Directors' duties: Decision taking and record keeping

This guide is based on UK law as at 1st February 2010, unless otherwise stated.

The requirement under the code of duties to pay regard to six specific factors of responsible business behaviour (see: Directors' duties: Six factors that boards cannot ignore, an OUT-LAW guide) inevitably raised fears of more paperwork. If the law required directors to have regard to these six factors in reaching their decisions, and threatened consequences for them if they did not (see: Remedies where there is a breach of directors' duties, an OUT-LAW guide), then surely they’d be wise to keep detailed records of their compliance.

The government, which promoted the Companies Act 2006 as a way of cutting red tape, was keen to play down the idea. The attorney general tried to reassure: "There is nothing in this Bill that says there is a need for a paper trail … I do not agree … that directors will be subject to a breach if they cannot demonstrate that they have considered every element."

Nonetheless, directors who have to defend themselves against allegations that they ignored, say, the interests of employees or the community, will need some evidence in their favour.

An attempt at a solution to this problem was made by the GC100, a group of in-house lawyers and company secretaries at FTSE 100 companies who published guidance on the point. They argued that best practice should be for management to prepare a background paper when a board is asked to make a decision of any importance. That paper would deal with all relevant factors (and ignore any that are not). And it would then be up to the directors to read their briefing papers and to use their judgment in arriving at a decision.

That is a practical answer. Minutes do not need to reprise a lengthy boardroom debate weighing up competing factors. The proper place for a consideration of those issues is the board paper circulated ahead of the meeting. That will be good evidence that the directors have complied with their duty to consider all relevant factors.

The solution also highlights the need for management below board level, who prepare the board paper, to have an equally good understanding of directors’ duties.