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(I.II) Duties of Care and Skill
The directors’ fiduciary duties impose on them a largely negative obligation to do nothing which conflicts with the company’s interests. The common law duties of care and skill, however, represent the courts’ attempts to regulate the entrepreneurial side of the director’s activity. The common law on directors’ duties of care and skill arose from the end of the nineteenth century or in the early years of the twentieth century before the existence of ‘professional’ company directors. For this reason, the standards imposed are subjective and low.
The judicial expression of the duty of care were couched in subjective terms: ‘A director is required to take in the performance of his duties such care as an ordinary man might be expected to take on his own behalf’. There was a similar subjective duty of skill: ‘A director is required to exhibit in the performance of his duties such degree of skill as many reasonable be required from a person with his knowledge and experience.’
The leading case on the nature and extent of the duty of skill and care is Re City Equitable Fire Insurance Co Ltd , in which three basic principles were formulated, (a) a director is not an expert, and need only display skills he actually possesses. (b) a director is not bound to give continuous attention to the affairs of his company. (c) director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. The standards imposed are surprisingly low. Nevertheless, it seems that now the law is moving towards a more objective standard of care and skill for company directors. Firstly, an objective standard of care and skill will be required in any event of an executive director employed under a contract of service, and the position of non-executive director will be considered later. Furthermore, section 214 of the Insolvency Act 1986 imposed a higher standard of skill and care on directors for the purpose on wrongful trading. The section requires the director to behave as ‘a reasonably diligent person having both— (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has’.
The law on directors’ duties was discussed hereinbefore, now there are various proposals have been made to reform the law governing directors’ duties in a number of respects. Firstly, the rules governing directors’ fiduciary duties are complexity and difficult to comprehend for the company directors. Secondly, the relatively low standard of care and skill required of a company director by the law. This issue has been briefly considered earlier in this essay. The third relates to the fundamental duty to act bona fide ‘in the interest of the company’. The Law Commissions recommend to codification of directors’ duties to make the law more accessible and coherent.
(II) The Position of Non-executive Directors in The Corporate Governance Framework
In a preceding part of this essay, the law on directors’ duties and prospective development have been observed. A director who fails in his duty to the company has unlimited liability for any resultant loss, even if he has not himself made a personal gain (as, for example, in the case of negligence). So there is an important problem faced by non-executive directors of knowing with certainty the extent of these duties. As board members, all directors, whether executive or non-executive, owe the same legal duties. Although it is widely acknowledged that in reality executive and non-executive directors fulfil distinct roles, as matters stand at present the legal position is likely to be that non-executive directors face the same potential liability as executive directors.
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