08 Jan

'Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.'

Cadbury Report definition- 1992

See also our pages on joint ventures and business vehicles.

Directors' Duties

Directors are the agents of a company who manage its day-to-day business. They include any person occupying the position of director, whether or not they have that title. 

A shadow director of a company is a person whose directions or instructions the directors of the company are accustomed to act in accordance with. 

The general duties are owed to the company and are:

Duty to act within powers—requires a director to act in accordance with the company's constitution and only exercise powers for the purposes for which they are conferred.

Duty to promote the success of the company—directors must act in a way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its shareholders as a whole, and in doing so have regard to a non-exhaustive list of matters including the impact of the company's operations on the community and the environment; for further information.

Duty to exercise independent judgment—this duty is not infringed by acting in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors or in a way authorised by the company's constitution; for further information.

Duty to exercise reasonable care, skill and diligence— a director must exercise the care, skill and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions of the director in relation to the company (the objective test) and to use the general knowledge, skill and experience that the particular director has (the subjective test).

Duty to avoid conflicts of interest—a director must avoid a situation in which he or she has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company and is subject to various exceptions; for further information.

Duty not to accept benefits from third parties— requires a director not to accept a benefit from a third party conferred by reason of the director being a director, or them doing (or not doing) anything as a director.

Duty to declare interests in proposed transactions or arrangements—means that a director must declare if they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, and the nature and extent of that interest, to the other directors.

If a director breaches one or more of the general duties the company could have grounds to bring a civil action against the director, or the director may be disqualified if he or she is shown to be unfit to be managing a company as a result of the breach.

Breach of duty actions can be brought by the board of directors on behalf of the company.  A company can also take legal action against a director (or former director) for breach of duty through a derivative claim brought by one or more shareholders on behalf of the company.

Corporate governance for large private companies

Purpose and leadership. An effective board develops and promotes the purpose of a company and ensures that its values, strategy and culture align with that purpose.

Board composition. Effective board composition requires an effective chair and a balance of backgrounds, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of a board should be guided by the scale and complexity of the company.

Director responsibilities. The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision making and independent challenge.

Opportunity and risk. A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value, and establishing oversight to identify and mitigate risks.

Remuneration. A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company.

Stakeholder relationships and engagement. Directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.

Wates Corporate Governance Principles for Large Private Companies


By the publications team at: Contracts-Direct.com with the assistance of the referenced third parties.

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