“The quality of a business’s decisions often determines the quality of its future.”
Many directors of owner-managed businesses are also shareholders.
Some are family members. Some are founders who never expected to sit on a board.
All of them owe the same legal duties to the company.
Understanding those duties helps directors make confident decisions and avoid unnecessary personal risk.
The Companies Act 2006 sets out seven general duties that every director owes to the company. They apply to executive and non-executive directors alike.
The Seven General Duties
Act within your powers
Directors must act in accordance with the company’s constitution and use their powers only for the purposes for which they were given.
Promote the success of the company
Directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
In doing so, they must have regard to factors including the long-term consequences of decisions, the interests of employees, relationships with customers and suppliers, and the company’s reputation.
Exercise independent judgement
Directors may take advice, but the decisions must ultimately be their own.
Exercise reasonable care, skill and diligence
Directors are judged against what can reasonably be expected of someone in their role, and against their own particular knowledge and experience.
Avoid conflicts of interest
Directors must avoid situations in which their personal interests conflict, or may conflict, with those of the company, unless the conflict has been properly authorised.
Do not accept benefits from third parties
Directors must not accept benefits from third parties that are conferred because they are a director, where this could reasonably give rise to a conflict of interest.
Declare interests in proposed transactions
Where a director has a personal interest in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors.
“Good governance is not an obstacle to decisive leadership. It is what makes decisive leadership safe.”
When the Company Is Under Financial Pressure
When a company is insolvent, or approaching insolvency, directors must give increasing weight to the interests of the company’s creditors.
Decisions taken during this period are often scrutinised closely, and directors who continue trading when there is no reasonable prospect of avoiding insolvent liquidation or administration can face personal liability.
Early advice at the first sign of financial difficulty helps directors understand their position and protect both the business and themselves.
Questions Business Owners Ask
Who are directors’ duties owed to?
The general duties are owed to the company itself, rather than to individual shareholders. In practice, that means shareholders usually cannot enforce them directly in their own name, although there are circumstances in which they may bring a claim on the company’s behalf.
Do the duties apply to non-executive directors?
Yes. The general duties apply to every director, whether executive or non-executive. What is reasonably expected of a director may, however, depend on their role.
Can a director be personally liable for a breach of duty?
Yes. A director who breaches their duties may be required to compensate the company or account for any profit made. Directors can also face disqualification in certain circumstances.
I am also a shareholder. Does that change my duties?
No. When acting as a director, you must comply with your duties as a director, even if your interests as a shareholder point in a different direction. Keeping those two roles distinct is an important part of good governance.
Does directors’ and officers’ insurance cover everything?
Not usually. D&O insurance can provide valuable protection, but policies contain exclusions and limits. It is worth understanding exactly what is covered before relying on it.