How Will Life in the Boardroom be Affected by the Codification of Directors' Duties? 

March, 2007 - Michael Wylie

The Companies Act 2006, which is likely to come into force towards the end of 2007, represents the first attempt to codify directors' duties in UK law. In broad terms, a director's duties currently include the requirement to exercise reasonable skill, care and judgement, not to exceed the powers given to him/her, to avoid conflicts of interest and to act in good faith and in the interests of the company.

In codifying directors' duties, the Government has expanded and re-stated the last of these, as a duty to act in a way which the director considers, in good faith, to be most likely to promote the success of the company for the benefit of its members and, in doing so, have regard to (amongst other things) a number of "stakeholder factors" when making decisions. These "stakeholder factors" include the likely consequences of any decision in the long term, the need to foster business relationships with suppliers, customers and others and the impact of business operations on the community and the environment.

This last factor in particular has sparked considerable debate, with some believing that it will provide easy means for shareholder activist groups to be obstructive. Others have argued that each stakeholder factor should become an absolute obligation in its own right rather than simply being a matter to be considered in the board decision-making process.

While the codification of directors' duties is certainly a departure from the traditional position, control in the boardroom should continue to rest with directors rather than stakeholders. The most likely real change in practice is that the paper trail (in the form of board minutes and related board memoranda) will need to evidence in reasonably full detail that all relevant "stakeholder factors" have been taken into account in reaching decisions.


Michael Wylie is an associate specialising in corporate finance with the commercial law firm Shepherd and Wedderburn. +44(0)131 473 5245


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