Sample Essay On The Impact Of The Company's Act 2006 On Directors' Duties:

The Companies Act 2006 ('CA06': unless stated, statutory references are from the CA06) seeks to do what Romer J said was "impossible"; namely, describe directors' duties in terms which accommodate every director's circumstances, including the nature of their company and directorship (Re City Equitable Fire Insurance). The Act is derived from counter-part common law and equitable principles. As will be shown, these were extremely flexible and could apply to "situations that no one [had] foreseen and categorised"(Clarke, 1986, p141). However, few directors understood their basic duties from this compendious mass of legal sources (BIS, 2010a,p.10).

Both the Law Commissions (1999) and the CLR (2001) recommended that the Act should clarify and make accessible these rules developed at common law and equity. For directors, this would cut litigation costs resulting from misunderstanding. Across companies, this could raise standards of corporate governance. But this was the first time under UK law that directors' duties would be committed to writing in one place. This controversial proposition caused widespread debate, not least because directors are integral to companies.

The company is a separate legal personality. Directors are required to act on its behalf. There are three types: De Jure directors (including nominees) are appointed by the company; De Facto directors, whilst not appointed, perform tasks particular to directorship (Re Hydrodan); Shadow directors, excluding professional advisors, are implied directors if they instruct other directors (Unisoft Group). All directors manage companies and their assets. Since this position lends directors significant powers and responsibilities, it is vital duties are imposed on them to uphold behavioural standards, and protect the company and its beneficiaries. Under the CA06 Shadow Directors are subject to "the corresponding common law rules or equitable principles"(s.170(5)). However, the Act otherwise applies to "any person occupying the position of director, by whatever name called"(s.250). Not only, then, does the CA06 affect the activities of the company's engine and legal face, but it attempts to regulate an incredibly broad range of directorships.

Clarity and accessibility, therefore, are bold ambitions for an Act that must speak to the provincial part-timer and the City executive. This essay takes an overview of the CA06 assessing its broader impact on corporate governance; before looking closely at the Act's legal heritage to see if it really has improved directors' understanding of their duties. Codification clarifies some aspects of the law. However, it introduces fresh ambiguities as the Act's general wording tries to preserve the "impossible".

Ss.171 to 177 contain directors' duties. They are owed by directors to the company (s.170(1)). S.170(3) states codified duties supersede equivalent common law and equitable principles. However, s.170(4) requires courts to have regard to interpretations of those sources when interpreting and applying the statute. S.178 imports remedies for breach of duty, from common law and equity.

Considering each duty, s.171 requires directors to act under the company's constitution (s.171(a)), and only exercise powers for the purposes given (s.171(b)). S.172 specifies directors must act in good faith to further the company's success, for the benefit of its members as a whole. In doing so, the director must have regard to factors (a)-(f)(s.172). Thirdly, directors must exercise their independent judgement (s.173). S.174 establishes directors' duty of care. A dual standard is imposed, the first limb being objective- directors must demonstrate knowledge, skills and experience that might be reasonably expected of a person of their position (s.174(2)(a))- the second, subjective- the director must demonstrate the knowledge, skills and experience that they have (s.174(2)(b)).

S.175 states the duty to avoid actual or potential conflicts with the company's interests. It concerns conflicts of interest and duty, and conflicts of duties (s.174(7)). The duty applies particularly to the exploitation of a company's property, information or opportunity (s.175(2)). However, it only arises over directors' third party dealings (s.175(3)). Furthermore, ss.175(4)(b), 175(5) and 175(6) provide the board a procedure for authorising conflicts by the board. Persons ceasing to be directors remain subject to this duty (s.170(2)). S.176 provides directors cannot accept benefits from third parties. Dissimilarly to s.175, s.176 provides no authorisation procedure. Finally, directors with direct or indirect interests in their company's transactions must declare to other directors the nature and extent of those interests (s.177(1)-(4)), unless unaware of their interest or the transaction concerned(s.176(5)).

But how could these seven simple statements apply to a corporate community? Corporate governance "is the system by which companies are directed and controlled"(ECGI(Cadbury Committee),1992,[2.5]). Essentially, it how directors manage and the values they set for their company (FRC, 2010,p.1). In 1992 the Cadbury Committee felt efficient corporate governance was essential for the economy's growth (1992). By 2006 commentators noted a cultural shift in this understanding (FRC, 2006). A company's conduct affects the community, from its customers and employees, to resources utilised. Therefore, corporate governance should also encompass "what is good for society at large"(Hodge/BIS, 2007,p.1). Since directors are responsible for a system which impacts the company and, more widely, the economy and society, it is vital they have clear guidelines to uphold standards.

The fact of codification should, in theory, improve corporate governance. With accessibility and clarity comes accountability: anyone, including directors, can determine a breach of duty. Codification therefore allows directors to regulate their activities, thereby improving management standards. S.172, particularly, implements two significant changes to corporate governance. Firstly, it asks directors to take a long-term perspective when promoting the company's success. British businesses have been criticised for taking volatile actions (Arora,2011). Now, directors are required to think responsibly thereby enhancing the quality of their company's operations.

Secondly, directors must consider the "company as a whole". This adopts the 'enlightened shareholder approach' recommended by the Law Commissions (1999) and the CLR (2001). Accordingly, not only must directors consider shareholders when managing the company, but also stakeholders (Sealy,2010,p.302). The duty's list of factors to consider includes the interests of the company's employees, its business relationships, the community and environment (s.172(1)(a)-(f)). As a statutory statement, it therefore crystallises the notion that good corporate governance should encompass wider considerations. It was anticipated that s.172 would radically improve the quality of directors' decision-making (Keay,2009,p103).

In practice, however, has s.172 delivered the promised improvements to corporate governance? Directors' adoption of long-term focus has always been doubted. Sceptical, Davies writes: "if directors perceive that their positions [are] under threat, they will manage for the short-term... it is [useless] to them if the company is set to do well in the future."(2010, p.149) Even four years on from the CA06's accession, the BIS called for a review of corporate Britain's long-term focus(2010b). This was partly in response to the furore following Kraft's Cadbury takeover: short-term fund interests acquired Cadbury shares with to sell them to Kraft for a quick profit (Company Law, 2010,p.1). Potentially, s.172 has done little to shake the short-term out of British corporate governance.

Similarly, s.172's enlightened shareholder approach has its critics. Given the impracticalities of balancing diverse factors (a)-(f), many believe directors will simply pay them "lip-service"(Sykes, 2010,p.228). Furthermore, Sales J confirmed that s.172 was not a vehicle for enforcing specific factors from s.172(a)-(f). Provided directors decide in 'good faith' which interests, as opposed to others, best promote the success of the company, they will not be held accountable(Ex p.People & Planet).Perhaps, s.172 raises unrealistic hopes about what can be achieved for wider corporate governance values.

According to the BIS' review, less than half the companies surveyed made changes following codification (2010a,p.6).The banking crisis 2007-9 tested the notion that improvements to corporate governance were made atall (Arora,2010). However, given the CA06 has only operated for four years, it is too early to anticipate its impact. Significantly, the BIS also found that 79% of companies understood the statutory statement of directors' duties, as opposed to the old law (2010a, p.6). Arguably, codification and s.172 especially, provide an accessible framework of considerations, which, if understood, should inform companies' decision-making. And, as the BIS concedes, "how can you measure the value of knowing that a company's books are sounder than they were before?"(2007a,p.4). Maybe codification fails to achieve the broader aims of corporate governance, but perhaps statistics cannot reveal its subtler impact on individual companies' management standards.

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