Director dilemmas and how to overcome them

“I hate violence, yes I do. It’s kind of a dilemma, huh?” Jackie Chan

Directors routinely grapple with dilemmas – whether it’s managing diverse shareholder expectations, choosing between business strategies, reconciling conflicts of interest, or simply trying to contain an overbearing CEO. 

The ability to balance integrity and entrepreneurial skill in the face of uncertainty is part of the job description. And often, there is not one obvious right decision, just a series of options that are “less bad” than the others.

The legal basis on which decisions should be assessed is contained within the Companies Act 2006, which codified 250-odd years of case law into a statutory statement of seven directors’ duties.

Directors must:

• Act within the powers of the company
• Promote the success of the company for the benefit of its members (shareholders) whilst also paying regard to the impact of company operations on (among other things) the community and environment, as well as the interests of company employees.
• Exercise independent judgment
• Exercise reasonable care, skill and diligence
• Avoid conflicts of interest
• Not accept benefits from third parties
• Declare, where applicable, any interest in a transaction or arrangement with the company

As ever, understanding the law is the easy bit; applying the law is where judgment is required. What most directors are faced with when deciding the best course of action to take in any given situation is best described as a balancing act.

The UK Corporate Governance Code – another key part of the UK’s regulatory framework for boards and corporate governance – identifies some other apparent dilemmas for boards:

• The board must be entrepreneurial, driving the business forward, while also ensuring controlling controls, checks and balances are in place
• Risks are part and parcel of running a business, and indeed profits are often described as the rewards of risk-taking, but they must be managed. 
• The board needs to be informed about the workings of the company but not interfere with its day to day running
• The board must be sensitive to short-term issues but remember the overriding goal is long-term value creation.

Boards will not necessarily be condemned (at least from a governance perspective) if they ultimately fail to make the best commercial decisions; when it comes to defending their actions in court, directors need to demonstrate they have acted in good faith, with reasonable care and skill, and with regard to the principles of the law.

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