Around 1,000 people are disqualified from acting as a director of a company in the UK every year for reasons such as unfairly failing to deal with company taxes and, more recently, abuse of Covid-19 support schemes. Whilst there will always be some people setting out to defraud the system, in many cases directors don’t have the intention of acting in a way that causes them to be considered unfit to be a director. However, they still might not fulfil all of their legal responsibilities. Like a juggler, there is great skill in keeping your eye on all of the balls and not letting any of them drop too far.
In my role as an advisor to company directors, I often find that my clients are not aware of the strict duties placed upon them by company law in the UK. They may not realise the potential consequences of failing to meet those duties. On the other hand, some people are incredulous as to how others in business appear to get away with actions that they consider not to be good business practice.
What is a director?
Any person aged 16 or over can incorporate a company and become a company director, so long as they have not been disqualified already! A limited liability company is owned by its shareholders, who are entitled to benefit from profits made by the company. The directors act as agents for the company and usually manage the company’s business on behalf of the shareholders. In a small company, the directors and shareholders are often the same people (or person), whereas in a large company there tends to be a board of directors responsible for looking after the company for the shareholders.
However big or small, or somewhere in between, the legal duties placed on directors are the same. These duties can be found in the Companies Act 2006. I do not have the space here to talk about all of them but will highlight a couple of areas which are sometimes overlooked.
What are the duties of a director?
There is a duty to promote the success of the company. That sounds straightforward at first blush; after all, why wouldn’t a director want their company to be successful? In fact, there are many factors to consider, all of which the law says can contribute to this duty. These include taking account of the long-term consequence of decisions, the interests of stakeholders such as employees, customers and suppliers, and the impact that the company has on the environment.
A commercial company is generally seeking to make a profit for the benefit of the shareholders, and the directors should have this is in mind when making decisions. However, where a company is facing insolvency, the directors are required to put the interests of the creditors first.
Exercising care and skill
Directors are expected to exercise reasonable care, skill and diligence when managing the company. The measuring stick for this is not the same for all directors however, even though the duty itself is the same.
Every director is expected to have a base level of care and skill which could reasonably be expected of any person exercising the functions of that director. This means that ignorance is not an excuse for poor conduct.
Where a director has relevant knowledge, skills and experience to their role, they are expected to utilise them for the benefit of the company, and they will be judged with a higher bar than if they did not have those attributes. It is only right that the company should benefit from the expertise of its directors.
The master juggler
All put together, there is a lot for a director to think about when deciding how best a company should be run. How do you manage all these factors, and more, which may conflict with each other?
The first step is recognising the numerous balls which must be juggled. Writing a list (or drawing pictures) can help make sense of them. The benefits of talking to someone else should not be underestimated and can lead to solutions and new ways of thinking that did not seem possible before. There are many people happy to lend an ear, such as fellow directors, professional advisors, business coaches and mentors.
There will always be things that go wrong in business but keeping an eye on all of the balls will get any director on their way to becoming a master juggler.