Becoming a director of a company, whether it’s as you start your own business or have worked your way up the career ladder, is an exciting time filled with opportunity. Being a director can be very rewarding, satisfying and profitable – but it doesn’t come without risk. To do the best for your business, it is worth reminding yourself of the roles and responsibilities of directors.
The Role of the Board
The Institute of Directors defines the role of the board as ensuring the company’s prosperity by collectively directing the company’s affairs while meeting the appropriate interests of its shareholders and relevant stakeholders.
As a director, you are expected to establish and deliver the business’ purpose, visions and values; delegate responsibilities to senior managers and be accountable to shareholders and stakeholders. You decide which tasks can be delegated and which will be best managed yourself, you review your successes and areas for improvement and plan for your future.
But as well as your role and the personal and professional benefits this has for you, you should also be aware of the challenges and responsibilities that becoming a director brings and how you can overcome these.
The Companies Act 2006 details the additional legal responsibilities you carry when becoming a director:
To act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred.
As a director, it is important to be familiar with the articles of association for your business as they are likely to restrict your individual decision-making powers.
To promote the success of the company for the benefits of its members.
You should act in good faith to promote success for the company and its shareholders. You need to consider the outcomes of your decisions for everybody involved in the business – employees, suppliers, customers and communities. It is also important to consider the impact your decisions will have on the environment, the reputation of your company and your business’ success in the longer term.
All decisions should be made within the best interests of the company, not to benefit any individuals. However, be broad-minded when evaluating those interests, keeping in mind other stakeholders – the financial aspect is not the only perspective to consider.
To exercise independent judgment.
As a director, you are legally obliged to exercise judgment independently and be prepared to question the decisions of others. If the existing board make decisions, it is important to question why that’s the best thing for the company. If you have a different approach in mind, you should voice it.
To exercise reasonable care, skill and diligence.
As a director, you are expected to make decisions based on diligence, knowledge, skill and experience and are accountable for those decisions.If you have specific professional training (for example legal or accountancy training), you will be held to a higher level of accountability than less-qualified members of the board when decisions are made relating to your expertise.
To avoid conflicts of interest.
A conflict of interest could arise if you have a close, personal interest in the business of competitors or other third parties such as suppliers. Alternatively, if you are responsible for a decision regarding an employee or potential employee with whom you have a close relationship (e.g. a family member or close friend), this would also constitute a conflict of interest.If you find that you have a conflict of interest, you must declare this to the board so that it can be resolved.
It is important to ensure that your non-financial interests (personal beliefs and values, welfare and political views) do not take precedence over your lawful and ethical duties as a director.
Not to accept benefits from third parties.
You must not accept benefits with the expectation of you doing, or not doing, something within your power to influence a decision.
To declare an interest in a proposed transaction or arrangement.
If you have an interest in a deal or transaction, you must make it known. If a close friend or family member will benefit from you doing business with a specific supplier, you must declare this to your fellow board members.
Becoming a director should not be a daunting prospect nor anything to be frightened of. The risks are minimised as long as you comply with your legal responsibilities as a director. Following these rules will protect your business from malpractice and help to ensure your continued success.
If you are worried about becoming a director and how to act in the best interests of your company, get in touch to discuss how we can help you.
Martyn Jones, Specialist in Corporate Governance