Company Directors grappling with the looming recession are being warned that they could face litigation if they fail to abide by an onerous new code of duties now in force under the Companies Act.
The principle underlying the new code –'Enlightened Shareholder Value' – however requires Directors to take into account in their decisions and actions the interests of a much wider group of stakeholders, including employees, customers, suppliers and the wider community. They could ultimately face the prospect of litigation should they fail in their duties and obligations.
Central to the new code is the principle that requires Directors to promote the success of the company in such a way that it generates success in the widest sense for all members. In so doing, they must have regards to the likely long term consequences of their decisions to such stakeholders.
George Frier, Head of Corporate law at McClure Naismith LLP, thinks few businesses are aware of their obligations under the new code: "The potential impact on the management of every business is immense. Directors' responsibilities are going to be in the spotlight and their decisions and actions will be under more scrutiny than ever before by such stakeholders."
Frier is also concerned that there could be a wider impact on the economy, adding: "It would be tragic if these new duties could deter businesses from taking risks and being entrepreneurial. While compliance with the new code could dilute the appeal of a Directorship, no one would want it to paralyse directors from making the right decisions".
The administration of the company and the commercial interests of individual Directors will also be under scrutiny. Given the risk of subsequent challenge, boards need to carefully consider all the implications set out in the new code, but provided they can demonstrate that they have considered fully the likely consequences of their decisions they would be wise not to detail in board minutes all of the factors which led to a particular decision. Best practice would have options and consequences spelt out in a briefing paper, for discussion.
There is also a new requirement for director approval of conflicts of interest, and only disinterested directors may approve the conflict in question.
"The new code extends the responsibilities and liabilities of directors, just at the start of a recession. The timing could not have been worse and companies should make sure they get good advice particularly if considering actions which might be controversial with hindsight." concluded Frier.
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