Being a director of a limited company comes with significant powers and responsibilities. Directors are thought of as the nerve centres from which the activities of the company radiate. There are many aspects to the role, from managing the company's daily business activities to managing stakeholders' interests, setting budgets, managing the financial aspects of the company and ensuring legal compliance.
Directors have numerous statutory duties under the Companies Act 2006 and having a fundamental understanding of these duties is key to succeeding. They include the duty to promote the success of the company, exercise reasonable skill, care and diligence and avoid conflicts of interest (see our handy guide to directors' duties for a more detailed discussion). This blog provides some practical tips on how to fulfil these duties.
1. Know the constitution
Directors have a duty to act within their powers and only exercise those powers for the purposes for which they were given. A director's powers, and their purposes, come from the company's articles of association. These may regulate, amongst other things, the appointment and removal of directors, the running of board and shareholder meetings, the transfer of shares and how to manage directors' conflicts of interest.
For this reason, it is important that directors have an awareness and an understanding of their company's current articles of association to ensure they are at all times acting within their powers.
2. Be prepared
Preparation is a key part of a director's role. They should read board papers and reports well in advance of meetings and be prepared to discuss and interrogate them. Preparation is the best way directors can ensure that they exercise the skill, care and diligence required of them.
3. Take responsibility
Whilst it can be appropriate, and in some cases essential, to delegate tasks to colleagues and employees, directors cannot escape responsibility by doing so. They must continue to supervise and hold those carrying out the tasks to account. They should have regular meetings, ideally more frequently than board meetings, for briefings and to monitor colleagues' progress. Directors should be aware that the articles may contain a list of matters reserved to the board that cannot be delegated. If so, it will be clear which tasks can be delegated and which can only be performed by them. They should consider raising awareness of these demarcations to senior management, to prevent the possibility of them performing tasks reserved to directors.
4. Keep records
Having good record-keeping practices is an essential part of a director's role. This is a duty that can and has caught directors out in the past and lack of awareness of these obligations will not be a defence (one director received a 7-year ban after claiming to have been oblivious to the fact he had to keep certain records). All board and shareholder resolutions must be recorded by way of minutes which in turn must be kept at the company's registered office (or an alternative location of their choosing) for at least 10 years. In addition to this, directors must keep and maintain accounting records and company books and be in a position to provide them to office-holders on request. If directors have any uncertainty as to these obligations then they should address this immediately.
5. Make your own judgments
A key part of a director's role is decision making and directors must exercise independent judgement. In other words, they must not blindly follow other directors' decisions without interrogating the facts and the situation. They should take collective responsibility for the decisions being made and be open and transparent about any personal interests they may have. Where any director has a potential or actual conflict of interest, they must comply with the rules on conflicts of interest set out in the Companies Act and the company's articles (our directors' duties guide has more information on this).
6. Get professional advice
Just because directors have to make their own decisions does not mean they cannot seek help in making those decisions. The government has stated that the duty to exercise independent judgment does not preclude directors from seeking specialist advice. What's important is that it is the directors, having gathered the information and advice they need to form a reasoned opinion, who make the final call.
If things do go wrong in the company, there are significant risks for directors. For example, where the company is in financial trouble, there are circumstances in which a director could be personally liable. Seeking independent legal advice can help mitigate this risk and others and ensure that you are best equipped to thrive in your role.
For more information on directors' duties or any other queries please get in touch with a member our Corporate Team or your usual Brodies contact.
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