Directors' duties

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

Shareholders have pooled their funds for a common purpose - to conduct an enterprise that they presumably could not afford to conduct on their own. The role of a company director is to guide and grow the business, observing the duties described below.

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Chairman have a particular role to lead the board and to establish an environment in which executive management can successfully execute the strategy set for the company by the board.

As those ultimately responsible for the company's actions and the shareholders' funds invested in the company, directors are subject to a strict set of duties, reflecting the position of trust they hold.

An ability to fulfil these duties while successfully growing the business is the mark of a good company director; a clear understanding of risk versus reward is essential.

In summary, directors have the following duties:

1. act in good faith in the best interests of the company
2. act for a proper purpose
3. act with care and diligence
4. not misuse information they receive in their role, or misuse their position, for their own or someone else's personal gain
5. avoid conflicts of interest, and
6. prevent insolvent trading.

Directors' duties have evolved over time. The above duties are now set out in statutes (primarily the Corporations Act), however, a body of case law expands upon the underlying legal and equitable principles. A company's constitution generally also sets out additional duties and obligations of the directors of the company.

As a general rule, directors owe their duties to the company, not the shareholders or creditors of the company. However, there are provisions in the Corporations Act under which a director can be liable to these stakeholders (e.g. liability for insolvent trading).

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.