Posted by Zoe Pettigrew, Solicitor
Corporate Governance update: new ICSA guidance on directors’ duties.
The Chartered Governance Institute (“ICSA”) has recently published new guidance on directors’ general duties under the Companies Act 2006 (“Act”). ICSA provides guidance for governance professionals across all sectors and whilst aspects of this new guidance applies to publicly owned, listed companies, many of the recommendations have practical application for privately owned companies and their directors should take note.
Following on from James Worrall’s article setting out some key corporate governance considerations for businesses earlier in the pandemic, some of the key areas from this new guidance are highlighted below. You can also view The Chartered Governance Institute’s new guidance here.
Duty not to accept benefits from third parties
- This duty only applies if the benefits could reasonably be regarded as likely to give rise to a conflict of interest. If such a conflict arises it cannot be approved by the board of directors (the “Board”) but only by shareholder approval if this is provided for in the company’s articles of association.
- Best practice is to ensure that the company has robust and appropriate policies in place to deal with benefits and at what level they can be approved. Benefits are not defined in the Act and therefore this can be a challenging area especially, for example, if offered during contract negotiations.
- Companies should create a register of all benefits offered and received as this will ensure that there is a clear record of decisions made.
Duty to declare an interest in a proposed transaction or arrangement
- Best practice is for the director to declare their interest before the transaction or arrangement is entered into by the company, and for the decision as to whether to enter into the transaction or arrangement then made without that director being present.
- If the company requires a conflict of this nature to be approved by the shareholders to permit the relevant director to vote, this should be provided for in the articles of association.
Duty to declare an interest in an existing transaction or arrangement
- An interest only needs to be declared if it could reasonably be regarded as likely to give rise to a conflict of interest. This must be made at a Board meeting or by notice in writing, or a general notice.
- Directors can commit a criminal offence if they fail to comply with the requirements in this section. There is also the potential for the company, or a shareholder, to bring a claim therefore affecting the director financially (e.g. liability for damages) and their future career prospects (if disqualified or removed).
Duty to promote the success of the company – reporting requirement
“Large” companies (i.e. companies meeting two of the following:
- turnover above £36m;
- balance sheet assets above £18m;
- more than 250 employees)
are required to produce, and publish on their website and in their annual report, a statement under s172 (1). This statement must show how the directors have considered the factors in s172 (a) – (f) of the Act when performing this duty in decision making.
When taking decisions Boards should consider these factors in as broad a way as possible, for example, how does the company approach the following?
- the long term prospects of the business;
- employee engagement – equality, diversity and inclusion, its methods of engaging with its workforce and how the workforce contributes to the company’s success as well as the corporate culture of the company;
- relationships with other key stakeholders – engage with its suppliers and customers (and how their views affect Board decisions) and the responsible sourcing of, sustainability of and risks associated with its supply chains;
- impact on the community and environment – engage with its local community, assess its impact on the environment and deal with any environmental concerns;
- reputation – review its business conduct, values and culture and monitor and address any reputational risks; and
- members of the company – achieve a balance between shareholders including access to information about the company, minority shareholders and any other key stakeholders (especially as this may have recently changed during the pandemic).
For more information about your duties as a director, or what your board should be considering when taking decisions, contact Zoe Pettigrew from our Corporate team on:
01225 459 935 Email us
Keeping you informed about Corporate news, events and opinion.