There is a common misconception that when a member organisation nominates a director, that the director is elected to represent that organisation. This is becoming increasingly common with partnership arrangements and directors sitting on multiple boards. It is therefore crucial that a director understands that their duty is to the company on whose board they are sitting.
Whether you are an executive or non-executive director you are still subject to the same legal duties. Many of these duties were known in the past as common law duties but the Companies Act 2006 ‘codified’ many of these and they are set out in the act.
Duty to Act within Powers
This essentially means that a director can only act in accordance with the company’s constitution. It is therefore crucial that a director is familiar with their Memorandum and Articles*, the company’s objects and the powers that the company has.
Duty to Exercise Independent Judgment
A director must not blindly follow the judgment of those who nominated them but must act independently and follow their own judgement on a decision.
Duty to Avoid Conflicts of Interest
A director must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. In particular this relates to the exploitation of any property, information or opportunity that a director may become privy too.
Duty to Exercise reasonable care, skill and diligence
Arguably one of the most important duties of a director. A director must exercise the care, skill and diligence that would be exercised by a “reasonably diligent person”. The duty takes into account both the general knowledge, skill and experience that may be reasonably expected and also the general knowledge, skill and experience that the director actually has.
Other duties contained in the act, along with common law duties, include the Duty to promote the success of the company; Duty not to accept benefits from third parties; Duty of confidentiality; and the Duty to declare an interest in existing or proposed transactions or arrangements.
(* Recently constituted limited companies will have all of their rules contained within their Articles).
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