SuperSeed summarises the seven general duties the UK Companies Act 2006 places on every company director, and notes that they apply equally to executive and non-executive directors, who should work as one team.
- The seven duties are: act within powers, promote the success of the company, exercise independent judgement, use reasonable care, skill and diligence, avoid conflicts of interest, not accept benefits from third parties, and declare interests in proposed transactions.
- Directors are there to promote the success of the company, not their own interests.
- UK company law does not distinguish between executive and non-executive directors, even though their roles differ greatly.
- The post notes it is not legal advice and suggests following the duties in spirit wherever you do business, while observing local law.
Note: this article does not contain legal advice. If you are unsure of your legal/fiduciary responsibilities as a company director, please seek advice from your legal counsel.
UK Companies Act 2006 prescribes 7 general duties all directors must observe. These are specific to UK company law, but they are quite sensible, and it might be sensible to follow them in spirit wherever you might be doing business (while of course observing local laws and regulation).
- Act within powers – meaning that directors should only do the things their company constitution (articles, shareholders’ agreement) allows them to do, and only for the purposes they were intended.
- Promote the success of the company. This objective is very instructive. Directors are not there to look out for their own interests, but to promote the success of the business itself. That is the job at hand!
- Exercise independent judgement. The purpose is for directors to act independently (to promote the success of the company) without being swayed by other interests – either those of the founders/management or other stakeholders.
- Exercise Reasonable care, skill and diligence. Being a director is a proper responsibility that should be taken seriously.
- Avoid conflicts of interest. Meaning: don’t do things that conflict you, and if you think there might be a conflict, discuss it openly with the other directors.
- Not to accept benefits from third parties. Do not get into a situation that could get you accused of being bribed and not having the company’s best interest at heart.
- Declare interest in a proposed transaction or arrangement. If there is a potential conflict of interest in relation to a specific transaction, you must declare this to the other directors.
Interestingly, in defining the role of a director, UK company law doesn’t distinguish between executive directors (“management”) and non-executive directors (investors, NEDs), despite their actual roles being vastly different. Given some of the corporate governance scandals seen in places like Carillion I am not sure that’s helpful, but that’s a discussion for another day. The key point is that – when it comes to the UK Companies Act, the role of the director applies equally to management and outsiders, and it is helpful to remember that it is not for one group to come to meetings feeling that their job is purely to educate another group, but for both groups (execs and non-execs) to come together as one to discuss how best to solve the most pressing problems of the business.
Frequently Asked Questions
What are the seven general duties of directors under the UK Companies Act 2006?
To act within powers, promote the success of the company, exercise independent judgement, exercise reasonable care, skill and diligence, avoid conflicts of interest, not accept benefits from third parties, and declare any interest in a proposed transaction or arrangement.
Do the same duties apply to non-executive and investor directors?
Yes. UK company law makes no distinction between executive directors and non-executives such as investors, so the duties apply equally to management and outsiders on the board.
What should a director do about a possible conflict of interest?
Avoid situations that create a conflict, discuss any potential conflict openly with the other directors, and declare an interest in any specific proposed transaction or arrangement.