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GC100 Issues Guidance on Directors’ Duties

07/11/2018

At a glance

The GC100, which is the voice of general counsel and company secretaries working in FTSE 100 companies, recently released updated guidance on directors’ duties (the “Guidance”), specifically section 172 of the Companies Act 2006. The Guidance may assist any director in discharging their duties, particularly in the context of larger decision making processes, or be useful for directors of larger companies with varied interests or operations.

Section 172 imposes a general duty on every company director to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. The duty is owed to the Company (although shareholders could enforce this on behalf of the company through a derivative action).

Section 172 requires directors to “have regard” to a non-exhaustive list of factors; including the likely consequences of any decision in the long term, the interests of employees, how the actions of the company affect customers, suppliers, the community and the environment, the company’s reputation and the need to act fairly between the members of the Company.

The factors for consideration, as listed in section 172, are not intended to conflict with the director’s primary duty to promote the success of the company for the benefit of its members as a whole, but are matters to be considered by each director when taking any action in his/her capacity as director.

The Guidance provides a useful summary of the key matters for directors to consider when discharging their duty under section 172, the legal background to section 172, an example scenario of how directors should discharge their duties, as well as practical steps directors can take to establish an environment which assists them in discharging their duties.

The Guidance notes that:

  • For most commercial companies, “success” will usually mean long term value creation from which all shareholders benefit.
  • The section 172 duty is owed to the company, not stakeholders; however directors must have regard to the matters provided for in the section (employees, suppliers, customers, others with whom the company has a business relationship, the community and the environment and the company’s reputation for high standards of business conduct).
  • Directors are to have regard to the section 172 factors when they carry out their role, in good faith, using their own skill and judgment, having regard to the likely long term consequences of their decisions. Not all directors will come to the same view on any given matter or circumstance.
  • Section 172 should be considered when directors are setting strategy, as well as establishing policies and procedures to support decision making. Information should be generated and provided to directors in a way which assists them in carrying out the duty, with on-going training given to support director decision making generally.
  • Directors should consider and review if they know enough about the stakeholder interests and factors which are relevant to the company so that they are properly informed in making any decisions and in discharging their section 172 duty.
  • Board papers and minutes should be prepared in a manner which addresses the stakeholder factors provided for by section 172.
  • Directors of subsidiary companies should be clear that they owe their duties to the subsidiary of which they are a director and not the parent company.
  • Directors of joint venture companies owe their duties to that joint venture company. Directors appointed by joint venture recipients need to be clear when they are acting as the representative of the shareholders and when they are acting as directors of the joint venture company.
  • The duty under section 172 needs to be discharged alongside the other directors which directors owe under the Companies Act 2006, other statutes or regulations, or otherwise at common law.

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