Understanding Directors' Duties

Legal Responsibilities in Corporate Governance

Directors of companies have significant legal responsibilities.  Specific duties apply to directors in carrying out their role.

Who is a Director?

The Corporations Act states that a “director”, is a person who is appointed to the position of a director (or alternate director) or someone acting in the position of director.

The Role of Directors

The primary responsibilities of directors include strategic decision-making, oversight of operations, and ensuring compliance with legal and regulatory requirements. Directors act as fiduciaries, entrusted to protect the interests of shareholders, employees, and other stakeholders.

Duties of Directors

A director of a company owes various duties to the company from the following sources:

• the general law;

• statute law, including the Corporations Act; and,

• the company constitution.

Where a company is listed, additional requirements and responsibilities may also apply under the listing rules of the stock exchange.

The Corporations Act at Chapter 2D contains the general duties of directors.  The general duties in the Corporations Act are not all the duties owed by directors, however largely codify the common law on directors’ duties. 

This article focuses on the general duties of directors contained in the Corporations Act.

General Duties of Directors

The General Duties of directors are outlined below:

1. Duty of Care and Skill

Directors must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in the corporation’s circumstances and  occupied the office held by, and had the same responsibilities within the corporation as, the director.

From a practical perspective this will include, however not be limited to, the following:

·       Being informed about the company’s activities and financial standing.

·       Seeking expert advice when dealing with complex issues.

·       Ensuring decisions are made in the best interest of the organization.

2. Duty to act in good faith and proper purpose

A director must exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose.

3. Duty to not to use position improperly

Directors must not improperly use their position with the intention gaining an advantage for themselves, or someone else, or cause detriment to the company.

4. Duty not to use information improperly

A director must not improperly use information obtained because they are or have been a director to gain an advantage for themselves or someone else, or cause detriment to the company.

Directors who breach these duties are liable for civil and criminal penalties.

For advice on fulfilling your director duties, please contact us.