The duties of the directors

Competing with the company

Directors cannot, clearly, compete directly with the company without a conflict of interests arising. Similarly, they should not act as directors of competing companies, as their duties to each company would then conflict with each other.

In practice, it is not wholly unusual to see directors serve for two or more companies in competing fields, but it is tacitly assumed that they may only do so if the companies consent.

Common law duties of care and skill

Traditionally, the level of care and skill which has to be demonstrated by a director has been framed largely with reference to the non-executive director. In Re City Equitable Fire Insurance Co [1925] Ch 407, it was expressed in purely subjective terms, where the court held that:

"a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience." (emphasis added)

However, this decision was based firmly in the older notions (see above) that prevailed at the time as to the mode of corporate decision making, and effective control residing in the shareholders; if they elected and put up with an incompetent decision maker, they should not have recourse to complain.

However, a more modern approach has since developed, and in Dorchester Finance Co v Stebbing [1989] BCLC 498 the court held that the rule in Equitable Fire related only to skill, and not to diligence. With respect to diligence, what was required was:

    "such care as an ordinary man might be expected to take on his own behalf."

This was an objective test, and one deliberately pitched at a higher level.

More recently, it has been suggested that both the tests of skill and diligence should be assessed objectively.

Remedies for breach of duty

In most jurisdictions, the law provides for a variety of remedies in the event of a breach by the directors of their duties:

   1. injunction or declaration

   2. damages or compensation

   3. restoration of the company's property

   4. rescission of the relevant contract

   5. account of profits

   6. summary dismissal

The future

Historically, director's duties have been owed almost exclusively to the company and its members, and the board was expected to exercise its powers for the financial benefit of the company. However, more recently there have been attempts to "soften" the position, and provide for more scope for directors to act as good corporate citizens. For example, in the United Kingdom, The Companies Act 2006, not yet in force, will require a director of a UK company "to promote the success of the company for the benefit of its members as a whole", but sets out six factors to which a director must have regards in fulfilling the duty to promote success. These are:

* the likely consequences of any decision in the long term

* the interests of the company’s employees

    * the need to foster the company’s business relationships with suppliers, customers and others

    * the impact of the company’s operations on the community and the environment

    * the desirability of the company maintaining a reputation for high standards of business conduct, and

    * the need to act fairly as between members of a company

This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. Under the Companies Act 1985, protections for non-member stakeholders were considerably more limited (see e.g. s.309 which permitted directors to take into account the interests of employees but which could only be enforced by the shareholders and not by the employees themselves. The changes have therefore been the subject of some criticism.

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