Coronavirus: Corporate governance and directors’ duties
What is meant by corporate governance?
There is no formal definition of 'corporate governance', the term broadly captures the rules, practices and processes by which a company is directed and controlled. It is intended to ensure a company has appropriate documentation and procedures in place to comply with legislative and regulatory requirements, the company’s constitution and best practice in the relevant industry. At times like this, with many companies facing extraordinary financial pressures, and threats to their existence, good corporate governance is more important than ever to support good decision making and to protect directors from personal liability.
What are the overarching duties facing directors?
The Companies Act 2006 (“Act”) sets out the duties owed by directors to a company. There are seven “general duties” set out in the Act and these are as follows:
- a duty to act in accordance with the constitution of the company and to use powers only for the purposes for which they were conferred
- a duty to promote the success of the company for the benefit of the members
- a duty to exercise independent judgment
- a duty to exercise reasonable care, skill and diligence
- a duty to avoid conflicts of interest
- a duty not to accept benefits from third parties, and
- a duty to declare to the other directors any interest that a director has in any proposed transaction or arrangement with the company.
What should boards and individual directors be considering?
The second duty, to promote the success of the company for the benefit of the members is of particular importance in the current climate. The term "success" is not defined in the Act and may well be determined by a link to the profitability of a company. The Act sets out a non-exhaustive list of factors that directors should have regard to in satisfying this duty. These include, among other matters:
- the likely consequences of any decision in the long term
- the interests of the company's employees
- the company's business relationships with suppliers, customers and others
- the impact of the company's operations on the community and the environment
- the desirability of maintaining a reputation for high standards of business conduct, and
- the need to act fairly as between the members of the company.
The provisions of the Act do not require every factor to be considered in relation to every decision but it is prudent to draft board minutes to reflect the factors that have been considered in reaching decisions, particularly regarding decisions that are being made in relation to one or more of the areas covered by the factors. At the very least there should be a documented record of the manner in which any relevant decision taken at board level has been considered beforehand.
Directors should take a moment to refresh their understanding of their obligations and duties, and ensure that their decision making is with these obligations and duties in mind. This is of particular importance to directors of companies facing financial distress. For these companies, their directors' duties to act in the best interests of the company are supplemented by additional obligations. Where there are concerns around insolvency, the overarching duty of directors to act in the best interests of the company are revised from a duty to the company’s shareholders, to a duty owed to the company's creditors. Directors should ensure that their decisions, and the factors considered in their decision making process, are thoroughly documented to ensure that they can produce evidence of this later.