Guides
The duties of a company director
The duties of a company director matter now, more than ever, because good governance and board effectiveness are no longer a tick-box exercise.
A director’s prime responsibility is towards the ‘company’, not the company’s shareholders.
An easy way of understanding this is to think of the company as a separate legal entity.
It is very much like an independent person.
A company has its rights and liabilities, just like any private citizen.
It is important to remember that a company is not the same as its shareholders, and this is why it’s essential to understand the duties of a director and where they lie.
A director’s duties are owed to the company
Companies must be able to trust their directors. Directors owe their fiduciary (‘of trust’) duties to the company and not to shareholders. The various Company Acts around the world are clear on this.
When a person registers as a new director, the statement is clear. They must acknowledge that, as a director, they have “legal duties and obligations”. This means that if in the future, a director pleads he/she was unaware of their duties, this defence will not stand up in court.
The eight great duties
Duties within duties
Apart from the ‘eight great’ duties, directors have many other responsibilities – duties within duties if you like. When making decisions as a director, you also must consider:
- Potential long-term consequences for the company
- The interests of your employees
- Maintaining your company’s good reputation
- The need to nurture and grow profitable relationships with customers and suppliers
- The company’s impact on the environment and local community
The need to act reasonably between members, for example, treating those with few shares in the same way as institutions with a much more significant shareholding.
Are you up for the challenge?
Before accepting a role as a director or non-executive director, you must be honest with yourself.
Are you capable of handling the responsibilities?
In his book, ‘A practical guide for company directors’, David Duffy, writes: “When appointed, directors assume responsibilities and duties that must be carried out diligently. If they are not prepared to assume these responsibilities, then they should not become a director.”
What can happen to a director who does not carry out their duties?
If a director breaches company law, they can face serious consequences.
If a shareholder, creditor, or the company, suffers loss or damage, they can take action against a director personally.
However, in most cases, the company pursues directors who have failed in their fiduciary duty.