Directors' Duties

The details vary by country, but common-law systems share a core. Directors must use reasonable care, skill and diligence and make up their own minds instead of following others. They must act in good faith for the company's benefit (some laws add regard for employees, suppliers and the environment), stay within the powers in its constitution, avoid conflicts of interest and refuse benefits from third parties. The duties are owed to the company, not to individual shareholders, so it is the company that normally sues for breach. Courts generally defer to honest business decisions made after proper inquiry. Directors cannot escape responsibility by delegating, though they may rely on advisers and management when that reliance is reasonable. Some statutes add specific duties, for instance on accounts, insolvency and safety. Breach can lead to damages, removal and, in some cases, disqualification. Minutes showing that a board asked questions, took advice and recorded its reasons are the usual defence when a decision is later challenged.

A company's board is asked to approve the purchase of a business owned by one director's brother. The director discloses the link and leaves the meeting. The remaining directors request an independent valuation before voting, and the minutes record the discussion, which protects them if the price is later challenged.