Here at NDP, much of our time is spent advising and defending directors of liquidated companies who are being investigated and prosecuted by the Insolvency Service (IS) and Liquidators of failed companies for not fulfilling duties owed by Directors to their company and its creditors.
Often, after detailed examination of the facts, we are able to convince the IS to abandon their investigations seeking Director Disqualification and/or financial recompense. Indeed, we often find that the liquidation of their company is no fault of the director and has happened despite their best efforts. However, we also often find that there is not wide or deep understanding of what the duties of a director are, especially in the SME sector, which is why we are pleased to hear that the Institute of Directors (IoD) has launched a code of conduct for directors.
The IoD’s code of conduct for directors
The general duties of directors are laid down most importantly in the Companies Act 2006. Directors must know and understand these duties, but legal acts can be lengthy, written in legalese and often are simply not read in detail by directors.
This is why we are pleased to see that the Institute of Directors has launched a code of conduct for directors, that provides a behavioural framework for directors, whether of UK companies or otherwise, that is accessible, easy to read and is based on the following six principles:
- Leading by example – Demonstrating exemplary standards of behaviour in personal conduct and decision-making.
- Integrity – Acting with honesty, adhering to strong ethical values, and doing the right thing.
- Transparency – Communicating, acting and making decisions openly, honestly and clearly.
- Accountability – Taking personal responsibility for actions and their consequences.
- Fairness – Treating people equitably, without discrimination or bias.
- Responsible business – Integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts.
These Principles are inspired by the Seven Principles of Public Life (formerly known as the Nolan Principles), first published in 1995 by the Committee on Standards in Public Life. Although the code is voluntary, and there is no formal enforcement mechanism associated with it, it is important to note that it sets a high standard for the conduct of directors in addition to what is set out in the Companies Act.
The IoD encourages companies, and therefore directors, to publicly commit to compliance with this code of conduct by, for example, making disclosures in annual accounts and on the company’s website; communication to employees and other stakeholders; and through social media.
Importantly, the IoD makes it clear that If the recommendations of the Code are perceived as conflicting with mandatory requirements – such as those arising from legislation, regulation, contractual obligations, professional standards or organisational rules – then the requirements of the latter should prevail. Directors should apply their judgement in the application of the Code and seek professional advice in respect of fulfilling their legal obligations.
Our thoughts
We agree that the code is a useful guide for any director and will be particularly relevant for any person who has just been appointed as a director for the first time (e.g. the founder of a company). It also could form part of a pack of materials given by companies to new directors when they join the board, to remind them of the importance of good corporate governance.
The code does not replace the legislation, but is intended to work alongside it, as a guide to better governance.
The Code may well become a benchmark against which the conduct of directors is judged, moving forwards.
