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individual directors (as well as management) for their particular input, for example in relation to the impact of actions on the community and the environment. Boards, of course, currently do so, but the existence of the statutory factors may cause some Chairmen and some boards to be more concerned to obtain specific input from individual directors on different aspects of the statutory factors.

The duty to exercise independent judgement

A director of a company must exercise independent judgement.

This duty is not infringed by his acting:

(a)in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or

(b)in a way authorised by the company’s constitution.

Section 173

This duty codifies the current principles of law under which directors must act in good faith and must exercise their powers independently without fettering their discretion or subordinating their powers to the will of others. This replicates the decision of the Court of Appeal in Fulham Football Club Ltd v. Cabra Estates plc14 which drew a distinction between the fettering of future discretion and the making of a decision to bind themselves to do what was necessary to execute a contact which, at the time when the contract was negotiated, they genuinely believed to be in the interests of the company as a whole. The former is prohibited; the latter is permitted.

This codified duty now incorporates in a single concept the old law that a director should (a) act in good faith and (b) not fetter his judgement by undue delegation or as a consequence of a conflict of interest. While the codified wording attempts to unite these separate duties together, section 170 of the Act requires the codified duties to be interpreted and applied in the same way as the old law. Nonetheless, the codified wording is much clearer and therefore brings into much sharper focus the need to act independently.

The duty to act independently requires a director to act independently in his judgement. It may be that a conflict of interest exists between the personal interests of a director and the interests of the company, but assuming the procedures concerning disclosures and approval of conflicts of interests are followed (as discussed below) then a director is still acting independently even if he is in fact conflicted.

Section 173 enables directors still to act independently even if they delegate their functions to the extent set out in the company’s constitution.

From the board’s point of view, the Chairman is likely to become even more concerned to ensure that:

14 [1994] 1 BCLC 363.

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executive directors take a broad view of their responsibilities as directors, and not limit their contribution to matters within their particular function or line management role

non-executive directors who are not independent (for example if appointed by a substantial shareholder) take care to express their own views (rather than the views of their appointor)

as, in either case, the director in question may not be exercising sufficient independent judgement.

The duty to exercise reasonable care, skill and diligence

A director of a company must exercise reasonable care, skill and diligence. This means the care, skill and diligence that would be exercised by a

reasonably diligent person with

(a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b)the general knowledge, skill and experience that the director has.

Section 174

This codifies the current law and is consistent with the approach applicable to wrongful trading and the obligation of directors to disclose relevant audit information.

Even in 1881 it had been said that no longer is ‘a director an ornament, but an essential component of corporate governance. Consequently, a director cannot protect himself behind a paper shield bearing the motto “dummy directors”.’15 As regards the board, on the face of it no particular change in behaviour is required: the new standard reflects the standard of conduct required of all

directors under the old law. Nonetheless a board will need to be concerned that it is not just having regard to the statutory factors (among others) in its decisionmaking process, but also is doing so with sufficient care, skill and diligence. This in turn highlights the importance of a board assessing how it will do so. To a large extent a board can help itself by, for example, having a method of operating under which:

the company has environmental, community, employee, ethical conflicts policies which the board formally considers periodically

the board keeps under review the principal risks and uncertainties affecting the company

those members of management providing board papers and input to the board are themselves aware of the statutory factors and seek to have regard to them in their input to the board.

15 Williams v. Riley 34 NJ Eq 398 at 401(Ch. 1881).

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All are likely to be regarded as necessary (at least by a Main Market company) and are evidence of the taking of reasonable care. They demonstrate that decisions were informed by these steps, and the board can maintain they were not decisions which no reasonable board would have decided and which should therefore be treated as negligent. These steps may not prevent individual directors from taking a wrong decision but they help protect the board against liability for the acts and omissions of individual directors.

What is the appropriate test by which to judge the acts or omissions of directors? It is helpful to consider the test of negligence applied to professionals generally as well as the traditional formulation of the law in relation to directors. In the so-called Bolam test (so called, after the name of the court case)16 the Judge decided that:

where you get a situation which involves the use of some special skill or competence, then the test as to whether there has been negligence or not is not the test of the man on the top of a Clapham omnibus, because he has not got this special skill. The test is the standard of the ordinary skilled man exercising and professing to have that special skill.

Although the law on directors’ duties of care and skill developed separately from the law on professional negligence, there seems little between the two tests as formulated in Bolam and now as applied to directors under the Companies Act 2006. It would be surprising if the common law standard of skill, care and diligence expected of professionals differed significantly from that expected of directors. In either case, liability arises when the professional or director takes action outside the range of possible actions that his or her peers would, in all the circumstances, have taken. Both the professional and the director can be wrong without being negligent. It indicates that the more the board can establish a framework to consider the statutory factors in its overall decisionmaking process with appropriate skill, the more it will avoid wrong decisions, let alone negligent ones.

The duty to avoid conflicts of interest

A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity). Section 175

Under the old law, directors’ conflicts were regulated under the common law principle known as the ‘no-conflicts’ rule. Its aim was to prevent a fiduciary from being swayed in any decision by considerations of any personal interest or

16 Bolam v. Friern Hospital Management Committee [1957] 2 All ER 188; [1957] 1 WLR 582.

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the interest of a third party. As made clear by Lord Russell in Regal (Hastings) Ltd v. Gulliver,17 the ‘no conflicts’ rule applies regardless of bad faith, so the court will not examine the fairness of the transaction in substance. The rule is strict in that if a conflict existed that could have allowed the director to consider interests other than the company’s there has been a breach of the duty.

It was clear, however, that the strict application of the rule could not go unqualified. Thus, a director could contract, or have an interest in a contract, if that interest had been properly disclosed to the company and the company had consented (by an ordinary resolution of the members in general meeting) to the director’s participation. The old law allowed for a modification of the requirement for the members to approve any conflicts, by inclusion of a provision in the articles of association that the board can do so instead of the general meeting.

Under the old law it was clear from the case of Re Bhullar Bros. Ltd18 that a conflict of interest can arise even if the company itself is not a party to the transaction in question. This was a case on the exploitation of a corporate opportunity that the company was incapable of taking advantage of. The director therefore took the opportunity for himself, believing that, as the company was incapable of contracting, there was no conflict of interest. It was decided that:

It seems obvious that the opportunity to acquire the property would have been commercially attractive to the company . . . Whether the company could or would have taken that opportunity, had it been made aware of it, is not to the point . . . the anxiety which the appellants felt as to the propriety of purchasing the property . . . is, in my view, eloquent of the existence of a possible conflict of duty and interest.

And, under the old law, the ‘no conflicts’ rule extended to possible conflicts. Lord Cranworth had already decided in Aberdeen Railway Company v. Blaikie19 that no fiduciary:

shall be allowed to enter into engagements in which [the director] has, or can have, a personal interest conflicting, or which may possibly conflict, with the interests of those whom he is bound to protect.

As a result, it seems that the old law had reached a point where a director could be prohibited from entering into transactions in which he had, or could have, a personal interest which is conflicting, or which might possibly conflict, whether or not the company was a party to that transaction or capable of entering into that transaction.

The requirement for authorisation by independent directors is essentially codifying the current law as it operates in practice, with some additional

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flexibility for some private companies. Many companies incorporate in their articles of association the provisions of the old Table A, article 85 which allow directors to authorise another director to be interested in a transaction or arrangement in which the company is interested, or to hold multiple directorships, provided the director concerned has disclosed the nature and extent of any interest. The new law allows the independent (non-conflicted) directors to authorise the conflict if, for a private company, the company’s constitution does not prohibit this and, in the case of a public company, if its constitution so allows.

A concern has been expressed that the effect of the new law is that multiple directorships will not be possible. This arises because the common law presently maintains a negative position, namely that a director can comply with the ‘no conflicts’ rules and therefore avoid any disadvantage to the company by declaring the extent of his interest to the company or board and by not participating in discussions or a vote on that particular matter. This is in contrast to the new law which involves a positive duty that the director must avoid all situations in which his interests will or may possibly conflict.

The Government has been clear that the duty is of general application and does not imply an obligation to avoid the conflict, if the situation cannot reasonably be regarded as likely to give rise to such a conflict. It argues that this avoids the impossible situation in which a director could be required to predict possible conflicts before he could know they would arise. As stated by the Solicitor General:

If a person cannot possibly foresee a situation, it cannot be reasonably regarded as being likely to give rise to a conflict of interest. On the other hand, if they can foresee it, the directors or members of the company should be able to make an informed decision about whether it is an acceptable conflict.20

The Solicitor General usefully referred21 to Lord Upjohn in Re Bhullar Bros. Ltd:

The phrase ‘possibly may conflict’ requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict.

This gives some reassurance as to potential, future conflicts. The ability to manage future conflicts therefore depends, in part, on whether they are foreseeable and the disclosure required when a transaction is proposed.

This, however, does not address the situation where a conflict of interest does actually arise. In the case of a multiple directorship, the circumstances

20The Solicitor General, Standing Committee Debate, Company Law Reform Bill [Lords], Hansard Col. 615, 11 July 2006.

21Ibid., Col. 614.

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giving rise to the conflict may not necessarily be within the direct control of the director of one company, if the conflict arises because of decisions made by the board of the other company. Here, one has to assess both the ability of a director with an actual conflict to absent himself from board discussions and voting on that matter, and the duties of the conflicted director to disclose his interest. So far as the former aspect is concerned, the Government’s views were expressed in Parliament by the Solicitor General who said:

I was asked about people absenting themselves from a meeting. People will not be able to do that as of right. They cannot just walk out of a meeting without declaring that they have interests. If they have been authorised, in advance or at the time, to have a particular interest, there should be no difficulty with them merely absenting themselves from a particular directors’ meeting. In the vast majority of cases, an appointment will be made on the basis that a director will be able to withdraw. He will have declared his interest and therefore should be able to do that.22

The effect of the view expressed by the Solicitor General is that directors will not be able to absent themselves ‘as of right’ but (in the vast majority of cases) will do so where the director has declared his interest and his appointment has been made on the basis that he is able to withdraw in relation to the conflicted matter. In both a private and a public company, it should be possible to construct the constitution of the company and the board procedures so that a director with a multiple directorship can disclose that other directorship on appointment, and obtain the authorisation of the independent directors to be able to withdraw from discussions and voting where there is a specific conflict (either an actual one or a reasonably likely one). A director may well be advised to obtain the equivalent authorisation from the board of which he is already a director before accepting the appointment as a director of another company. Hopefully, current sensible practice (which does enable directors to absent themselves on specific matters) will continue. If we go back to the purpose behind the ‘no-conflicts’ rule, it is to prevent the fiduciary from being swayed in any decision by considerations of any personal interest or the interest of a third party, so the practice of allowing multiple directorships and directors to absent themselves on specific conflicts should still enable a director to comply with this duty.

A board will want to review the company’s constitution and, possibly, adopt a procedure to be followed for independent directors to clear conflicts which the constitution permits them to clear. They may also want to become more formulaic in their approach to board meetings, checking (and recording in the minutes that they have done so) that directors have disclosed actual or possible conflicts.

22 Ibid., Col. 613.

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