Company directors have certain legal obligations that they must fulfill in their role. These responsibilities are set out in Companies Act 2006. During a crisis period and economic downturn, it is vital that directors know and understand these and act accordingly. We have summarised these duties below for your information.
Know Your Constitution
The articles of association of all limited companies will set out the rules governing how the company is run internally. Most small limited companies formed in the past 15 years will have been incorporated using ‘model articles’. These are standard procedures applicable to how directors make decisions about the company’s best interests over and above their own self-interests.
Model articles can be viewed on Companies House online here:
Promoting The Company
Directors must act in a way that they consider would be most likely to promote the success of the company for the beneﬁt of its members (shareholders) as a whole. Directors must consider the likely consequences of all decisions for various stakeholders, including employees, suppliers, customers and communities. They should also consider the impact on the environment, the company’s reputation, company success in the longer term and all of the shareholders.
Promoting the success of the company brings with it a number of implications.
Board decisions can only be justified by the best interests of the company, not on the basis of what works best for anyone else, such as particular executives, shareholders or other business entities. Directors should be broad minded in the way that they evaluate those interests with regard to other stakeholders rather than adopting a narrow financial perspective. The key way to think is this – what would a reasonable person do? What would someone else think about what I have decided? Is it moral and ethical?
A director needs to form their own view on the best interests of the company. If a director is not familiar with key aspects of the company’s activities, they should ensure they do so quickly and thoroughly. The role of director is not that of a passenger in determining the direction of a company.
Directors should not simply implement the commands of other parties (such as major shareholders). Also, directors cannot avoid their responsibility to make independent decisions by relying on the knowledge or judgement of other directors or experts.
The role of director is not for everyone, so take care when taking up such a role in a limited company – especially those in the charitable and voluntary sector.
Exercise Reasonable Care, Skill & Diligence
There was a time when directors could be appointed purely for their name or reputation, without the expectation that they would actually do any work as a board member. Those days are now over due to the duty for directors to exercise reasonable skill, care and diligence in their role.
The benchmark is that of a reasonably diligent person with the general knowledge, skill and experience that could reasonably be expected from a person carrying out the director’s functions. Also, directors with specific professional training or skills (such as a lawyer or accountant) are held to a higher standard in related issues than less qualified colleagues.
Conflicts of Interest & Personal Benefits
Directors must disclose to fellow board members things such as other directorships or roles which would reduce the scope of their attention. They should spread themselves to thin in case this compromises their position and affects their ability to focus exclusively on their director duties.
Other board members (or the shareholders, in some cases) must decide how to manage or approve the conflict and maintain the integrity of the board’s decision-making process.
Examples of conflicts of interest include situations where the director has relationships of a business or personal nature with persons or entities that are affected by the company’s activities. It could also relate to situations where the director may be considering taking advantage, on a personal basis, of property, information or opportunity which belongs to the company.
Gifts or benefits from third parties are also a potential threat to a director’s objectivity. Most importantly, directors have a statutory duty to disclose any direct or indirect interest in proposed or existing transactions or arrangements with the company.
Maintaining The Accounts
It should go without saying that directors are responsible for ensuring proper books and records are maintained of the company’s financial activities, transactions and position.
Books of account must be sufficient to allow ease of access in such a way that allows the current financial position of the company to be determined.
Nowadays, cloud accounting systems such as Xero are perfect in fulfilling this duty. Keeping your data up-to-date on a daily and weekly basis will allow you or your accountant to quickly see the company’s financial health – what are the assets, how much is owed to the company, who are the company’s creditors, if the company is profitable etc.
Even more important in maintaining the books is allowing directors to use current financial information to plan forward and make much more informed decisions on the company’s finances including pricing of products/services, cost reviews and cash-flow forecasting.
Please note – even by appointing an accountant to oversee the company’s finances does not remove your responsibilities as director in these matters. You still need to ask relevant questions, get access to all relevant data, understand the numbers……..
All directors must ensure their roles are being fulfilled is by ensuring all board meetings are fully minuted. One of the important purposes of the minutes of board meetings is to provide a record of the board’s decision-making process.
These minutes must be kept for 10 years. Years from now, it may be difficult for you to remember if you fulfilled your directors’ duties in respect of some key decision. The minutes can provide vital evidence that you did act responsibly. Directors may need to rely on such minutes in the future should the company enter insolvency or be subject to any particular claims.
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