A company’s directors provide the management, direction, and supervision for a company, and, in accordance with the generally accepted concept of shareholder primacy, have traditionally aimed to maximise the financial position of the company for the benefit of its shareholders. However, the Companies Act 1993 sets out a number of duties that directors must also adhere to.
Directors’ duties are an important feature of company law. They work to ensure that the company acts properly and doesn’t put others at risk, particularly financially. Director duties require a director to exercise their powers for proper purposes, to avoid reckless trading, to not allow the company to incur obligations that they don’t reasonably believe can be met, and, more generally, to act in good faith and in the best interests of the company.
This latter obligation, to act in good faith and in the best interests of the company, has traditionally been used to justify the focus on financial performance. However, the Companies (Directors Duties) Amendment Act 2023 has now clarified that a company director can take actions that take into account wider considerations, beyond the financial bottom-line.
The duty to act in the best interests of the company has been amended to record that a director may consider matters other than the maximisation of profit: for example:
- environmental matters (such as climate change, carbon footprint and waste management);
- social matters (such as modern slavery, fair trade and consumer responsibility); and
- governance matters (such as board diversity, disclosure and transparency, and risk management).
When the Amendment Act was being considered by Parliament, many considered that these changes to the duty to act in the best interests of a company were unnecessary because many modern corporates already recognise the importance of their connection with local communities, society, and the environment. Nevertheless, this change clarifies that directors can consider wider factors than shareholder primacy, without being found at fault for failing to maximise profits.
For more information on this Act, or directors’ duties generally, please contact a member of our corporate and commercial law team.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.