Becoming a director of a company is often seen as a promotion or an honour but it also important to remember that there are a number of responsibilities that must be undertaken in the role.
Here we look at what they are and give some general advice for those considering becoming a company director but as with all things legal if in doubt please take proper advice.
Responsibility 1 – Act within your powers. The memorandum and articles of companies normally set out what the rights of a director will be and the rules for conduct. It is important that the new director makes themselves familiar with them when taking office and ensures that they comply with the terms. It is also a requirement that the company itself doesn’t stray from the terms of its articles under the direction of the director.
Responsibility 2 – acting in good faith. The director must use his powers to act in the best interest of the company. This means that they do all they can to ensure that the company achieves what it sets out to do in its objects. The director will need to consider the ramifications for any decision process including the effects on employees, creditors, shareholders and stakeholders and ensure that they make a considered judgement.
Responsibility 3 – Acting as an independent judge. This means that the directors are charged with putting the interest of the firm above that of their own individual needs. This sits alongside number 3 as the two are often, in practice intertwined.
Responsibility 4 – Exercising reasonable care and diligence. Ignorance is no defence in law and especially not in the case of directors’ conduct. The individual must make themselves aware of all information that they need to do their job. It may mean ensuring that they have the requisite amount of training to do the job but it will certainly mean attending a good amount of board meetings. Absence is not an option and a director is expected to know at all times what is happening with their company and exercise reasonable skill in decision making.
Responsibility 5 – Avoiding conflict of interest. A director must make sure that the decisions they make are from the sole point of view of the company and not made to benefit another firm that they may have an interest in or to help out a friend or family member. This leads on to…
Responsibility 6 – A duty not to accept benefits from third parties. When does accepting a gift become a bribe? Small gifts, properly declared and given irrespective of any benefit to the third party are acceptable but making a secret profit is not, even if that profit may be goods or services rather than cash.
Responsibility 7 – The duty t declare any interest in a decision or transaction. Even if the interest is slight or not direct (for instance if a family member may benefit) then it will still need to be declared. The director should then remove themselves from the decision making process where applicable. Similarly there may not be an interest but it may look as though there is. In this case, to avoid any claims of impropriety attaching itself to the company the director should also forego any part in the decision making process.
Responsibilty 8 – when things gets bad and the company is facing insolvency then the director has a duty to act not in the interests of the company and its shareholder but in the interests of the creditors. Ensuring that they avoid wrongful or fraudulent trading is extremely important in this case.
Becoming a director is an exciting time in the career of any business person but it must be approached in a business-like manner. Making yourself aware of the rights and responsibilities of a director is critical to ensure a favourable outcome.