The directors manage the company on behalf of its shareholders on a day-today basis. As directors, they run the company by making decisions as a board, or by delegating specific functions to individual directors.
Directors owe general duties to their company. These duties were codified by the Companies Act 1985 (CA 2006). If a director exceeds his powers or breaches his duties, he can be liable to the company for the loss he has caused. Any liability for breach can be avoided if the director’s conduct is capable of subsequent approval or ratification by the shareholders.
In addition the CA 2006 requires the directors to obtain prior shareholder approval for certain decisions and directors’ powers can be further regulated, and limited, by the Articles.
As already mentioned, ultimately, if shareholders do not approve of the way the directors are managing the company, they can change the composition of the board by removing directors and/or appointing new directors.
Financial reward of directors
The financial reward for the director will be in the form of payment for services rendered. If the director is also an employee of the company (an executive director) then his payment will be in the form of a salary. If the director is not an employee (a non-executive director) then he will receive directors’ fees. Either way the entitlement is purely contractual and is based on whatever the company decides is appropriate.
The company acting through the directors – agency
The company is a separate legal person but it is not animate. It has no mind and no body and cannot do anything on its own. The directors therefore need to act as the agents of the company. The concept of agency means that, while a director is acting with the authority of the company (the principal), any act of the director is seen, in law, to be an act of the company.
There are situations where it can be hard to determine whether the agent (the director) has acted with the actual authority of the company and thus whether the company should be bound. Where it is not clear, the common law rules of agency need to be applied.
Directors’ decision making
When exercising powers and functions, the directors act as a board and make decisions by passing board resolutions. The Articles will regulate the procedure for passing board resolutions. In most cases this means that the directors make decisions by passing board resolutions at a board meeting and board resolutions are usually passed by a simple majority of those who are present at the meeting, and voting. As an alternative the Articles usually allow directors to take decisions unanimously by some other means that allows all the directors to indicate common consent (as an example see Model Articles paragraph 8).
As mentioned above, the directors can also delegate their powers and functions. They often delegate their powers and functions to:
- committees;
- individual directors (such as a managing director); and/or
- officers of the company who are not directors.
Any such delegation is done by means of a board resolution so that, in essence, the delegatee acts with full board authority.
Directors’ duties
Directors are usually empowered to exercise all the powers of a company in order to manage the company’s business on a day-to-day basis (see Model Articles paragraph 3). Directors must exercise these powers in accordance with their statutory duties.
Whenever a director is making a decision, they must always consider the duties to which they are subject. Before the enactment of the CA 2006, directors’ duties derived for the most part from common law and equity. The former regime still operates to the extent not expressly provided for in the CA 2006 and the CA 2006 provides that the new duties shall be interpreted and applied in the same way as the common law rules and equitable principles.
Statutory duties under CA 2006
The statutory duties under CA 2006 are as follows:
- duty to act within powers (s.171);
- duty to promote the success of the company for the benefit of its members as a whole (s.172);
- duty to exercise independent judgment (s.173);
- duty to exercise reasonable care, skill and diligence (s.174);
- duty to avoid conflicts of interest (s.175);
- duty not to accept benefits from third parties (s.176); and
- duty to declare any interest in a proposed transaction (s.177).
Directors who are also shareholders
It is not unusual for a director to hold shares in their company and in some smaller private companies most, or all, of the directors will also be shareholders. It is important to remember that where a person is both a director and a shareholder then he has two separate roles. The person’s actions need to be divided into those taken as a director and those as a shareholder, and analysed separately, in the relevant capacity.