Lecture 4

BOARD OF DIRECTORS-ROLE,
TYPES, DUTIES & LIABILITIES

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DEFINITION

 The board of directors undertake the

governance of companies.
 There is no definition provided under the UK

Companies Act 2006.

 Section 250- states the term [director]

“includes any person occupying the position

of director, by whatever name called”.

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DEFINITION CONTD.

 Therefore if the articles of association utilises

terms such as administrators, trustees,
governors, custodians, managers etc to
describe the members of a company’s board,
those persons are directors.
 Section 154- Companies are required to
have directors.
 A private company must have at least 1. A
public company must have at least 2.
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DEFINITION CONTD.

 Section 155- A company must have at least

1 director who is a natural person.
 Beyond these basic requirements, under UK

Law, the structure and functioning of the

board of directors is generally left to be
prescribed by the Articles of Association.
 Other jurisdictions have provisions in their

company law regarding the board of

directors.
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ROLE

 Governance is the act of exercising control

over the use of assets and translating the
wishes of owners into organisational
performance.
 Owners control the use of assets through the

management of companies.
 The job of the corporate board of directors is

corporate governance.
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ROLE CONTD.

 UK Corporate Governance Code 2018-

 A successful company is led by an effective and entrepreneurial
board.
 The board should establish the company’s purpose, values and
strategy, and satisfy itself that these and its culture are aligned.
 The board should ensure that the necessary resources are in place
for the company to meet its objectives and measure performance
against them.
 The board should also establish a framework of prudent and
effective controls, which enable risk to be assessed and managed.
 In order for the company to meet its responsibilities to shareholders
and stakeholders, the board should ensure effective engagement
with, and encourage participation from, these parties.
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ROLE CONTD.

 The role of directors includes engaging

constantly with owners (shareholders),
developing strategy for corporate success
and monitoring compliance with approved
strategy.
 Directors occupy a pre-eminent position in
the management of companies- Automatic
Self-Cleansing Filter Syndicate Co Ltd v
Cunninghame [1906] 2 Ch 34
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ROLE CONTD.

 Gramophone and Typewriter Ltd v Stanley

[1908] 2 KB 89 - Per Buckley LJ- “directors
are not servants to obey directions given by
shareholders as individuals…they are
persons who may by the regulations be
entrusted with the control of the business…”
 Towcester Racecourse Co Ltd v

Racecourse Association Ltd [2002] EWHC

2141 (Ch)
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ROLE CONTD.

 The Articles of Association prescribes the

scope of the powers of directors.
 UK Model Articles-Article 3- subject to the

articles, the directors are responsible for the

management of the company’s business, for
which purpose they may exercise all the
powers of the company (note effect of
Article 4 and Article 5).
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TYPES OF DIRECTORS
 EXECUTIVE DIRECTORS- These are the full time
officers overseeing the day to day management of the
company. They usually have service contracts with the
company. The managing director is an executive director
who is responsible for the overall running of the
company.
 NON-EXECUTIVE DIRECTORS- Their existence
resulted from corporate governance reforms and
practices, not as a provision of the Companies Act. They
are normally appointed to the boards of public listed
companies to act as monitors of the executive directors
and management. Their appointments are usually part-
time.
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TYPES CONTD.
 DE FACTO DIRECTORS- This refers to a
director who has not been formally appointed to
the board and is therefore not a de jure director,
but he/she has undertaken directorial roles. The
question of whether or not a person is a de facto
director usually arises in relation to the
imposition of liability for breach of fiduciary
duties and in the context of disqualification
orders. See Gemma Ltd v Davies [2008]
EWHC 546 (Ch); The Commissioners for HM
Revenue and Customs v Holland [2010]
UKSC 51

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TYPES CONTD.
 SHADOW DIRECTORS- This refers to persons who
seek to evade the duties and liabilities of directors by
remaining in the background, instructing and directing
the decisions and actions of directors without accepting
an appointment to the board, whether de jure or de facto.
(Note the effect of The Small Business, Enterprise and
Employment Act 2015 on shadow directors).
 UK Companies Act-Section 251- shadow director
means a person in accordance with whose directions or
instructions the directors of a company are accustomed
to act. This excludes professional advisers, except where
they act beyond the scope of their professional duties.

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TYPES CONTD.
 ALTERNATE DIRECTORS- UK Model Articles for Public
Companies- Article 25- any director (the appointor) may
appoint as an alternate any other director, or any other person
approved by resolution of the directors to exercise that
director’s powers and carry out that director’s responsibilities.
An alternate director has the same rights in relation to
meetings and resolutions as his/her appointor. He/she is not
entitled to remuneration from the company and ceases to be
an alternate director if the appointing director ceases to be a
director. He/she also bears the liability for his/her acts and
omissions.

 NOMINEE DIRECTORS- These are members of the board

who are nominated by shareholders or stakeholders.
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TYPES CONTD.
 Note: in the US, the term “Outside Director” is
widely used to refer to non-executive directors
and they are regarded as “independent”, subject
to evidence to the contrary.
 “Corporate directors”- ie companies- may be
permitted by the company law in some
jurisdictions. (The Small Business, Enterprise
and Employment Act-generally, no corporate
directorships in UK).
 “Worker director” or “employee director” is
common in Europe.
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DUTIES OF DIRECTORS
 It has long been settled under common law that
company directors owe fiduciary duties to the company.

 Directors are viewed as agents of the company and the

fiduciary duties developed by equity apply to ensure that
fiduciaries do not abuse their position of trust- Aberdeen
Railway Co v Blaikie Bros [1854] 1 Macq 461- per
Lord Cranworth LC –
The directors are a body to whom is delegated the duty of
managing the general affairs of the company. A corporate
body can only act by agents and it is of course the duty of
those agents so to act as best to promote the interests of
the corporation…

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DUTIES OF DIRECTORS
 See also Towers v Premier Waste
Management Ltd [2011] EWCA Civ 923-per
Mummery LJ –
A director of a company is appointed to direct its
affairs. In doing so, it is his duty to use his position
in the company to promote its success and protect
its interests. In accordance with equitable
principles, the special relationship with the
company generated fiduciary duties on the part of
a director…
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DUTIES CONTD.

 Under UK Law, the fiduciary duty of directors

has been codified under Sections 171-177 of
the Companies Act 2006.
 The aim was to make the law more
accessible, certain and comprehensible.
 Section 170- the general duties are owed by
a director of a company to the company- this
gives statutory effect to the principle in
Percival v Wright [1902] 2 Ch 401
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DUTIES CONTD.
 The duty which closely resonates with corporate governance debates
and has been described as a statutory statement of enlightened
shareholder value is Section 172 which provides as follows:
A director of a company must act in the way he considers, in good faith,
would be most likely to promote the success of the company for the
benefit of its members as a whole, and in doing so have regard
(amongst other matters) to-
 a) the likely consequences of any decision in the long term
 b) the interests of the company’s employees
 c) the need to foster the company’s business relationships with
suppliers, customers and others
 d) the impact of the company’s operations on the community and the
environment
 e) the desirability of the company maintaining a reputation for high
standards of business conduct, and
 f) the need to act fairly as between members of the company

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DUTIES CONTD.
The Companies Act (Strategic Report and Directors’
Report) Regulations 2013 (SI 2013/1970) amended the
Companies Act 2006 as follows:
Sec 414A- All companies, except those exempted as small
companies, should prepare a strategic report instead of a
business review.
Sec 414C- The purpose of the strategic report is to inform
members of the company and help them assess how the
directors have performed their duties under Section 172. It
should contain a fair review of the company’s business and
a description of the principal risks facing the company.
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DUTIES CONTD.

 Re Smith & Fawcett Ltd [1942] Ch 304

 Re Southern Counties Fresh Foods Ltd

[2008] EWHC 2810

 People & Planet v HM Treasury [2009]

EWHC 3020
 Iesini v Westrip Holdings Ltd [2009] EWHC

2526

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DUTIES CONTD.
 Directors in Germany owe similar fiduciary
duties to the company as is the case in the UK.
 These duties are specified under statutory
provisions in the German Civil Code (BGB), the
German Commercial Code (HGB), the Private
Limited Companies Act (GmbHG) and the Stock
Corporation Act (AktG).
 Example, members of the supervisory or
management board who have breached their
duties are jointly and severally liable together
with any colluding third party (Section 117 AktG).
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DUTIES CONTD.

 Section 43 GmbHG specifies the duties of the

managing director to include pursuing the
business purpose, being loyal to the
company, not to take advantage of his
position.
 Directors duties also arise out of contracts

(specified in individual contracts or in the

articles of association).
 The most prominent duty is the duty of

loyalty.
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DUTIES CONTD

 In the US, directors owe fiduciary duties under

common law.
 The duty of care- which requires directors to
exercise the degree of care that an ordinarily
careful and prudent person would exercise in
like circumstances-Note: directors are protected
by the Business Judgment Rule.
 The duty of loyalty- avoid conflict of interest
and refrain from using position to gain personal
advantage- the BJR does not apply here.
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LIABILITIES
 Directors are liable for breaches of their duties,
negligence, default, breach of trust. (note
Section 260 CA 2006- derivative claims).
 Re Barings Plc (no 5) [1999] 1 BCLC 433
 Equitable Life Assurance Society v Bowley
[2003] EWHC 2263
 Lexi Holdings Plc v Luqman [2009] EWCA Civ
117
 Bristol and West Building Society v Mothew
[1998] Ch 1
 Regal Hastings Ltd v Gulliver [1942] UKHL 1
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LIABILITIES CONTD.

 Cook v Deeks [1916] 1 AC 554

 Extrasure Travel Insurance Ltd v Scattergood [2002]
All ER 307
 Hogg v Cramphorn [1967] Ch 254
 Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC
821
 Boardman v Phipps [1967] 2 AC 46
 Bray v Ford [1896] AC 44

Remedies include disgorge of profits, liability to render

accounts, removal from office, disqualification etc.
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BOARD COMMITTEES
The board may delegate various functions to
committees, but the board as a whole remains
responsible for corporate governance.
 Audit Committee.
 Remuneration Committee.
 Nomination Committee.

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BOARD COMMITTEES
UK Corporate Governance Code 2018 Provisions:
 Provision 24-The board should establish an audit committee of

independent non-executive directors, with a minimum membership

of three, or in the case of smaller companies, two.
 Provision 32-The board should establish a remuneration

committee of independent non-executive directors, with a minimum

membership of three, or in the case of smaller companies, two.
 Provision 17-The board should establish a nomination committee

to lead the process for appointments, ensure plans are in place for
orderly succession to both the board and senior management
positions, and oversee the development of a diverse pipeline for
succession. A majority of members of the committee should be
independent non-executive directors.
US- NYSE Corporate
Governance Standards
 Sec 303A.04 – Listed companies must have a nominating/corporate
governance committee composed entirely of independent directors.
 Sec 303A.05 - Listed companies must have a compensation
committee composed entirely of independent directors.
Compensation committee members must satisfy the additional
independence requirements specific to compensation committee
membership set forth in Section 303A.02(a)(ii).
 Sec 303A.06 - Listed companies must have an audit committee that
satisfies the requirements of Rule 10A-3 under the Exchange Act.
 Sec 303A.07 - The audit committee must have a minimum of three
members. All audit committee members must satisfy the
requirements for independence set out in Section 303A.02
Seminar – Discussion on this week’s topic.
Reading and Questions for discussion uploaded
on Blackboard for you to prepare.

Next lecture (ie teaching week 5

which is w/c 6th November) - Board of
Directors: Size, Structure, Composition,
Appointment.