UNDERSTANDING THE FIDUCIARY DUTIES OF A COMPANY DIRECTOR
The fiduciary duties of a company director are set out in law and executive and non executive directors are equally bound in their governance of the company.
Company directors play a crucial role in the governance and management of businesses, acting as stewards and decision-makers on behalf of shareholders and other stakeholders. In the United Kingdom, directors are bound by a set of fiduciary duties, which impose legal and ethical responsibilities to act in the best interests of the company. These duties serve as a cornerstone of corporate governance, ensuring accountability, transparency, and the protection of shareholders’ rights. This article aims to provide an overview of the fiduciary duties imposed on UK company directors.
Duty to Act in Good Faith:
The duty to act in good faith requires directors to act honestly and in the best interests of the company. Directors should exercise their powers for proper purposes, avoiding conflicts of interest and refraining from any personal gain at the expense of the company. This duty encompasses a high standard of care, skill, and diligence, demanding that directors make informed decisions and act with the level of skill expected from a person with their knowledge and experience.
Duty to Promote the Success of the Company:
Under the Companies Act 2006, directors have a duty to promote the success of the company. This duty includes considering the long-term consequences of their decisions, the interests of employees, the impact on the community and the environment, relationships with suppliers and customers, and maintaining the company’s reputation. While the duty primarily focuses on shareholders’ interests, it also emphasises the broader responsibility of directors towards society and sustainable business practices.
Duty to Exercise Independent Judgment:
Directors must exercise their powers independently, without being unduly influenced by external factors or pressures. They should make decisions based on their own judgment, considering the relevant information and the company’s best interests. Directors should avoid conflicts of interest and ensure that their personal relationships or affiliations do not compromise their ability to act impartially.
Duty of Skill, Care, and Diligence:
Directors are expected to possess the necessary skills and knowledge to carry out their roles effectively. They should devote sufficient time and attention to their duties, keeping up with industry developments and seeking professional advice when required. Directors must use their skills and expertise to make informed decisions, assess risks, and safeguard the company’s assets and interests.
Duty to Avoid Unauthorised Benefits:
Directors are prohibited from using their position to gain personal advantage or accepting unauthorised benefits from third parties. Any potential conflicts of interest must be disclosed promptly and managed appropriately to ensure fairness and transparency. Directors should also avoid situations where their personal interests conflict with those of the company and act in a manner that promotes the best interests of shareholders.
In summary: The fiduciary duties of UK company directors serve as a crucial framework for ensuring ethical conduct, accountability, and responsible decision-making within corporations. By adhering to these duties, directors can contribute to the long-term success and sustainability of their companies, while protecting the interests of shareholders and stakeholders. Understanding and upholding these fiduciary duties are essential for maintaining public trust in corporate governance and promoting a culture of integrity within UK businesses.
Companies House – 7 Duties of a Company Director