7 things you need to know about being a director

These 7 statutory duties are owed by each director to the company. These form the basis of what being a company director is all about.

1 – Company’s constitution

The first of these duties is that as a director you must follow the company’s constitution and its articles of association. These are written rules about running the company for you and the board, agreed by the members, directors, and the company secretary.

The constitution sets out what powers you have as a director, and the purpose of those powers.

When the company was first registered you may have used the model articles available for private or public companies. Alternatively, you may have created your own tailored articles with the help of a legal advisor.

As a director, it’s important to be familiar with the articles of association as they may constrain your decision-making powers in certain ways. If you exceed your powers, any decisions made could be reversed and you may be responsible for any financial losses the company faces.

2 – Promote the success of the company

A duty to promote the success of the company may seem like an obvious task for a director, but there is a lot to consider. You must act in the company’s best interests to promote its success and in good faith. You must consider the:

• consequences of decisions, including the long term
• interests of its employees
• need to support business relationships with stakeholders (suppliers, customers and others)
• impact of its operations on the community and environment
• company’s reputation for high standard
• need to act fairly to all members of the company

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 shareholders or other business entities. But directors should be broad minded in the way that they evaluate those interests, considering all stakeholders rather than just the financial perspective.

If the company becomes insolvent, your responsibilities as director will apply towards the creditors, instead of the company. A creditor is anyone owed money by the company.

3 – Independent judgement

The third major duty requires directors to exercise independent judgement. As a director you are meant to develop your own informed view on the company’s activities and not allow other people to control your powers as a director.

You can accept advice, but you shouldn’t avoid your responsibility to make independent decisions by relying on the knowledge or judgement of other directors or experts.

4 – Exercise reasonable care, skill and diligence

As a director you have a duty to perform to the best of your ability.

You must use any relevant knowledge, skill or experience you have. If you have any specific professional training or skills (such as an accountant or lawyer) you are held to a higher standard in related issues than less qualified colleagues.

Avoid conflicts of interest (covering 5, 6 & 7)

The remaining three legal duties relate to the need for directors to avoid or manage conflicts of interest which may affect their objectivity, not accepting benefits from third parties and to declare an interest in a proposed transaction or arrangement.

You must avoid situations where your loyalties might be divided. If situations arise which impose multiple claims on your attention or loyalty, it is essential that you disclose them to your fellow board members and follow any process set out in the company’s articles of association to maintain the integrity of the board’s decision-making process.

This duty continues to apply if you’re no longer a director. You must not take advantage of any property, information or opportunity you became aware of as a director.

Gifts or benefits from third parties are also a potential threat to a director’s objectivity. As a director you have a statutory duty to disclose any direct or indirect interest in proposed or existing transactions or arrangements with the company.

The company may allow you to accept benefits like reasonable corporate hospitality if it’s clear there’s no conflict of interest.

Important note – Keeping a record

You can prove you have fulfilled these legal duties by keeping a record.

One of the important purposes of the minutes of board meetings is to provide a record of the board’s decision-making process. It is a legal requirement to keep these minutes for 10 years. These minutes can provide vital evidence that you fulfilled your duties as a director in years to come, if ever needed.

If you need any assistance with your role as a director please do not hesitate to contact us.