What it means to be a company director

A common query raised by clients is a question about what it means legally to be a director of a company. This is particularly prevalent as the operational role of a director could differ greatly from business to business.

However, whether you’re an executive director on the board of a large manufacturing company or a director of a management company of a block of flats which you live in, there are seven key legal duties set out under law that you must comply with:

1. A director can only act within the powers conferred upon them and in accordance with the company’s constitution. This means that unless the company’s articles of association allows you to do something, you will be breaching your legal duties by acting outside of these powers.
2. All directors have a duty to promote the success of the company. This means that all decisions made by you in your role as director should be made in good faith, and should consider the effect this may have on the company, including matters such as relationships with employees, suppliers and the company’s professional reputation.
3. Directors must exercise independent judgement. They can utilise advice from others but the final decisions are theirs to make.
4. A director must use reasonable care, skill and diligence in their decision making and work as a director. If a director has specialist experience, this duty is a higher standard to meet, given their niche level of expertise.
5. Directors should avoid situations that cause conflicts of interest with the company’s interests and tell the other directors about any potential conflicts they may encounter.
6. A director is not permitted to accept benefits from third parties. There may be certain exceptions to this if there is no conflict of interest but it is advisable to avoid these situations.
7. If there is a proposed transaction that a director could benefit from, they must declare this to the other directors.

The key overriding duty is to act in good faith in the best interests of the company in order to promote its success. All other statutory and non-statutory duties flow from this and will also encompass wider areas of concern, such as confidentiality and anti-corruption. But as long as any director can demonstrate that they have used their good judgment to do the best for the company, then they will have likely fulfilled their legal duties.

All the statutory duties which a director is required to comply with are owed to the company and its shareholders. In the event of a breach of duty it could result in a claim for damages being brought against the offending director, together with potential disqualification.

So whilst the title of a director may be desired by many, it is important to understand the legal responsibilities which come alongside this. If you have any queries about your role as company director, Please get in touch with our Corporate and Commercial team.