Clyde & Co recently hosted a NEDonBoard panel discussion on the legal duties and liabilities that apply to non-executive directors (NEDs). Laura Cooke, a partner at Clyde & Co, kicked off the discussion by reminding the audience that the Companies Act 2006 (CA 2006) does not differentiate between executive and non-executive directors: they must all abide by the same duties (sections 171 to 177).
Interaction between “exercising independent judgement” and conflicts
While section 171 sets out the core duty of acting within the company’s powers, section 173 provides for what is considered a crucial duty when acting as a NED: “exercising independent judgement”. The interaction between this provision and conflicts (section 175) that may arise while sitting on the board has been scrutinised following the collapse of Carillion (see Blog post, Key learnings from Carillion’s collapse). This is not an easy duty to discharge and various directors, especially in the financial services industry, have been criticised for not dealing with conflicts appropriately.
“Duty to promote the success of the company”
Laura Cooke pointed out that there is still some uncertainty surrounding the interpretation of the “duty to promote the success of the company”, which was introduced for the first time in 2006 (section 172). While it is clear that this provision requires the directors to look at both the interests of the company and its shareholders, and those of various stakeholders, there is still significant debate about what this means in practice. There is undoubtedly a subjective element to determine what the success of the company means. However, there is now a relatively large body of guidance available to assist directors in complying with the section 172 duty, including GC100 guidance on directors’ duties: section 172 and stakeholder considerations.
“Duty to exercise reasonable care, skill and diligence”
According to Laura Cooke, the expected standard in regard to the “duty to exercise reasonable care, skill and diligence”, is measured against both an objective and a subjective benchmark. The subjective requirement (that is, what is expected of a director with the same knowledge and experience) can only raise the bar. A director with a specific skill set (for example, a financial background) may be judged more robustly in matters falling within that specialism.
Additional duties that apply
In addition to the provisions of the CA 2006, there are further duties that apply to directors of listed companies and those in specific sectors (such as those arising from the approved persons regime and the senior managers and certification regime in a financial services context). Laura Cooke highlighted the relevance of the recently revised UK Corporate Governance Code, which sets out a “comply or explain” approach, and the Wates Principles for large private companies. For further information, see Corporate governance reform: toolkit.
Directors should also think carefully about the consequences of their actions and what they may face when things go wrong (for example, claims by the company, the shareholders or third parties, and criminal or regulatory liability) and bear in mind that there is no distinction between executive directors and NEDs under the Insolvency Act 1986.
This article was originally published on NEDonBoard. NEDonBoard is the professional body for non-executive directors and board members listed on GOV.uk. In addition to her role at Practical Law, Laura Marianello is a NEDonBoard ambassador.