New Law On Directors’ Duties

Richard Coombs explains what businesses need to know about the new raft of legislation affecting directors of companies.

Debate and controversy is currently surrounding the introduction of statutory statements for directors’ duties. These statements will replace the existing laws based on the decision made by judges over the last two centuries and are part of The Companies Act 2006 due to come into force over the next 12 months.

The current general duty on directors will be replaced by a duty to act in a way that a director considers, in good faith, will most likely promote the company’s success for the benefit of everyone involved. The intention is to enshrine in statute the principle of “enlightened shareholder value”.

So what does that mean?

Well, to discharge their duty, directors should consider:

• The likely consequences of any decision in the long term.
• The interest 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 the members of the company.

In doing so, directors must exercise reasonable care, skill and diligence.

There is a concern that the new law will merely increase corporate bureaucracy, with even more voluminous board minutes drafted by lawyers and accountants. Lord Goldsmith, the Attorney General, went on the record to deny this, but it would not be the first time that a Government Minister’s statements are proved to be wrong. Even so, given the speed and relative informality of decisions taken by companies, it would be unreasonable if the courts adopt an over legalistic approach.

GC100, a group representing in-house lawyers for FTSE 100 companies, recently produced a paper presenting their view of best practice. They believe directors should only document whether or not they considered the six named factors or any other considerations where it is appropriate to do so. This is helpful but hardly clear. No doubt courts will continue to apply the new rules and, so, will, in effect, continue to make the law.

For many companies in the South West it will, no doubt, still be business as usual. But their decisions will be questioned. For example if a company is in financial trouble and goes into administration or liquidation, then properly prepared board minutes, as ever, will be important.

But one major benefit of the new law and the ensuing debate is a reminder to directors of their duties and the issues they must consider, even before the new Act comes into force. And I do wonder how many realise, for example, that even under the present law they must take into account their employees’ interests as well as their own?

Published 04/04/2007.