Governance and Compliance Update: Directors in the New Era of Corporate Governance
15 February 2017
We examine how the Companies Act helpfully sets clear and defined parameters for the role and responsibilities of a company director.
The role of a company director is an interesting but onerous one. It may seem that with the commencement of the Companies Act 2014 (the "Act") that the responsibilities of the role have increased, which to some extent may be true. However, while the Act has introduced new provisions that affect directors and the scope of their responsibility, the Act has also clarified a lot of the law relating to directors. This helps those holding the position to understand exactly what the law requires of them.
Examples of what is new for directors and why these changes are good include:
- Codification of fiduciary duties: The Act has written the fiduciary duties of directors into law. The principal effect of doing this is that there is now a clear statement of the standards of conduct that the law requires of directors.
- Directors’ compliance statement: The Act requires the directors of PLCs and certain large companies to annually confirm that policies and arrangements have been put in place, and reviewed, so that the company can achieve material compliance with certain company and tax law obligations. While on first glance this may appear to be a particularly burdensome obligation, the directors’ compliance statement is actually proportionate in nature. It is not a blanket confirmation that the company has complied with its company and tax law obligations but a statement that measures are in place so that the company can achieve compliance with certain of its more onerous obligations. The statement is also a “comply or explain” requirement, meaning that the measures don’t have to be in place but if they are not in place the directors must explain why. It has been our experience that companies of the size required to comply with this obligation have these measures in place already. This requirement of the Act has facilitated the proper documenting and review of this process thereby enhancing the company’s governance practices.
- De facto and shadow directors: The Act defines de facto directors for the first time so that there are now statutory definitions of both de facto and shadow directors. The Act also implicitly acknowledges that a body corporate can be a shadow director. Clearly defining what makes someone a de facto or someone or something a shadow director and by stating that the duties set out in the Act as applying to directors apply equally to de facto and shadow directors, can only assist boards of companies in conducting their business in the manner envisaged by the law and in line with best practices in corporate governance.
- Directors’ loans: The Act provides an incentive for directors to ensure that any loans they make to a company or any loans made by the company to them, in accordance with the requirements of the Act, are properly documented. Where these loans are not documented, company favourable (but rebuttable) presumptions are made that the loans in question are, when made to the company a gift or interest free, unsecured and subordinated and when made by the company, repayable on demand and bearing interest at the appropriate rate.
- Directors in default: The Act goes into some detail on directors’ responsibilities and defines “in default” in the context of sanctions specified in the Act in respect of officers. The Act also classifies the offences under the Act in respect of which a director can be prosecuted. The clarity provided by the Act in this regard again assists directors in understanding the standards of conduct that the law requires of them and the consequences for them of the breach of those standards.
- Company secretary: Directors are now required to ensure that the secretary has suitable skills to maintain the records required by the Act. Again this requirement can only serve to enhance the corporate governance structures within a company.
When it comes to matters of corporate governance, clarity, and particularly statutory clarity, can only serve to enhance compliance. When it is easy for those in a position of responsibility to understand exactly what is required of them, it is easier for them to actually comply with those requirements. The provisions of the Companies Act 2014 that, on first glance, may appear to add to the onerous responsibilities of directors, may not, on further examination be an imposition only; they are measured, governance enhancing provisions that also serve to allow directors to perform their role within clearly prescribed parameters that can also protect them.
For more information, please contact Claire Lord or another member of our Corporate Governance and Compliance team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.