Directors’ Duties and Liabilities: Why Good Governance Matters More Than Ever

Rethinking the Role of the Modern Director

Once seen as a rather dry topic best left to lawyers and accountants, directors’ duties and liabilities are now front-page business issues. A series of corporate scandals, governance breakdowns, and compliance failures have cast new light on how company directors operate — and the standards they are held to.

As highlighted in a recent Impact Lawyers briefing, the legal and ethical responsibilities of directors have never been more scrutinised. From large listed companies to growing SMEs, the expectations placed on directors go far beyond profit and performance.

“Today’s directors must balance commercial drive with care, transparency and integrity,” says Jenny Holloway, CEO of Fashion-Enter Ltd and Chair of the Apparel Textile Manufacturers Federation (ATMF). “You’re not just accountable for business outcomes — you’re accountable for the decisions and culture that shape them.”

Understanding Directors’ Powers

At the most basic level, directors are responsible for managing the company and exercising all of its powers. The board acts collectively and that collective responsibility applies equally to executive and non-executive directors.

While the board may delegate tasks, it cannot delegate accountability. Each director remains responsible for ensuring the company is run lawfully and ethically, and that the decisions made align with its constitution and long-term interests.

The Core Statutory Duties

Under the Companies Act 2006, directors owe a series of statutory duties to the company and, by extension, its shareholders and stakeholders. In practice, these are the guiding principles of responsible corporate conduct.

• Act within powers: Directors must operate within the scope of the company’s constitution and only use their powers for their intended purpose.
• Promote the success of the company: They must act in good faith to benefit the company as a whole, considering long-term sustainability, employee welfare, and relationships with suppliers and customers.
• Exercise independent judgment: Directors are expected to think critically, question assumptions, and make autonomous decisions.
• Show reasonable care, skill, and diligence: They must demonstrate competence, applying both their professional expertise and diligence expected of a reasonable person in their role.
• Avoid conflicts of interest: Personal gain should never come before company interest.
• Refuse third-party benefits: Accepting inducements or advantages that could influence decision-making is prohibited.
• Declare interests: Transparency is key — any potential conflict must be declared to fellow directors.

As Holloway notes:

“The Companies Act sets out the legal framework, but real governance goes beyond the letter of the law. It’s about doing the right thing, even when nobody’s watching. That moral compass, what I call the ‘craftsmanship of leadership’ , is what defines great directors.”

Beyond the Boardroom: Everyday Responsibilities

Directors’ obligations extend far beyond quarterly board meetings. They are the custodians of a company’s integrity – responsible for compliance, financial management, and strategic oversight.

That includes:

• Ensuring compliance with all statutory and regulatory requirements, including employment, health and safety, and anti-money laundering laws.
• Overseeing accurate financial records, prudent use of funds, and timely payment of taxes.
• Filing annual accounts, confirmation statements, and returns with Companies House.
• Making strategic decisions that balance innovation with risk management.
• Maintaining transparency and disclosure, ensuring company information is properly recorded and available when required.

The “Smell Test” – A Gut Check for Good Judgment

Sometimes, poor governance isn’t about technical breaches – it’s about judgment. As one seasoned governance expert once put it:

“Forget about right and wrong for a second – what were they thinking?”

This so-called “smell test” remains a useful yardstick for directors. If a decision wouldn’t pass the “grandmother test” – if you wouldn’t be comfortable explaining it to your grandmother or seeing it on the front page of a newspaper – then it probably deserves a rethink.

When Limited Liability Has Limits

Directors often take comfort in the concept of limited liability, the idea that their personal assets are protected if the company fails. But that protection isn’t absolute.

If directors act negligently, dishonestly, or trade wrongfully during financial distress, they can face personal liability. Courts may “lift the corporate veil” to hold them personally accountable for losses, particularly where creditors are harmed.

As Holloway points out:

“Directorship is a privilege, not a shield. The best directors treat that responsibility with the seriousness it deserves because every decision has a ripple effect on people’s livelihoods.”

A New Era of Accountability

Corporate governance is no longer a tick-box exercise; it’s a measure of leadership quality and business resilience. In an era of public scrutiny and social transparency, directors must lead with integrity, foresight, and a commitment to doing what’s right – not just what’s legal.

Good governance builds trust. And in business today, trust is the most valuable asset of all.

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