Briefing

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Directors: Role and Responsibilities

What is a director?

Although this may seem obvious, it is not necessarily just those

people who are called 'directors' who will qualify as such. For
instance, company law provides that a director includes 'any
person occupying the position of director, by whatever name
called'. This means that if, on the facts, a person is fulfilling the
role of a director, then he or she may be deemed to be one and
fully liable as such. Equally, if the directors are accustomed to
act in accordance with the directions and instructions of a third
party, that person may be deemed to be a 'shadow director' of
the company. Company law subjects shadow directors to many
of the responsibilities of directors.

What is the director's role?

Although companies are legal entities in their own right, they

can only act through human agents. Company directors fulfil
this role and the operation and management of the company is
typically delegated to them. The directors' powers to manage
the company are subject to the terms of its constitution and any
restrictions that may be contained within it.

Directors generally exercise their powers through the board of
directors, which will meet periodically to consider matters
relating to the company and will make its decisions through
resolutions. However, in practice, the running of a large
company would be impossible if all decisions required a full
board meeting. Whilst in small companies with few directors,
day-to-day decisions can be taken at meetings of all of the
directors, board meetings of larger companies are relatively
infrequent and are generally used to discuss and formulate
policy or to approve and authorise important transactions.
company and do not devote their whole working time to it.
Their relative distance from the daily operations of the
company gives them an objective overview, which operates to
the benefit of members.
Which duties are imposed on directors?
As directors may be given extensive powers, the law imposes
certain duties on them to safeguard the rights of shareholders
and others.

The operation of most companies is delegated to their
executive directors, who are usually employed under the terms
of a service contract with the company. Many companies now
also appoint one or more non-executive directors, who are
selected for their commercial experience and expertise, but
who are generally not involved in the day-to-day running of the
The duties arise from a number of sources and, at present,
there is no definitive code of conduct to which directors can
turn for guidance. However, this difficulty has been recognised
and the question of how best to communicate these duties to
directors is currently being examined by the Government as
part of its wide-ranging review of company law. It is proposed

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 that there will be a statutory 'statement' of duties which
directors will have to acknowledge when taking up office, which
will include duties of obedience, loyalty and the duty to exercise
independence of judgement with skill, care and diligence. As this
statement will still not be exhaustive of the obligations on
directors, it remains to be seen whether this will clarify matters
or just add to the complexity. No date has yet been confirmed
for its introduction but it is unlikely to come into effect before
2006 and possibly even 2007.
In broad terms, directors' duties fall in three categories:
1. Fiduciary duties: directors owe these duties because
they are in a position of trust and confidence in
relation to the company. They include the duty to act
in the best interests of the company and not for any
improper purpose. As a corollary, directors are not
permitted to put themselves in a position where their
personal interests conflict with the interests of the
company and may not make a profit out of their
position unless the company expressly permits them
to do so.
Other responsibilities
Directors of companies whose securities are listed on an
investment exchange are subject to a further layer of
regulation. For example, the Listing Rules of the UK Listing
Authority impose a number of duties on the directors of a
listed company. One requirement of the Listing Rules that is
particularly important for such directors is that listed
companies must include in their annual reports and accounts
a statement as to how they have applied the principles set
out in the Combined Code on Corporate Governance,
giving reasons for any non-compliance. The best practice
requirements set out in the Combined Code are increasingly
seen as of relevance to all companies and many non-listed
companies now also seek to abide by them.
Further Information
For more information on these or any corporate issues,
please contact:

Christopher Owen in London on +44 (0)20 7753 7512

2. Duties of skill and care: directors must exercise a
or by email chris.owen@manches.com
certain level of skill and care in carrying out their
functions. The general view is that nowadays, at a David Tighe in Oxford on +44 (0)1865 813602 or by
minimum, a director will be required to show the email david.tighe@manches.com
skill that can reasonably be expected of a person
carrying out his or her functions and if s/he personally
has greater skills, s/he will be judged accordingly. In
addition, an executive director's service contract may This briefing note is intended merely to provide a summary
impose a particular duty of skill and care. of the law in this area and is not a comprehensive guide. It
is not intended to provide legal advice for specific cases.
3. Statutory duties: legislation now imposes a number of Note: The law and practice in this note is stated as at
further responsibilities on directors. These range from November 2005.
company law compliance requirements (e.g. to maintain
accounting records and prepare annual accounts) to
liability under non-corporate legislation, such as The
Health and Safety at Work etc Act 1974.

There are various remedies that may be sought against directors

for breach of their duties, depending upon the circumstances. In
some cases, there may be opportunities for the director to
mitigate his or her liability. In certain situations, the court may
grant relief from liability if s/he has acted honestly and
reasonably; in other circumstances, the shareholders of the
company may ratify the unauthorised acts. It is also possible for
companies to indemnify their directors against liabilities to third
parties and in addition, many companies now purchase
Directors and Officers Liability Insurance to protect their
officers in this respect.

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