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Farrer & Co | Directors' Duties: new guidance published

At the request of the government, the GC100 (a group of general counsel from the top FTSE 100 companies) has recently published guidance for directors in relation to their duties under section 172 of the Companies Act 2006.

Section 172 imposes a general duty on every company director to act in a way they consider, in good faith, will most likely promote the success of the company. This section also requires directors, when making decisions and choices regarding policies and strategy, to consider a non-exhaustive list of factors; the interests of the company’s employees, the likely consequences of any decision in the long term, and the company’s business relationships with suppliers, customers and others, to name a few.

The newly published guidance has the objective of providing practical help to directors in performing their section 172 duty. In this guidance, the GC100 highlight five key areas that directors should consider when taking decisions to ensure the section 172 duty is embedded in their decision-making and choices. The guidance also gives helpful examples of actions directors can take to better ensure compliance with the duty.

Practical steps you could take to help discharge your section 172 duty

Although the GC100 guidance recognises there is no one-size-fits-all approach to discharging the section 172 duty, it sets out some practical steps you may want to consider when carrying out your role as a director.  These include:

  • Strategy – when setting and/or updating the company’s strategy, and considering risk issues, think about your overall duties as a director, and the stakeholder and other factors which will promote the success of the company or will be affected by its activities.

  • Training – ensure you provide suitable induction and refresher training to all new and existing directors respectively. In particular, this should include specific training on their duties as directors, including the duty under section 172.

  • Information – you should ensure that the information you receive as a director is appropriate and relevant to allow you to make informed judgments. As part of this you should consider whether you receive such a volume of information that it obscures your duty to promote the success of the company, or whether the information you receive is too focused on certain areas, such as financial statistics.

  • Policies and processes – implement policies and processes that support the company’s operating strategy and goals with consideration to the section 172 duty. The guidance is helpful in giving tailored guidance on this point for boards, managers, directors of UK subsidiaries and directors of UK joint venture companies.

  • Engaging with stakeholders – you may wish to think about how stakeholder groups experience the company, its board and management, through both day-to-day business interactions and, also, more specific processes or structures designed for engagement. Perhaps ask yourself and your management whether your company does what it says it does for its stakeholders, and whether there is the perception that it is doing so.

The guidance also discussed an overarching theme of culture. It was recommended that directors keep in mind the importance and effect of board and senior management actions and leadership in setting culture within the company. The guidance notes that culture is not only set at board and senior management level, but also by the actions of managers at every level of the organisation, and that directors should consider what sort of culture(s) are right for their company’s activities and how they might influence that.

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