There has been a lot of media coverage in the past couple of years devoted to directors’ duties under the new Companies Act of 2008, and the fact that directors can be held personally liable if they breach those duties. The effect can be fear and uncertainty – but the basic principles are easy to understand and live by. There are five things every director should know:
1. What exactly is a “fiduciary duty” anyway?
“Fiduciary” comes from the same Latin word for faith and trust that’s given us “fidelity” and “confidence” (it’s also why there’s a tradition of calling dogs Fido). Basically, if someone places their faith and trust in you – for example by giving you their money to invest or their company to manage – you have a duty not to betray that trust. You have to be loyal and act in their best interests, not your own. It’s really that simple. The moment you find yourself thinking in terms of what’s best for you personally, take a deep breath and a long cold drink of water and think again.
2. What is a “duty of skill and care”?
As a director, you don’t only have to act in good faith – you have to know what you’re doing. The expectation is not that you should be an expert, or never make a mistake – but you should have the skills that can reasonably be expected of someone in your position, and apply those skills. You can’t, for example, approve a deal because it feels right in your gut or the other person is in your church and you’re sure you can trust them. You need to do all the due diligence required to make sure it will benefit the company.
3. It doesn’t matter how big or small the company is
These duties apply equally to directors of small companies, large listed companies and non-profits. It gets more scary and complicated the more of other people’s money is at stake, but your basic duties and responsibilities to your shareholders remain the same.
4. It doesn’t matter what it says on your business card
You don’t have to carry the name of Director to bear these responsibilities. The law puts it in more complicated terms, but basically: If it looks like a duck, and walks like a duck, and quacks like a duck, it’s a duck. So if you attend board meetings, make important decisions, sign off on deals and do other things that directors do, the law will regard you as a director. You can’t avoid the responsibility by steering clear of the name.
5. When in doubt, always opt for more transparency
The law is absolutely clear that you may not use your position to make any kind of secret profit, whether the company loses out or not. If you set up your own new company to take advantage of a major opportunity offered by a client, that’s a clear breach of your duties. But things that seem more innocuous can also be breaches: What if a major supplier offers you a discount when you renovate your house? Even if there’s no expectation of reward, this could still breach your duties. Honesty, as always, is the best policy: Tell the board and let them decide.
In many ways, the Companies Act just codifies in law what most people regard as basic ethics and common sense. If your habit is to act in good faith and care, you’re unlikely to have any problems. But anytime you’re in doubt, seek advice – – it’s always better to know what you’re getting into.