Legal Duties And Responsibilities Of A Director Under Section 172 Of Companies Act 2006 And Wates Corporate Governance Principles 2018 Essay.

Director's Duty under Section 172 of Companies Act 2006

Karen is the director of a large private limited company that is incorporated in the United Kingdom. This legal document is to advise Karen about her duties as well as the responsibilities to the stakeholders with regards to the shareholders as provided under Section 172 of the Companies Act 2006. In addition to it, as Karen also wants to understand the effects of Principle 3 and Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies on Karen’s duties as a director so, this present document also provides advice in relation to the same to Karen.

Legal effect of the director’s (Karen) duties and responsibilities to the ‘stakeholders’ in relation to ‘shareholders’ provided under Section 172 of the Companies Act 2006.

According to Section 172 of the Companies Act 2006, which deals with the duty to promote the success of the company, imposes the duty on the director (in the present case on my client Karen) to act in good faith that the director believes that such action is likely to promote the success of the company for the benefit of the stakeholders in relation to the shareholders as a whole.[1] There was a famous case of Regentcrest v. Cohen[2], in this case, the court stated that it is necessary to consider that what the director honestly as well as genuinely believed was beneficial to promote the success of the company.[3] The same has happened in the case of Charterbridge Corp Ltd. v. Lloyds Bank Ltd.[4] and Extrasure Travel Insurance Ltd. v. Scattergood[5]. The factors in relation to stakeholders provided under sub-section 172 (1) of the Companies Act 2006 which include consequences of any decision taken by the director in the long term, interests of the employees of the company, promote the business relationships of the company with the customers, suppliers, and the others, impact of the operations of the company on the environment as well as community, appropriateness of the company in maintaining the reputation and goodwill for the high level of conduct of business, and requires to act in a fair manner among the members of the company.[6] Further, there are certain authors who stated that Section 172 of the Companies Act 2006 contrast between the stakeholders and shareholders value beliefs.[7] The approach comprised by the English law determines the happy standard between these limits and is an effectual method of holding the benefits of all those who are indulged in the company.[8] However, the implication is that Section 172 of the Companies Act 2006 introduced the management of stakeholders as invalid or erroneous from the time when the factors provided under sub-section 1 of Section 172 are just influential to the major purposes of safeguarding that the for the benefits of the members the company is successful.[9] Regardless of its flexibility, Section 172 provides assistance but at the same time values the need for distinct management to the directors.[10] So, these are the Legal effect of the director’s (Karen’s) duties and responsibilities to ‘stakeholders’ in relation to ‘shareholders’ under Section 172 of the Companies Act 2006.

Factors affecting stakeholders under Section 172 of Companies Act 2006

Effect of Principle 3 and Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies on Karen’s duties as a director.

The duty that is owed to the company is not directly to the stakeholders or the other shareholders. The main goal of the company begins with the benefit of the shareholders as a whole because shareholders are the owners, and in addition to it, the company is finally run for the benefit of the shareholders. The effect of Principle 3 and Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies imposes responsibilities the Karen (director of the company).[11] According to Principle 3 of the Wates Corporate Governance Principles, 2018 for Large Private Companies deals with the responsibilities of the director, which provide that the board of directors, as well as the sole director, must have a good understanding of their responsibilities as well as accountabilities.[12] In addition to it, it provides that the policies and procedures of the board or an individual director must support independent challenge as well as effectual decision making. Further, Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies deals with the relationship and engagement of the stakeholder, which provides that the director must adopt the effective stakeholder relationships associated with the purpose of the company.[13] Further, Principle 6 imposes the responsibility on the director is to oversee the significant involvement with the stakeholders and have respect to the views of the stakeholder at the time of taking decision.[14] So, these are the effect of Principle 3 and Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies on Karen’s duties as a director.

Legal risks that the director (Karen) should consider in her bid to balance her duties and responsibilities to ‘stakeholders’ in relation to the ‘shareholders’ provided under Section 172 of the Companies Act 2006.

As Section 172 of the Companies Act 2006 defines the term company success as encouraging the interests of the shareholders while taking into consideration the diverse group of the stakeholders.[15] This arises the challenge for the director of the company to show respect for the interests of the stakeholder, which might be against with which is best for the shareholders. For example, if the director of the company determines to close the production site of the business with 1500 dismissals. So, such a decision can seem fit for the shareholders, but the 1500 employees who are affected by dismissal shall not feel that their interests have been served by the director of the company.[16] Therefore, if the director takes such type of decisions, then it leads to closure of the company, which also hamper the reputation of the company in the market as well.[17] Hence, there are certain legal risks that the director (Karen) should consider in her bid to balance her duties and responsibilities to ‘stakeholders’ in relation to the ‘shareholders’ provided under Section 172 of the Companies Act 2006.

Legal risks that the director (Karen) should consider in her bid to understand the effect of Principles 3 and Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies on Karen’s duties as a director.

Implications of Section 172 on balancing stakeholders' and shareholders' interests

The Wates Corporate Governance Principles 2018 for Large Private Companies are the principles that follow the approach beneficial for good corporate governance. This also helps the companies to explain and apply the relevance of the corporate governance agreement. The main motive and principles based on which these Wates Corporate Governance Principles 2018 for Large Private Companies work is transparency, accountability and security. As Principle 3 of the Wates Corporate Governance Principles 2018 for Large Private Companies stated, the director’s responsibilities which further can be explained as the board of directors and every individual director need to understand their responsibility and their accountability regarding the company.[18] In the present case, Karen needs to understand his responsibilities and accountability and work for the benefit of the company. The decision-making process needs to be effectively supported, as well as the need to understand the challenges faced during the decision making process. The legal risk faced by the director here would be that if the director fails to understand the responsibilities and accountability, then the company could face loss, and liability would be on the director.[19] Further, Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies is regarding stakeholder relationships and engagement where it states that the directors should have a healthy relationship with the stakeholders and the legal risks that can be faced by the directors would be that the relationship or the engagement with the stakeholders would deteriorate, and the effect of this would be that the stakeholders would leave the company.[20] This would impact the company in terms of losing the stakeholders and facing loss while making the wrong decision with regards to the company.[21] If the directors would not be fair and balanced with the stakeholders, this would also impact the position and the perspective based on the annual report. Therefore the director, Karen, needs to understand the legal risks and act accordingly.

Recommendations that will aid the director (Karen) to balance her duties and responsibilities to ‘stakeholders’ in relation to ‘shareholders’ under Section 172 of the Companies Act 2006.

According to Section 172 of the Companies Act 2006, although the court has no power to interfere in the decision taken by the board or an individual director until and unless the same is against the law or such decision has not been made by the reasonable director.[22] Further, it is also recommended that first, before taking any kind of decision in relation to the company, the director (Karen) must take the suggestion from the stakeholders in relation to the company’s shareholders by conducting the meeting. Secondly, the director needs to be remaining transparent towards the stakeholder means the director needs to disclose each and every information in front of the public.[23] Thirdly, always take into consideration all the issues and problems faced by the employees while working in the company and address the same while taking the decisions. The director (Karen) must make sure that there should be fair treatment to all the shareholders, including the minority shareholders in the company. In addition to it, the director must ensure that the good working condition or environment must be provided to them.[24] This also helps the director (Karen) to corporate with the stakeholders in relation to the shareholders in balancing her duties and responsibilities provided under Section 172 of the Companies Act 2006. However, if it is necessary or urgent to take certain actions, then the director (Karen) should take the same, but it should be intimated to the stakeholders if it relates to the stakeholders of the company.[25] So, such recommendations will aid the director (Karen) to balance her duties and responsibilities to ‘stakeholders’ in relation to ‘shareholders’ under Section 172 of the Companies Act 2006.

Effects of Principle 3 and Principle 6 of Wates Corporate Governance Principles 2018

Recommendations that will aid the director (Karen) to give effect to Principle 3 and Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies.

As it is already stated above that the effect of Principle 3 and Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies are that the director needs to be aware of their responsibilities and accountabilities towards the company. Here the directors need to work on the policies of the company, practice to govern the company with good leadership skills, also to promote stewardship for the gaining value in the company. Consider each and every aspect of the company for making an effective decision that would benefit the company.[26] If in case any conflict arises in the company, then the director needs to understand the conflict and try to agree and set out the conflicts for the benefit of the company and also to compromise and agree with the board for the benefit of the company. The director also need to make the governance of the company transparently this would also help in maintaining the clarity between the owner and the employees. Also, while considering Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies the directors need to build a healthy relationship with stakeholders and engage them in every decision taken with respect to the company because of the stakeholders will not be engaged then this would also impact the companies functions, and here the director’s duty is to maintain a balance between the owner as well as the employees.[27] By maintaining the balance, would maintain the value as well as the reputation of the company. The director Karen would need to consider these points as part of his responsibilities as this would help him in maintaining the proper and smooth functioning of the company.[28] Hence, all the recommendations that are mentioned above will aid the director (Karen) to give effect to Principle 3 as well as Principle 6 of the Wates Corporate Governance Principles 2018 for Large Private Companies need to be considered by the director for the proper functioning and also for maintaining the transparency between the owner and the employees.

Conclusion

Lastly, it is concluded that please consider the same before taking any action in relation to the company, so that there will be no loss to the company and will run for the long terms.

Charterbridge Corp Ltd. v. Lloyds Bank Ltd. 1970

Extrasure Travel Insurance Ltd. v. Scattergood 2003

Regentcrest v. Cohen (2001) B.C.C. 494.

Wates Corporate Governance Principles 2018 for Large Private Companies

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