On 29 January, Clyde & Co hosted a NEDonBoard panel discussion on the legal duties and liabilities that apply to non-executive directors (NEDs), the role of directors and officers (D&O) insurance in mitigating directors’ personal liability and the due diligence that NEDs should carry out before accepting a position on the board.
In this blog post, we share some of the thoughts of the panellists on the Directors’ duties and liabilities that are relevant for NEDs. NEDonBoard thanks Laura Cooke from Clyde & Co for her contribution to the panel.
- The Companies Act 2006 does not differentiate between executive and non-executive directors: they all must abide by the same duties (Section 171 to 177). While Section 171 sets out the core duty of acting within the company’s powers, Section 173 provides for what is considered a crucial duty when acting as a NED: “exercising independent judgement”. The interaction between this provision and conflicts (Section 175) that may arise while sitting on the board has been particularly scrutinised in the collapse of Carillion. This is not an easy duty to discharge and various directors, especially in the financial services industry, have been criticised for not dealing with conflicts appropriately.
- There is still some uncertainty surrounding the interpretation of the “duty to promote the success of the company”, which was introduced for the first time in 2006 (Section 172). While it is clear that this provision requires the directors to look at not only the interest of the company and its shareholders but also at those of various stakeholders, there is still significant debate about what this means in practice. There is undoubtedly a subjective element to determine what the success of the company means. However, there is now a relatively large body of guidance available published by various trade bodies to assist directors in complying with the section 172 duty.
- Coming to the “duty to exercise reasonable care, skill and diligence”, Laura Cooke pointed out how the expected standard is measured against both an objective and a subjective benchmark. The subjective requirement (that is, what is expected by a director with the same knowledge and experience) can only raise the bar: a director with a specific skill set (for example, a financial background) may be judged more robustly in respect of matters falling within that specialism.
- Additional duties that apply to directors of listed companies and the sector-specific duties (such as those arising from the Approved Persons Regime and the Senior Managers & Certification Regime in a financial services context). Laura Cooke recalled the relevance of the recently revised UK Corporate Governance Code (Code), published by the Financial Reporting Council (FRC), which sets out a “comply or explain” approach. Despite being guidance and not hard law, the provisions of the Code are incredibly important. The Wates Principles for large private companies have also recently been finalised, for use from 1 January 2019.
- Directors should think carefully about the consequences of their actions and what they may face when things go wrong (which include claims by the company, the shareholders or third parties, criminal or regulatory liability) and bear in mind that there is no distinction between executives and NEDs under the Insolvency Act 1986.
On behalf of NEDonBoard, Laura Marianello
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