Editing Board of directors (section)

===Duties===<!-- This section is linked from [[Corporate benefit]]. See [[WP:MOS#Section management]] -->
{{main|Directors' duties|Fiduciary duties}}

Because directors exercise control and management over the organization, but organizations are (in theory) run for the benefit of the [[shareholder]]s, the law imposes strict duties on directors in relation to the exercise of their duties. The duties imposed on directors are [[fiduciary]] duties, similar to those that the law imposes on those in similar positions of trust: [[agency (law)|agents]] and [[trustee]]s.

The duties apply to each director separately, while the powers apply to the board jointly. Also, the duties are owed to the company itself, and not to any other entity.<ref>''Percival v Wright'' [1902] Ch 421</ref> This does not mean that directors can never stand in a fiduciary relationship to the individual shareholders; they may well have such a duty in certain circumstances.<ref>For example, if the board is authorised by the shareholders to negotiate with a takeover bidder. It has been held in New Zealand that "depending upon all the surround circumstances and the nature of the responsibility which in a real and practical sense the director has assumed towards the shareholder," ''Coleman v Myers'' [1977] 2 NZLR 225</ref>

==== "Proper purpose" ====
Directors must exercise their powers for a proper purpose. While in many instances an improper purpose is readily evident, such as a director looking to enrich themselves or divert an investment opportunity to a relative, such breaches usually involve a breach of the director's duty to act in good faith. Greater difficulties arise where the director, while acting in good faith, is serving a purpose that is not regarded by the law as proper.

The seminal authority in the United Kingdom in relation to what amounts to a proper purpose is the [[United Kingdom Supreme Court|Supreme Court]] decision in Eclairs Group Ltd v JKX Oil & Gas plc (2015).<ref>{{cite BAILII|litigants=[[Eclairs Group Ltd v JKX Oil & Gas plc]] |court=UKSC |division=|year=2015 |num=71 |date=2 December 2015}}</ref> The case concerned the powers of directors under the [[articles of association]] of the company to disenfranchise voting rights attached to shares for failure to properly comply with notice served on the shareholders.  Prior to that case the leading authority was ''[[Howard Smith Ltd v Ampol Ltd]]'' [1974] AC 821. The case concerned the power of the directors to issue new [[share capital|shares]].<ref>Following ''[[Hogg v Cramphorn Ltd]]'' [1967] Ch 254</ref> It was alleged that the directors had issued many new shares purely to deprive a particular shareholder of his voting majority. An argument that the power to issue shares could only be properly exercised to raise new capital was rejected as too narrow, and it was held that it would be a proper exercise of the director's powers to issue shares to a larger company to ensure the financial stability of the company, or as part of an agreement to exploit mineral rights owned by the company.<ref>''Teck Corporation v Millar'' (1972) 33 DLR (3d) 288</ref> If so, the mere fact that an incidental result (even if it was a desired consequence) was that a shareholder lost their majority, or a takeover bid was defeated, this would not itself make the share issue improper. But if the sole purpose was to destroy a voting majority, or block a takeover bid, that would be an improper purpose.

Not all jurisdictions recognised the "proper purpose" duty as separate from the "good faith" duty however.{{efn|This division was rejected in British Columbia in ''Teck Corporation v Millar'' (1972) 33 DLR (3d) 288.}}

==== "Unfettered discretion" ====
Directors cannot, without the consent of the company, fetter their [[discretion]] in relation to the exercise of their powers, and cannot bind themselves to vote in a particular way at future board meetings.{{efn|Although as Gower points out, as well understood as the rule is, there is a paucity of authority on the point. But see ''Clark v Workman'' [1920] 1 Ir R 107 and ''Dawson International plc v Coats Paton plc'' 1989 SLT 655.}} This is so even if there is no improper motive or purpose, and no personal advantage to the director.

This does not mean, however, that the board cannot agree to the company entering into a contract which binds the company to a certain course, even if certain actions in that course will require further board approval. The company remains bound, but the directors retain the discretion to vote against taking the future actions (although that may involve a breach by the company of the [[contract]] that the board previously approved).

===="Conflict of duty and interest"====

As fiduciaries, the directors may not put themselves in a position where their interests and duties conflict with the duties that they owe to the company. The law takes the view that good faith must not only be done, but must be manifestly seen to be done, and zealously patrols the conduct of directors in this regard; and will not allow directors to escape liability by asserting that their decisions were in fact well founded. Traditionally, the law has divided conflicts of duty and interest into three sub-categories:

=====1. Transactions with the company=====

By definition, where a director enters into a transaction with a company, there is a conflict between the director's interest (to enrich themselves with the transaction) and their duty to the company (to ensure that the company gets as much as it can out of the transaction). In some places, this rule is so strictly enforced that, even where the [[conflict of interest]] or conflict of duty is purely hypothetical, the directors can be forced to disgorge all personal gains arising from it. In ''Aberdeen Ry v Blaikie'' (1854) 1 Macq HL 461 [[Robert Rolfe, 1st Baron Cranworth|Lord Cranworth]] stated in his judgment that:

:"A corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, ''or can have'', a personal interest conflicting ''or which possibly may conflict'', with the interests of those whom he is bound to protect... So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of the contract entered into..." (''emphasis'' added)

However, in many jurisdictions the members of the company are permitted to ratify transactions which would otherwise fall foul of this principle. It is also largely accepted in most jurisdictions that this principle can be overridden in the company's constitution.

In many countries, there is also a statutory duty to declare interests in relation to any transactions, and the director can be fined for failing to make disclosure.{{efn|In the United Kingdom, see section 317 of the Companies Act 1985.}}

=====2. Use of corporate property, opportunity, or information =====
Directors must not, without the informed consent of the company, use for their own profit the company's assets, [[corporate opportunity|opportunities]], or information. This prohibition is much less flexible than the prohibition against the transactions with the company, and attempts to circumvent it using provisions in the articles have met with limited success.

In ''[[Regal (Hastings) v Gulliver|Regal (Hastings) Ltd v Gulliver]]'' [1942] All ER 378 the House of Lords, in upholding what was regarded as a wholly unmeritorious claim by the shareholders,{{efn|In summary, the facts were as follows: Company A owned a cinema, and the directors decided to acquire two other cinemas with a view to selling the entire undertaking as a [[going concern]]. They formed a new company ("Company B") to take the leases of the two new cinemas. But the lessor insisted on various stipulations, one of which was that Company B had to have a paid up [[share capital]] of not less than £5,000 (a substantial sum at the time). Company A was unable to subscribe for more than £2,000 in shares, so the directors arranged for the remaining 3,000 shares to be taken by themselves and their friends. Later, instead of selling the undertaking, they sold all of the shares in both companies and made a substantial profit. The shareholders of Company A sued asking that directors and their friends to disgorge the profits that they had made in connection with their 3,000 shares in Company B – the very same shares which the shareholders in Company A had been asked to subscribe (through Company A) but refused to do so.}} held that:

: "(i) that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in the utilisation of their opportunities and special knowledge as directors; and (ii) that what they did resulted in profit to themselves."

And accordingly, the directors were required to disgorge the profits that they made, and the shareholders received their windfall.

The decision has been followed in several subsequent cases,<ref>''Industrial Development Consultants v Cooley'' [1972] 1 WLR 443 (corporate information), ''[[Canadian Aero Service v. O'Malley]]'' (1973) 40 DLR (3d) 371 (corporate opportunity) and ''Boardman v Phipps'' [1967] 2 AC 46 (corporate opportunity, which again, the company itself had declined to take up)</ref> and is now regarded as settled law.

=====3. Competing with the company =====
Directors cannot compete directly with the company without a conflict of interest arising. Similarly, they should not act as directors of competing companies, as their duties to each company would then conflict with each other.

==== Common law duties of care and skill ====
Traditionally, the level of care and skill which has to be demonstrated by a director has been framed largely with reference to the non-executive director. In ''[[Re City Equitable Fire Insurance Co]]'' [1925] Ch 407, it was expressed in purely subjective terms, where the court held that:

: "a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of ''his'' knowledge and experience." (''emphasis'' added)

However, this decision was based firmly in the older notions (see above) that prevailed at the time as to the mode of corporate decision making, and effective control residing in the shareholders; if they elected and put up with an incompetent decision maker, they should not have recourse to complain.

However, a more modern approach has since developed, and in ''[[Dorchester Finance Co Ltd v Stebbing]]'' [1989] BCLC 498 the court held that the rule in ''Equitable Fire'' related only to skill, and not to diligence. With respect to diligence, what was required was:

: "such care as an ordinary man might be expected to take on his own behalf."

This was a dual subjective and objective test, and one deliberately pitched at a higher level.

More recently, it has been suggested that both the tests of skill and diligence should be assessed objectively and subjectively; in the United Kingdom, the statutory provisions relating to directors' duties in the new [[Companies Act 2006]] have been codified on this basis.<ref name="NormanGoddard">''Norman v [[Theodore Goddard]]'' [1991] BCLC 1027</ref>

==== Remedies for breach of duty ====
In most jurisdictions, the law provides for a variety of remedies in the event of a breach by the directors of their duties:
* [[Account of profits]]
* [[Damages]] or compensation
* [[Injunction]] or [[declaration (law)|declaration]]
* [[Rescission (contract law)|Rescission]] of the relevant [[contract]]
* Restoration of the company's property
* [[Termination of employment#Summary termination|Summary dismissal]]

====Current trends====
Historically, directors' duties have been owed almost exclusively to the company and its members, and the board was expected to exercise its powers for the [[corporate benefit|financial benefit]] of the company. However, more recently there have been attempts to "soften" the position, and provide for more scope for directors to act as good corporate citizens. For example, in the United Kingdom, the [[Companies Act 2006]] requires directors of companies "to promote the success of the company for the benefit of its members as a whole" and sets out the following six factors regarding a director's duty to promote success:
* The likely consequences of any decision in the long term
* The interests of the company's employees
* The need to foster the company's business relationships with suppliers, customers and others
* The impact of the company's operations on the community and the environment
* The desirability of the company maintaining a reputation for high standards of business conduct
* The need to act fairly as between members of a company

This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. Previously in the United Kingdom, under the [[Companies Act 1985]], protections for non-member stakeholders were considerably more limited (see, for example, s.309 which permitted directors to take into account the interests of employees but which could only be enforced by the shareholders and not by the employees themselves). The changes have therefore been the subject of some criticism.<ref>{{Cite web|url=http://www.altassets.net/features/arc/2006/nz8451.php|title=Director's duties}}</ref>

'''Board of directors technology'''

The adoption of technology that facilitates the meeting preparation and execution of directors continues to grow.<ref name=":0">{{Cite web|url=https://www.marketwatch.com/press-release/global-board-portal-market-growth-leading-players-and-forecast-to-2023-2019-09-23|title=Global Board Portal Market Growth, Leading Players And Forecast To 2023.|website=MarketWatch|language=en-US|access-date=2020-01-10|archive-date=10 January 2020|archive-url=https://web.archive.org/web/20200110225112/https://www.marketwatch.com/press-release/global-board-portal-market-growth-leading-players-and-forecast-to-2023-2019-09-23|url-status=dead}}</ref> Board directors are increasingly leveraging this technology to communicate and collaborate within a secure environment to access meeting materials, communicate with each other, and execute their governance responsibilities.<ref>{{Cite web|url=https://www.passageways.com/board-portal/everything-you-need-to-know|title=Board & Committee Meetings {{!}} Board Portal Software {{!}} OnBoard|website=Passageways Board Portal Software|language=en|access-date=2020-01-10}}</ref> This trend is particularly acute in the United States where a robust market of early adopters garnered acceptance of board software by organizations resulting in higher penetration of the board portal services in the region.<ref name=":0" />

====The board and society====

Most companies have weak mechanisms for bringing the voice of society into the board room. They rely on personalities who were not appointed for their understanding of societal issues. Often they give limited focus (both through time and financial resource) to issues of corporate responsibility and sustainability. A social board<ref>Acre Resources LTD (2018), [https://www.acre.com/resources/the-case-for-a-social-board/ The Case for a Social Board] {{Webarchive|url=https://web.archive.org/web/20181009132159/https://www.acre.com/resources/the-case-for-a-social-board/ |date=9 October 2018 }}, London, UK</ref> has society designed into its structure. It elevates the voice of society through specialist appointments to the board and mechanisms that empower innovation from within the organisation. Social boards align themselves with themes that are important to society. These may include measuring worker pay ratios, linking personal social and environmental objectives to remuneration, integrated reporting, fair tax and B-Corp certification.

Social boards recognise that they are part of society and that they require more than a licence to operate to succeed. They balance short-term shareholder pressure against long-term value creation, managing the business for a plurality of stakeholders including employees, shareholders, supply chains and civil society.