Corporate Governance And Directors’ Duties

This piece focuses on how complying with directors’ duties fits into good corporate governance. 

Before we begin discussing corporate governance, let’s remind ourselves of the directors’ duties under 172 of the Companies Act 2006, namely:

• To act within powers.
• To promote the success of the company.
• To exercise independent judgment.
• To exercise reasonable care, skill, and diligence.
• To avoid conflicts of interest.
• Not to accept benefits from third parties.
• To declare any interest in a proposed transaction or arrangement with the company.

The overriding duty is to act in good faith and in a way that promotes the company’s success for its shareholders’ benefit. However, in this day and age, customers, investors, and shareholders demand that this is done sustainably.

Here is where corporate governance comes into play. 

The above is a fine balance as it is not a director’s job to strictly weigh up the company’s interests with those of other stakeholders. Instead, a director must consider the best course of action to lead to the company’s success while considering long-term consequences. This may lead to some stakeholders being adversely affected; however, that does not mean the decision is wrong. 

• How does corporate governance affect director’s duties?
• D&O Insurance to Protect Directors From Liability

A further challenge is that company boards, especially those of large organisations, must  exercise proportionate oversight and monitoring whilst allowing managers to make the decisions required to move the company forward and meet its targets.

What is corporate governance?

Corporate governance is about best practices regarding company board leadership. It is governed by the UK Corporate Governance Code (the Code). The 2024 Code is divided into four sections, namely: Board Leadership and Company Purpose; Division of Responsibilities; Composition, Succession and Evaluation; Audit, Risk and Internal Control; and Remuneration. 

The Code gives a codified framework to ensure board members recognise the collective duties and responsibilities needed to advance the long-term, sustainable success of the company.

Corporate governance can be expanded to ESG, which stands for environment, social, and governance.

How does corporate governance affect directors’ duties?

In 2018, the GC 100 published new guidance on embedding directors’ duties under section 172 in board decision-making. The guidance provides for five specific actions to assist in ensuring section 172 duties are incorporated into any decisions made by directors:

• Strategy: When establishing or updating company’s strategy, the section 172 duties must be kept in mind.
• Training: When a new director is added to the board, they should take part in training based on section 172 principles. Ongoing training concerning section 172 duties and responsibilities and how they should tie into decision-making should be regularly provided. 
• Information: Consider and distribute the information directors require on appointment and going forward to help them carry out their role and satisfy section 172 duties. 
• Policies and process: Establish policies and processes appropriate to support the organisation’s operating strategy and commercial ambitions in the light of section 172 duties. 
• Engagement: Examine and set policies concerning the company’s approach to engagement with employees, investors, suppliers, and other stakeholders.

How can section 172 duties be incorporated into a company’s culture?

In an ideal situation, directors’ duties and responsibilities are woven into a company’s culture, making desirable behaviours automatic. The GC 100 guidance states that although there is no prescribed corporate culture that all companies must abide by, “a clear tone from the top will support developing the culture you wish to have throughout the organisation and inform business decisions at all levels.”

The top-down principle of creating a corporate culture is vital to ensuring its success.

Most employees of large companies are concerned with the actions and responses of their direct line manager and have little contact with board members. Remote policies are quickly read and forgotten. Therefore, each management layer must understand and embrace considerations such as approach to risk, policies on career progression, and communication about market opportunities and challenges.

In addition, line managers and supervisors need to train new employees on what directors’ duties are and how they impact the organisation at a base level. This will ensure that everyone in the company understands how and why certain board decisions are made and the duties and responsibilities considered when making those decisions.

Final words on Corporate Governance and Directors Duties

Throughout this series of articles, we have explained what directors’ duties are and why it is crucial for boards to understand their responsibilities to all company stakeholders. The risk of being challenged by NGOs, governments, and even the company’s own shareholders for breach of directors’ duties is increasing, especially relating to environment matters. Boards now run the risk of legal claims, reputational damage, and losing millions due to shelved projects if they fail to implement section 172 duties in their decision-making process.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect the law in place at the time of writing, 25 March 2024. This article does not constitute legal advice. For further information, please contact our London office.