Out-Law / Your Daily Need-To-Know

Directors' duties: Six factors that boards cannot ignore

Out-Law Guide | 16 Jun 2010 | 4:49 pm | 2 min. read

This guide is based on UK law as at 1st February 2010, unless otherwise stated. As part of its decision-making process, a board needs to consider the following factors and weigh up their influence ...

This guide is based on UK law as at 1st February 2010, unless otherwise stated.

As part of its decision-making process, a board needs to consider the following factors and weigh up their influence on its overriding duty to promote the company’s success (see: The code of directors' duties, an OUT-LAW guide).

Of course, some of the six factors will be more relevant than others; much depends on the type of decision being made. There is no requirement to waste time considering the environment and your suppliers where they are clearly unconnected to the matter at hand.

By the same token, some decisions will require the board to have ‘regard to’ other things as well. The list is not exclusive; it is a prompt, a guide for the ‘thinking’ board.

  • The likely long-term consequences of any decision. Promoting a long-term investment culture was a key objective of the government in introducing the Companies Act 2006. Some companies may find themselves with share registers made up of hedge funds and active value investors who look only for
    short-term returns. Despite that, the relevance of the long view is something a board is required to consider.
  • The interests of employees. Directors have been required to pay regard to employees’ interests for many years, though employees have had no direct means of enforcing this duty. That has not changed and, in any event, the interests of employees can diverge. In the unhappy circumstances where the directors have to choose between shutting factory A or factory B, the law gives them no help in deciding between one group of employees and another.
  • The need to foster business relationships with suppliers, customers and others. This may seem a statement of the obvious; it’s a poor company indeed that’s not aware of the importance of this. Nonetheless, small suppliers of large super markets may be one group glad of the statutory requirement.
  • The impact of the company’s operations on the community and the environment. Few large companies now feel they can ignore the environment (see the story of Shell's Brent Spar episode in Directors' duties: Case studies on the duty to promote the success of a company) but the ‘community’ is perhaps a trickier concept. The issue may be obvious where one company dominates a town and provides much of the employment and local wealth, but it may not be so clear-cut where the interests of one community conflict with another.
  • The desirability of maintaining a reputation for high standards of business conduct. Corporate buccaneers, in other words, have to think twice.
  • The need to act fairly between members. This is old law, but remains good under the Companies Act 2006. The private shareholder with a few hundred shares is entitled to the same treatment as the institution with many millions of shares. The disclosure obligations of listed companies make the same point on the dissemination of inside information (See: The FSA and securities regulation, an OUT-LAW guide.)

All this becomes irrelevant when a company is insolvent; then the interests of creditors take precedence over all else. (See: Financial difficulty and insolvency, an OUT-LAW guide.)