Directors’ Duties – Risk Management
The introduction of the Companies Act 2006 has imposed significant new regulatory duties on directors to ensure that a company’s interests are fully protected, but few company directors are aware of the scope and implications of their new responsibilities – read more.
Probably the most far reaching change, and the one that has the most obvious effect on directors, is the duty to promote the success of the company. This new duty stems from the overriding principle of the fiduciary duty – the duty of good faith – to act in the company’s best interest.
Most specifically, the Act imposes a duty to act in the way a director considers, in good faith, would be most likely to promote the success of the company. When exercising this duty, the director is required to have regard to a wide range of factors including:
- the long-term consequence of decisions as well as the interests of the employees;
- the relationships with suppliers and customers;
- the impact of the decision on community and environment; the desirability of maintaining a reputation for high standards of business conduct;
- the need to act fairly as between members of the company, as well as introducing wider corporate social responsibility into a director’s decision-making process.
‘Success’ is not defined by the Act, however Department of Trade and Industry guidance suggests that success in relation to a commercial company is considered to be its “long-term increase in value”.
The persistent common myth that limited liability status protects directors from being sued personally is categorically no longer the case. Even if they are also shareholders, directors have their own separate legal personality whose liability is unlimited. Also, it is essential to remember that it is not necessary to be called a director to be held accountable under the Act. The defining point is what one does and not what one is called. Similarly, it is vital for directors who are also shareholders to remember that two legal personalities operate here, in that a shareholder has a linked liability but a director does not, even if they are also a shareholder.
WHAT EXACTLY ARE THE DIRECTOR’S RISKS?
They are literally endless. As a director, you may be personally liable to defend any claims brought against you – claims that could leave your personal assets immediately at risk. Even your spouse or partner could be held liable, as could your heirs. The consequences can be devastating:
- Disqualification as a director
- Criminal prosecution
- Personal bankruptcy
- Loss of job and reputation
- Family trauma and financial hardship
And if that wasn’t bad enough let’s look at who can sue you:
- Your company
- Your shareholders
- Your employees
- Your creditors
- Your customers
- Your competitors
- Your regulators
- Or anyone else who feels that they have suffered a loss arising from the director’s wrongful action
THE NEXT STAGE
The point of risk management is to build a business that is safer to operate and financially safer to own. If you maximise your strengths and opportunities while minimising threats and weaknesses the result will be a stronger more successful business.
Equip for tomorrow – today.