New rules for directors come into force in October this year.
The Companies Act 2006 ("the Act") contains new statutory duties for company directors which will apply to both executive and non-executive directors. These duties are to a large extent based on the existing "common law" duties, however some of the new duties do extend the common law rules.
In particular the duty to promote the success of the company, although developed from the common law principle of acting in good faith in the company's best interest, goes beyond the current common law directors' duties. In terms of this new duty, a director must act in good faith in a way that he considers most likely to promote the success of the company for the benefit of the members as a whole. The Act states that in so doing directors must have regard to, amongst other matters:
The likely consequences of any decision in the long term;
The interests 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; and
The need to act fairly as between members of the company.
The stated intention behind this provision is to enshrine in the Act the principle of "enlightened shareholder value". As can be seen, this duty requires a range of factors to be considered in the decision-making process, including corporate social responsibility. Inevitably there will be situations where it is difficult to balance conflicting factors and ultimately it will be for the courts to define the scope of the duty.
There has already been concern that the inclusion of a seemingly mandatory list of factors may end up creating greater bureaucracy at board level, with ever more lengthy board minutes documenting the directors' consideration of each and every factor. Directors should however be wary about using standard board minutes which list the prescribed factors and turning the process into a "box ticking" exercise.
Apart from the duty to avoid conflicts of interest, which comes into force in October 2008, the new duties will apply from 1 October 2007.
We are circulating regular E-Bulletins to keep our clients and contacts updated as the provisions of the Companies Act 2006 come into force. For further information on the directors' duties provisions or to subscribe for...