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Home > Corporate Governance Checklists > Directors’ Duties: A Primer

Corporate Governance Checklists

Directors’ Duties: A Primer


Checklist Description

This checklist provides an overview of the most important duties of directors.

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Definition

Directors have important and powerful positions in a company. The stockholders entrust them with the running of the company, and this is why the law requires directors to comply with certain duties.

Directors have a duty to act within their powers for a proper purpose, which is underlined in the bylaws of the company. They also have a duty to promote the success of the company and, in doing this, must balance the interests of the stockholders, employees, suppliers, and customers of the company. The law does not define success, but in general this is agreed to mean increasing the value of the company and its business.

The directors are required to exercise independent judgment when making their decisions. They also have a duty to exercise reasonable care, skill, and diligence in the performance of their duties. An experienced director will be expected to exercise a higher degree of care, skill, and diligence in the performance of his or her activities.

Directors have a duty to avoid conflicts of interest. What constitutes a conflict of interest is a complex issue, but in general it refers to transactions between a director and third parties, rather than between a director and the company. Directors have a duty not to accept benefits from third parties if they give rise to a conflict of interest. Benefits in this sense include money and benefits in kind, such as corporate hospitality. It is advisable to obtain specific legal advice in respect of conflicts of interest, as this subject can be quite controversial and difficult to assess.

Directors have a duty to declare any interest in proposed transactions or arrangements with the company. They must disclose any such interest to the board of directors and, in certain circumstances, obtain the approval of the stockholders. This includes transactions involving the director or any person connected with the director, such as a spouse or children, and the company.

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Advantages

  • Directors’ duties enhance the role of a company’s directors and guide their direction of the company’s business.

  • These duties also reduce the risk of fraud and nonperformance, in the interests of the stockholders.

  • The duties give stockholders and investors the confidence to invest in companies and enable them to follow the directors in the performance of their responsibilities.

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Disadvantages

  • Compliance with directors’ duties can be expensive in terms of both time and money. It requires an active training program and professional advice.

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Action Checklist

  • When accepting an appointment as a director of a company, make sure you understand the consequences of the appointment. Obtain specific information about the company itself and the duties imposed upon directors by the bylaws of the company, as well as the company laws in the country where the company is incorporated.

  • If necessary, obtain legal advice regarding the consequences of your appointment, and the duties, obligations, and responsibilities you will have as a director under the law.

  • Most jurisdictions require a transparency in any personal interest a director may have in the company, and it will oblige the director to declare any conflict of interest it may have with the business of the company.

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Dos and Don’ts

Do

  • Put in place a good training program that will keep the directors up to date with their duties.

  • Obtain legal and professional advice regarding any changes in the legislation governing directors’ duties.

Don’t

  • Don’t ignore the importance of complying with directors’ duties and responsibilities. Doing so could be damaging both to the directors in question and to the company.

  • Don’t underestimate the need for proper training of directors and professional advice to help them fulfill their duties.

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Further reading

Books:

  • Loose, Peter, Michael Griffiths, and David Impey. The Company Director: Powers, Duties and Liabilities. 11th ed. Bristol, UK: Jordan Publishing, 2011.
  • Mitchell, Philip. Tolley’s Director’s Duties. Croydon, UK: Tolley Publishing, 2007.
  • Webster, Martin (ed). The Director’s Handbook: Your Duties, Responsibilities and Liabilities. 3rd ed. London: Kogan Page, 2010.

Article:

  • Cooke, Peter. “Duties of directors in new Companies Act 2006: Legal Q&A.” Personnel Today (May 8, 2007). Online at: tinyurl.com/3wpukru

Websites:

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