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HOW TO BE A DIRECTOR

Know your rights and your wrongs

The government hailed a sharp increase in the numbers of directors being banned last year [2000] as a cause for celebration – proof that its crackdown on rogue traders is working. Nervous board appointees may beg to differ.

The regulatory pressure on directors can be intense. The Companies Act contains about 200 statutory offences that directors can commit. That number “probably doubles” when health and safety, employment and other laws are taken into account, according to the Institute of Chartered Secretaries and Administrators.

The sanctions range from fines to disqualification or even imprisonment. And the courts will no longer accept ignorance as an excuse.

“In the olden days, directors were really there to add glitter to the nameplate – they were not expected to have any knowledge of the business or true involvement in its affairs and often they didn’t,” said Robert Hildyard QC. “Now the perception is that directors will be responsible for the conduct of the management of the company’s affairs.”

The old disqualification test of whether directors had done the best they could reasonably be expected to do has been supplemented with a new test – did the director behave as someone with the “knowledge, skill and experience” needed for that boardroom position would have behaved?” “It means a new director has pretty rapidly got to get to grips with the company’s procedures and risk management processes,” said Andrew Davison of Eversheds, the law firm. The price of failing to control risks can be high. It may have been a sole trader who brought down Barings Bank, but10 directors were disqualified as a result. Boards have a collective responsibility.

But what does the responsibility encompass? Research suggests many directors are confused about whether they have a legal duty to act in the interests of shareholders only or to take into account the – sometimes conflicting – interests of others.

In fact, the only explicit duty a director owes is to the company – in effect, a requirement to act in the best interests of shareholders, unless the company hits financial problems and creditors’ interests come to the fore. The Companies Act also imposes some duties in relation to employees.

The wide-ranging review of company law commissioned by the government, which is due to report next spring, triggered a fierce debate over whether this shareholder-driven approach is the correct one. Trade unions and a range of pressure groups argued that directors should have a direct legal duty to employees, customers and any other significant stakeholders.

But the government has indicated it does not support this pluralist approach. An interim report from the review steering group in March proposed clarifying the existing “obscure” law by issuing an inclusive statement of duties. This would make it clear that the duty to act in the best interests of the company requires taking into account the impact of actions on employees, customers, suppliers, the environment and local communities.

The statement would also spell out broad principles:

  • compliance and loyalty. Directors must act honestly, using their powers for the proper purpose, and to further company interests
  • independence of judgment. Directors must not get into a position where – because of a personal commitment they have made, for example – their hands are tied from acting in the company’s best interests
  • conflicts of interest. In essence, where the director’s interests are opposed to those of the company’s the latter must prevail
  • fairness – essentially a prohibition on favouring one group of shareholders over another
  • care, skill and diligence. The requirement to act with the “knowledge, skill and experience which may reasonably be expected of a director in his position”.

Financial Times: 2000