Write Short answers for the following:
Explain the general duties of a Director.
Explain the general duties of a Director.
1. Act within powers
You must act in accordance with the company’s constitution, and only exercise your powers for the purposes for which they were given.
The company’s constitution includes its articles of association and resolutions and agreements of a constitutional nature (e.g. shareholder or joint venture agreements).
2. Promote the success of the company
You must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
Success will generally mean a long-term increase in value but fundamentally it is up to each director to decide, in good faith, whether it is appropriate for the company to take a particular course of action.
When considering what is most likely to promote the success of the company, the legislation states that a director must have regard to:
- 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
- the need to act fairly as between members of the company.
This list is not exhaustive but is designed to highlight areas of particular importance to responsible business behaviour. Other relevant factors should also be properly considered.
3. Exercise independent judgment
You must exercise independent judgment and make your own decisions.
This does not prevent you from acting in accordance with the company’s constitution or an agreement which the company has entered into.
4. Exercise reasonable care, skill and diligence
You must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company
- the general knowledge, skill and experience that you actually possess.
The expected standard is measured against both objective and subjective yardsticks. A director’s actual understanding and abilities may not be enough if more could reasonably be expected of someone in his or her position.
5. Avoid conflicts of interest (a conflict situation)
You must avoid a situation in which you have, or could have, an interest that conflicts, or may conflict, with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity, regardless of whether the company could take advantage of it.
This duty is not infringed if:
- the situation you are in cannot reasonably be regarded as likely to give rise to a conflict of interest. On a proper analysis of the circumstances, consider whether there will actually be a conflict or potential for conflict with the interests of the company
- the situation has been pre-authorised. Authorisation may be given in the articles of association, by specific shareholder resolution or, in certain circumstances, by the other directors who do not share the same conflict.
There is no convenient set of rules to determine which situations will or will not give rise (or potentially give rise) to a conflict of interest. The following are examples of arrangements which may potentially give rise to a conflict situation:
- Multiple directorships – you are also on the board of a major shareholder, the pension scheme trustee company, a competitor or a customer or supplier of the company.
- Personal interests – you are a major shareholder, a competitor, a customer or supplier of the company or you own property adjacent to the company’s property which could be affected by the company’s activities.
- Advisory positions – you have another hat as an advisor (e.g. accountant or consultant) to the company or to a competitor of the company.
- Other profits – you make personal use of the company’s information or opportunities, want to take up an opportunity declined by the company or are in any situation where you can make a profit as a result of your directorship.
- Connected persons – if any of the above situations apply to a person connected with you, e.g. spouse, partner, parent, child or other close family member.
If you think you may be in a potential conflict situation you should:
Seek approval – potentially a conflict situation can be approved by the other members of the board. If the board does not have the power to authorise conflicts or is otherwise unable to approve the conflict situation it could refer the matter to the shareholders for approval.
Check the articles of association – the company’s articles might contain provisions relating to conflicts of interest, including:
- pre-authorised common conflict situations – these might list a limited set of circumstances allowing you to put yourself in a situation which could otherwise give rise to a potential conflict of interest without obtaining specific approval. Typical examples include cross-directorships of group companies or positions relating to the company pension scheme.
- conduct provisions – these might set out how you are expected to conduct yourself in relation to an authorised conflict and might also confirm that you will not be in breach of other duties to the company if you act accordingly. These typically deal with:
- protecting the confidential information of the company and the third party
- inclusion or exclusion from board meetings and receipt of board papers
- any benefit received as a result of the authorised conflict.
Regulate your behaviour – even if a potential conflict situation has been authorised or is permitted by the articles of association you should still act appropriately, remembering your obligation to promote the success of the company. You must take care to act in accordance with the articles of association and any terms and conditions attached to the authorisation.
6. Not accept benefits from third parties
You must not accept a benefit from a third party given because you are a director or because you do (or do not do) anything as a director.
This duty is not infringed if your acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest.
7. Declare interests in proposed or existing transactions or arrangements with the company
If you are in any way, directly or indirectly, interested in a transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors. In the case of a proposed transaction you must do this before it is entered into. In the case of an existing transaction you must do this as soon as reasonably practicable. This duty is not infringed if:
- your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest
- an interest has not been declared because you are unaware that you have the interest or the other directors are already (or ought reasonably to be) aware of it.
1. Act within powers
You must act in accordance with the company’s constitution, and only exercise your powers for the purposes for which they were given.
The company’s constitution includes its articles of association and resolutions and agreements of a constitutional nature (e.g. shareholder or joint venture agreements).
2. Promote the success of the company
You must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
Success will generally mean a long-term increase in value but fundamentally it is up to each director to decide, in good faith, whether it is appropriate for the company to take a particular course of action.
When considering what is most likely to promote the success of the company, the legislation states that a director must have regard to:
- 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
- the need to act fairly as between members of the company.
This list is not exhaustive but is designed to highlight areas of particular importance to responsible business behaviour. Other relevant factors should also be properly considered.
3. Exercise independent judgment
You must exercise independent judgment and make your own decisions.
This does not prevent you from acting in accordance with the company’s constitution or an agreement which the company has entered into.
4. Exercise reasonable care, skill and diligence
You must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person with:
- the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as you in relation to the company
- the general knowledge, skill and experience that you actually possess.
The expected standard is measured against both objective and subjective yardsticks. A director’s actual understanding and abilities may not be enough if more could reasonably be expected of someone in his or her position.
5. Avoid conflicts of interest (a conflict situation)
You must avoid a situation in which you have, or could have, an interest that conflicts, or may conflict, with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity, regardless of whether the company could take advantage of it.
This duty is not infringed if:
- the situation you are in cannot reasonably be regarded as likely to give rise to a conflict of interest. On a proper analysis of the circumstances, consider whether there will actually be a conflict or potential for conflict with the interests of the company
- the situation has been pre-authorised. Authorisation may be given in the articles of association, by specific shareholder resolution or, in certain circumstances, by the other directors who do not share the same conflict.
There is no convenient set of rules to determine which situations will or will not give rise (or potentially give rise) to a conflict of interest. The following are examples of arrangements which may potentially give rise to a conflict situation:
- Multiple directorships – you are also on the board of a major shareholder, the pension scheme trustee company, a competitor or a customer or supplier of the company.
- Personal interests – you are a major shareholder, a competitor, a customer or supplier of the company or you own property adjacent to the company’s property which could be affected by the company’s activities.
- Advisory positions – you have another hat as an advisor (e.g. accountant or consultant) to the company or to a competitor of the company.
- Other profits – you make personal use of the company’s information or opportunities, want to take up an opportunity declined by the company or are in any situation where you can make a profit as a result of your directorship.
- Connected persons – if any of the above situations apply to a person connected with you, e.g. spouse, partner, parent, child or other close family member.
If you think you may be in a potential conflict situation you should:
Seek approval – potentially a conflict situation can be approved by the other members of the board. If the board does not have the power to authorise conflicts or is otherwise unable to approve the conflict situation it could refer the matter to the shareholders for approval.
Check the articles of association – the company’s articles might contain provisions relating to conflicts of interest, including:
- pre-authorised common conflict situations – these might list a limited set of circumstances allowing you to put yourself in a situation which could otherwise give rise to a potential conflict of interest without obtaining specific approval. Typical examples include cross-directorships of group companies or positions relating to the company pension scheme.
- conduct provisions – these might set out how you are expected to conduct yourself in relation to an authorised conflict and might also confirm that you will not be in breach of other duties to the company if you act accordingly. These typically deal with:
- protecting the confidential information of the company and the third party
- inclusion or exclusion from board meetings and receipt of board papers
- any benefit received as a result of the authorised conflict.
Regulate your behaviour – even if a potential conflict situation has been authorised or is permitted by the articles of association you should still act appropriately, remembering your obligation to promote the success of the company. You must take care to act in accordance with the articles of association and any terms and conditions attached to the authorisation.
6. Not accept benefits from third parties
You must not accept a benefit from a third party given because you are a director or because you do (or do not do) anything as a director.
This duty is not infringed if your acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest.
7. Declare interests in proposed or existing transactions or arrangements with the company
If you are in any way, directly or indirectly, interested in a transaction or arrangement with the company, you must declare the nature and extent of that interest to the other directors. In the case of a proposed transaction you must do this before it is entered into. In the case of an existing transaction you must do this as soon as reasonably practicable. This duty is not infringed if:
- your interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest
- an interest has not been declared because you are unaware that you have the interest or the other directors are already (or ought reasonably to be) aware of it.
