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The duties and responsibilities of a director

Corporate scandals like Enron have put the role of the director firmly in the spotlight. Gone are the days when the title represented little more than a useful way of gaining entry to a golf club, or a handy description for your passport. The duties of a company director now carry wide ranging responsibilities - and heavy penalties if things go wrong. So you should be very careful about accepting a directorship or whom you appoint to the post in your company.

The Institute of Directors, (IoD) which publishes The Company Director's Guide, points out that anyone who takes up the position may be criminally prosecuted or personally sued by employees, bankers and customers. If the company runs into difficulties a director's home, savings and investments could be at risk.

A recent survey by the IoD and law firm CMS Cameron McKenna found that most directors did not know who they were accountable to. Three quarters of those asked said the range of legal opinion about the subject made their duties difficult to understand.

However, the part of the Companies Act 2006 dealing with director's duties came into effect on Monday 1st October 2007. For the first time, directors duties have been listed and codified, but there are concerns that the law will expose directors to greater potential liability and create additional bureaucracy at board level.

The only straightforward part of deciding whether or not to accept a directorship is knowing whether you or are eligible in the first place.

According to Companies House, you cannot be a director if:

you have been disqualified by a court from acting as a company director;
you are an undischarged bankrupt
in Scotland, you are under the age of 16
for a PLC or its subsidiaries, you are over the age of 70 unless a general meeting specifically approves you.

If you pass these criteria your duties still remain unclear. The legal definition of a director is drawn from a mixture of statutory and common law, your company's constitution, the contract of employment (if you're an executive director) or a letter of appointment if you're a non-executive director.

General duties

Under case law directors' obligations include:

complying with the company's constitution
running the business for the benefit of the company - usually this means its shareholders but this, too, is open to interpretation
maintaining independent judgement
avoiding profiting personally from their position and conflicts of interest
applying reasonable care and skill.

Financial duties

Every company director has a personal responsibility to make sure that certain documents are delivered to Companies House on time. These include:

accounts (for limited companies only)
annual returns;
notice of change of directors or secretaries
change of registered office.

Although your company probably has an accountant or financial adviser who helps to prepare accounts they won't be penalised if they are late. As with so many aspects of running a company, this is the directors' ultimate responsibility. Failure to deliver documents on time is a criminal offence and could leave a director with a criminal record and a fine of up to five thousand pounds for each offence. Around a thousand directors are prosecuted each year for late delivery.

If you are director of a company that is listed on the stock market, or you're thinking of obtaining a listing you are also responsible for making sure your company meets the requirements - which run to twenty-one chapters. Usually you will have a whole raft of advisers to ensure your company is doing the right thing. But, as with every aspect of being a director, the buck stops with you.

Many directors, too, are rightly worried that they might end up in court accused of something they weren't even aware was happening in their company. As shareholder and consumer groups become better organised it seems likely that directors could face more court appearances.

Mark Tyler, health and safety partner at CMS, says directors are right to worry:

"Directors' perceptions about health and safety risks are spot on. HSE investigations into serious accidents now routinely go right to the top of the management structures and look at personal responsibilities."

The role and definition of director is constantly evolving. While it still carries great prestige there are also considerable risks involved.

Useful Links

Institute of Directors: www.iod.com

Department of Trade and Industry: www.dti.gov.uk

Companies House: www.companieshouse.gov.uk

Financial Services Authority: www.fsa.gov.uk/ukla/

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