Directors’ Duties to be Expanded

One of the less well-reported changes to directors’ duties, which will be introduced when the Company Law Reform Bill becomes law in 2007, is the obligation put upon the company directors to promote the success of the company for the good of the shareholders as a whole.

This implies that the appropriate standard of conduct for a director will be one which balances long-term and short-term interests but, more particularly, there are certain factors which directors will be required to consider when working towards what is termed ‘enlightened shareholder value’.

These include a positive obligation to consider the interests of those outside the company, such as suppliers and customers, to consider the environmental impact of the company’s operations and to consider the impact on employees of decisions.

Although the obligation is not absolute – each of the above must be considered to the extent which is ‘reasonably practicable’ – there is little doubt that the overall intention is to increase the degree to which directors are accountable for the consequences of their decisions. In effect, the regulations mean a subtle redefinition of the concept of ‘good faith’.

The Bill also moves the goalposts somewhat as regards the duty of directors to avoid a conflict of interest with the company and extends the duty of disclosure of interests in transactions.

Directors of companies will need to consider the impact of the new law and how it will affect them and the governance of their company.