 in Oxford. For more details visit the web-site

Institute of Directors - Chartered Director professional qualificationChartered Director – the professional qualification for directors
Chartered Directors lead organisations in the private, public or third sectors, at the highest strategic level. As a Chartered Director you will demonstrate the expertise and integrity needed to meet the challenges of business today. If you are looking to enhance your skills and improve your organisation’s performance, Chartered Director is the professional qualification you need. For more details visit the web-site

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