Company directors play a critical role in the management and governance of a company. Directors have wide-ranging powers relating to running the company, but they also have important legal duties they must comply with. The roles and responsibilities of directors are key for proper corporate governance. In this post, we’ll discuss the main powers company directors have, as well as the key legal duties placed on them.
Powers of Directors
The board of directors is responsible for directing the affairs of a company and has authority to exercise all powers of the company. The key powers of directors include:
Manage the Business
The primary power of the board is to manage the business and affairs of the company. Directors take collective responsibility for the overall leadership and control of the company. Day-to-day management is often delegated to executives, but the board has ultimate responsibility for operations. They can make decisions on matters such as entering into major contracts, raising finance, appointing senior employees, and determining business strategy.
Directors need not personally carry out all management functions and will often delegate authority to assist in managing the company. The board may delegate tasks to managing director, managers and other executives while retaining overall supervision and control. Delegation allows the board to focus on broader governance while executives deal with day-to-day operations within authority limits set by the board.
A fundamental board power is determining dividend payouts. The board assesses the company’s financial situation and outlook in order to recommend appropriate dividends. The final dividend declaration must be approved by shareholders at a general meeting, but the board’s recommendation carries significant weight. Declaring dividends is important for shareholders and reinforces the directors’ stewardship role.
Directors have the power to issue new shares in the company, subject to the provisions of the company’s constitution and relevant company law rules. This allows raising new capital through equity financing. Share issues allow growing the total assets and ownership base of the company. The board sets the terms and conditions for share issues.
Appoint Company Secretary
While not the most prominent power, the board has responsibility for appointing a company secretary who has an important role in the company’s administration. Appointing a skilled secretary contributes significantly to effective corporate governance.
In summary, the board has wide management powers, both directly and through delegation, to control the company’s affairs and operations. However, the powers must be exercised subject to the directors’ legal duties.
Duties of Directors
In addition to powers, company directors also have important legal duties they must comply with in undertaking their roles. Directors have duties placed on them by legislation and common law. Key duties include:
Duty of Care
Directors have a duty of care which requires them to carry out their role with reasonable care and skill. This duty encompasses diligence, competence and acting in a prudent manner. The law does not expect perfection, but the level of skill and care required must be commensurate with the nature of the company’s business. Directors must meet an objective standard taking into account their knowledge and experience.
Duty of Loyalty
The duty of loyalty requires directors to act honestly and in good faith in the interests of the company. Directors must not act for an improper purpose or for personal gain at the expense of the company. Self-dealing and exploitation of company opportunities for personal benefit are prohibited under this duty. Directors also have an obligation to retain confidential company information.
Duty to Act within Powers
Directors must act within the scope of their legal authority under the company’s constitution and the law. They cannot exceed their lawful powers or breach the company’s constitutional rules and procedures when acting on behalf of the company. Even if the action is intended to benefit the company, it will be unlawful if outside validly conferred power.
Duty to Exercise Independent Judgement
Directors must apply their own mind to matters before them and act objectively in the company’s best interests. They cannot simply act as instructed by management, shareholders or others without independently considering the wisdom and implications of decisions. Groupthink should be avoided.
Duty to Avoid Conflicts of Interest
Directors must avoid situations where their personal interests conflict with those of the company. This can arise through dealings with family companies, receiving personal benefits from third parties, or taking corporate opportunities for personal gain. Where conflicts arise, directors must disclose their interest and often exclude themselves from decision-making on the matter.
Compliance with these duties is essential for directors to meet their legal obligations. Failure to comply can result in personal liability and legal consequences for directors. While duties may seem onerous, they are designed to uphold high standards of corporate governance.
Company directors wield significant powers relating to management and governance of the company. They make major decisions and lead the company’s affairs. However, with these powers come legal duties and responsibilities. Directors must comply with key duties of care, loyalty, proper purpose, independence and avoidance of conflicts. Fulfilling the balance of powers and duties is essential for directors to meet their obligations and effectively govern in the company’s interests. The roles carry much authority but also personal accountability.