New rules for directors: be wary!

I attended another excellent seminar at the St John’s Innovation Centre (www.stjohns.co.uk) last week. This time it was on directors’ responsibilities. It was delivered by a team from Mills & Reeve (www. mills-reeve.com) and was another of the series organised by St John’s and supported by the Greater Cambridge Partnership with government money. There are more seminars planned and there’s information about them on the St John’s website. Mills & Reeve itself is a top 50 UK law firm with an interesting profile; check out its website.

The purpose of the seminar was to brief attendees about the new law (the Companies Act) which was passed in 2006. It came into effect on various dates up until October 2009 and was the first major update to legislation for 20 years. It is much more explicit about the role of the director. Here are my 6 points to note.

As a director you should worry about the new Act, but not too much. Although many feared the worst when such sweeping legislation was enacted this has not happened. Although it is now much clearer what the directors’ responsibilities are it is also helpful in defining them. It should have little impact on ‘good’ directors and if it encourages others to behave more responsibly then that’s a good thing.

Directors have an explicit duty to promote the success of their companies. The Act provides a checklist of factors which must be considered in exercising this duty. It’s not just about short term profitability. The factors are the:

• likely consequence of any decision in the long term;
• interests of the company’s employees;
• need to foster the company’s business relationships;
• impact on the community and the environment;
• maintenance of the company’s reputation for high standards of business conduct; and
• need to act fairly as between members of the company.

This checklist would also be useful in developing the company’s values and the impact they have on the development of its brand. This will be idea will be developed in a future entry to this blog.

Directors have authority for conflicts of interest. These might be:

• situational conflict where a director has an interest which conflicts with the company’s interests;
• conflicts arising from present and proposed arrangements with the company additional to their being directors; or
• the receipt of benefits from third parties.

Such interests must be declared and authorised.  A private company can allow situational conflicts to be authorised at board level but a benefit from a third party must be authorised by a resolution of the shareholders.

I don’t have any difficulty with this because in my other life as a part-time politico I am regularly required to declare interests, my employment and directorships are registered at the County Council, and gifts of over £25. The register of interests is open to public inspection.

It’s a good idea to check your company’s Directors and Officers (D&O) indemnity policy. Directors may be subject to shareholders’ claims for breaches of directors’ duties. Shareholders have a statutory right to apply to a court if they believe that the company is being run in a manner unfairly prejudicial to them. The act allows companies to grant indemnities to directors under certain circumstances. They can also take out insurance. It’s a knotty area, check it out!

Be serious about health and safety. Any company employing 5 or more people must have a written H&S policy. Companies are deemed to have a duty to take reasonable care for people’s safety. If they do not they leave themselves open to personal injury claims and, in extremis, to prosecution for corporate manslaughter. It doesn’t bear thinking about, just do it!

The credit crunch puts a premium on responsible director behaviour. In difficult times when companies run into financial difficulty directors have specific duties which go beyond their basic duty to promote success whilst the company is solvent. They must not support wrongful and fraudulent trading and must be visibly active in seeking advice and acting in the best interests not just of the company but also of its creditors. Note that fraudulent trading is a criminal offence and it’s a good idea to check the company’s D&O cover (see above).

There’s more information about the 2006 Companies Act on Mills & Reeve’s web-site. Click here (http://bit.ly/cP0JYy and http://bit.ly/bUn5ho). There are also useful links on the Department for Business, Innovation and Skills (http://bit.ly/9HVdFI) and Companies’ House web-sites (http://bit.ly/dd9wUT).