Many people reading this will already be a company director. Others may be thinking of taking on the role. But what is a director?
The exact role of a director varies from company to company depending on the size and type. But no matter the company, there are a set of common duties that all directors must follow.
In general, a company’s Articles of Association will set out the powers of their directors and the purpose of such powers. Directors must act collectively to guide and steward the company to success. But beware as restrictions and limits on this authority can exist. Furthermore, do not step outside the boundaries of your powers!
Firstly, every director should learn a little about what is expected of them and be mindful of their role and the duties placed upon them.
The Companies Act 2006 attempts to make this easier and has laid down seven statutory company director duties and principles which apply to all directors.
Company director duties:
1) Act within powers
Directors must act within their power and for the purposes which they were granted under the company’s constitution.
2) Promote success
Directors must act in good faith to promote the success of a company for the benefit of the company as a whole.
Consider the long-term consequences of decisions made.
Have regard to the interests of company employees as well as the impact on the community and environment.
Foster successful business relationships with suppliers, customers and others.
Act fairly between all the members of the company.
Maintain a reputation for high standards of business and conduct.
3) Declare interests in transactions
Directors must inform other directors of any direct/indirect interest in a proposed transaction or arrangement that the company is considering. The same rule applies for any interest held (either direct or indirect) in an existing transaction or arrangement.
For example, a company proposes to enter a contract with a business owned by a family member would be seen as a ‘transactional conflict’.
4) Reject third party benefits
Directors should not accept third party benefits which may be perceived as giving rise to a conflict of interest and as a result, are not acting in the best interests of the company.
The company can authorise the acceptance of some benefits in certain circumstances, for example, to allow a director to benefit from reasonable corporate hospitality. So that’s lunch, not a fortnight in the Bahamas!
5) Independent judgement
As a director you must exercise independent judgement at all times. For that reason do not allow yourself to be controlled by the will of others. Take advice where necessary, but apply your own judgement to make decisions.
6) Reasonable care, skill and diligence
Directors must exercise reasonable skill, care and diligence as exercised by a reasonably diligent person. Likewise directors must perform to the best of their ability and accept the high level of responsibility associated with the role.
7) Avoid conflicts of interest
Directors must avoid situations which could place them in a position of potential conflict. Therefore avoid situations where loyalties are divided.
Each director must decide their situational conflict and conflict of interest. If the conflict cannot be avoided then disclose it and follow the authorisation process. This will allow you to continue to act a director.
Most of all, be diligent and remember these duties apply to all directors. Be mindful of your position and what you do within a company as these duties apply even when you:
- are not active in your role as director
- someone else tells you what to do
- are an alternate, nominee, de facto or shadow director
Above all directors must understand their role and what they should and shouldn’t do.
Finally, you must perform the role to a high standard and safeguard the interests of yourself and ensure the company’s success. Fail to comply and the consequences could be serious! Worst case scenarios can result in company reputations being destroyed and directors disqualified. As a result companies can then seek to claim damages from the director who breached their duty. Failure to disclose an interest in an existing transaction with the company also carries the risk of a criminal sanction.