Online free quote
enquiries@fosters-solicitors.co.uk
01603 620508
Corporate governance serves as the backbone of any successful organisation, ensuring transparency, accountability, and ethical management practices. For directors, understanding their legal duties is not just a matter of compliance but a cornerstone of sound governance.
In this article, we’ll explore the key legal duties of directors, why they matter, and how they help businesses maintain integrity and achieve long-term success.
Corporate governance refers to the systems, processes, and policies by which a company is directed and controlled. At its core, it aims to balance the interests of a company’s stakeholders, including shareholders, employees, customers, and the broader community
Directors are pivotal in implementing corporate governance. Their decisions shape the company’s future, making it essential for them to be aware of their responsibilities under UK law.
Under the Companies Act 2006, directors in the UK have several statutory duties, as well as wider fiduciary duties. Failure to comply with these duties can lead to penalties, personal liability, damage to the company’s reputation and, in the most severe cases, criminal convictions.
Here’s an overview of the key legal obligations:
Duty to act within powers
Directors must act according to the company’s constitutional documents, including its articles of association, and use their powers for the purposes for which they were conferred.
Duty to promote the success of the company
Decisions made by directors should benefit the shareholders of the company as a whole, considering matters such as:
Duty to exercise independent judgment
Directors must make decisions themselves, and must not simply defer to the wishes or opinions of someone else. Nor must a director agree with somebody else, that they will vote at board meetings in a particular way.
Duty of care, skill, and diligence
Directors must perform their duties with the care, skill, and diligence that would be expected of a reasonably diligent person with both the knowledge, skill and experience reasonably expected of a director and the director’s actual knowledge, skill and experience.
Duty to avoid conflicts of interest
Directors must avoid situations where their personal interests conflict (or may conflict) with those of the company.
Duty not to accept benefits from third parties
Accepting gifts or other benefits could compromise the director’s independence and is strictly prohibited unless explicitly authorised.
Duty to declare interests in proposed transactions
If a director has a direct or indirect interest in a transaction with the company, they must declare it to the other board members before the company enters the agreement.
Duty of confidentiality
Directors have a duty of confidentiality to the company. This duty requires directors to refrain from disclosing or misusing confidential information for personal gain or to the detriment of the company and persists even after a director has left the company, ensuring that former directors cannot exploit sensitive information obtained during their tenure.
Understanding and adhering to legal duties is critical for several reasons:
Protecting the company: Proper governance reduces the risk of lawsuits and financial penalties.
Maintaining trust: Compliance helps to builds trust among those involved with the business, such as shareholders, investors and employees.
Enhancing Reputation: Good governance fosters a positive reputation, which is invaluable for long-term success.
In 2018, the collapse of Carillion, a major UK construction and facilities management company, highlighted the importance of good corporate governance. Investigations revealed significant governance failures, including a lack of oversight by directors and conflicts of interest.
The directors were accused of failing to act in the company’s best interests, prioritising short-term financial gains over sustainability. This resulted in the loss of thousands of jobs and widespread financial damage.
The Carillion case underscores the necessity of directors understanding and adhering to their legal duties.
Corporate governance experts often stress the need for regular training for directors. According to the Financial Reporting Council (FRC): “Good governance ensures companies can operate efficiently and responsibly while being accountable to shareholders and other stakeholders.”
Fosters Solicitors’ Head of Corporate, Josh Perez-Fosh adds “By practicing strong corporate governance, directors equip themselves to lead with confidence and adapt to future challenges, helping to safeguard their company’s success.”
Despite the clear legal framework, directors often face challenges in fulfilling their duties:
Balancing interests: Directors must navigate conflicting interests, such as short-term profit versus long-term sustainability.
Rapidly changing regulations: Staying updated with changes in corporate governance and compliance laws can be challenging.
Economic pressures: Financial pressures may tempt directors to compromise on ethical standards, highlighting the importance of accountability mechanisms.
Good corporate governance has tangible and intangible benefits:
To uphold their duties and strengthen corporate governance, directors should:
The new Labour government announced their intention to introduce the Audit Reform and Corporate Governance Bill, providing for enhanced investigatory and sanctioning powers against company directors. The draft Bill has not yet been published, but company directors should remain aware of plans to strengthen corporate governance obligations.
Our Business & Commercial team provides effective and pragmatic commercial advice to businesses of all types and sizes, from innovative startups to long-established companies. We can provide advice on a range of corporate matters, often supporting current or prospective business owners and company directors. Find out more about our Business Solicitors here, or contact us directly for more information.
This article was produced on the 12th February 2025 for information purposes only and should not be construed or relied upon as specific legal advice.
