1.1 Duty to promote the success of the company (section 172)
A director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
In so doing, the director must have regard (among other matters) to the following factors:
The likely consequences of any decision in the long term.
The interests of the company's employees.
The need to foster the company's business relationships with suppliers, customers and others.
The impact of the company's operations on the community and the environment.
The desirability of the company maintaining a reputation for high standards of business conduct.
The need to act fairly as between the members of the company.
The duty will apply to all decisions made by a director, not merely formal decisions made by the whole board. Also, the list of factors you should consider is not exhaustive and nor will it always be possible to protect the interests of all of the people affected all of the time. What you must be able to show is that you considered the relevant factors but overall your most important duty is to promote the success of your company.
Unfortunately, "success" is not defined. The government has stated that "success" in this context will usually mean "long-term increase in value" for commercial companies, and that what will promote the success of the company, and what constitutes such success, will be for you to decide acting in good faith!
One final point to note is that where this duty conflicts with your duty to act in the best interests of the companys creditors, (i.e. when the company is insolvent) then the interests of the creditors will normally be paramount.
What can you do to protect yourself?
If an issue ever arises, it will be important for you to be able to show that you paid due regard to the factors listed in section 172. One way to do this is to keep minutes of discussions about the factors listed in this section (and any other relevant factors) in relation to every decision you take. However, this could be quite time consuming and it has been suggested that:
It will be sufficient for the minutes to state that you have taken the factors into account in carrying out their duty.
If any factor is particularly relevant, whether or not in the specified list, the minutes should reflect points made during discussions (subject to company policies on record-keeping), but otherwise the discussion of each factor need not be minuted.
For significant or potentially controversial decisions, briefing papers prepared by management should address each listed factor, unless clearly irrelevant, along with other relevant matters.
You may also wish to circulate a copy of section 172 with board papers.
Other steps you may wish to consider include:
Ensuring management, those employees responsible for preparing board papers and presentations, and others involved in governance, are also given a thorough briefing on the new duties.
Reviewing the company's policy on minutes of meetings and determining how compliance with section 172 will be documented (minutes, briefing papers and presentations etc).
Concern has been expressed that directors may be exposed to risk if the board minutes deal with the section 172 matters inconsistently, for example by sometimes stating that the matters were taken into account, sometimes discussing each factor individually, and sometimes not referring to them at all. Such inconsistency could be construed as an indicator of whether, and to what extent, the board took the section 172 matters into account. Drafting and complying with a policy setting out the company's approach to section 172 might assist in rebutting such an assumption, however the policy would need to be carefully drafted and applied consistently, as failure to comply with it could also be adversely construed.
Please also see our pages on other Duties of Directors:-
If you have any question on any of those matters, or on any of the matters covered below, whether now or in the future, you should contact David Heys at Lawson-West on 0116 212 1027 or by email at dheys@lawson-west.co.uk.
