Legal guide for company directors and CEOs in the UK

Because environmental, social and governance (ESG) is such an increasing focal point of good corporate governance, we address ESG duties and responsibilities first. For more general duties and responsibilities of directors and CEOs, please scroll down the page or use the navigator to jump to the relevant section. 

Yes - as part of their overriding duty to promote the success of the company, directors must have regard to a number of “stakeholder factors”, including the following:

• likely consequences of any decision in the long term;
• interests of the company’s employees; and
• impact of the company’s operations on the community and the environment.

These factors therefore directly reference the environment and the welfare of employees, but the requirement to consider the long-term consequences of decisions means that matters of sustainability, and the long-term success of the company, should be at the forefront of directors’ minds.

As ESG issues attract increasing attention and director remuneration is increasingly linked to those issues, there is greater pressure on directors to prioritise those considerations when discharging their duties.

Besides their general directors’ duties, there are a number of other laws and regulations applicable to companies and their directors which relate to ESG considerations. These include direct obligations such as those under health and safety legislation, requiring companies and their directors to ensure that the company is operating safe working practices, environmental, product stewardship and chemicals regimes, and anti-bribery legislation imposing potential criminal penalties on companies and their directors if they employ bribery or corruption in the operation of the business or for their failure to prevent such practices.

Specific regulatory regimes which impose additional obligations and duties on directors also exist, particularly for directors of businesses operating in certain highly regulated sectors or undertaking highly regulated activities. Failure to comply with those additional duties may impose criminal liability upon individual directors if the director’s consent, complicity or neglect contributes to an offence being committed by a body corporate or the circumstances which result in an offence being committed.

Directors will also need to be mindful of the increasing focus on anti-greenwashing measures, captured within existing regulations aimed at protecting consumers from misleading marketing and regulatory codes issued by regulators such as the UK Competition and Markets Authority (CMA) or the Advertising Standards Authority.

There are also reporting obligations as noted below which seek to promote high standards of ESG compliance by making information regarding the company’s performance more readily available to stakeholders. These legal obligations are supported by an increasing number of corporate governance requirements, particularly for listed companies. For example, the UK Corporate Governance Code sets out best practice for companies in respect of corporate governance and protecting shareholder interests, and includes ESG requirements such as an emphasis on diversity in the composition of the board. There are also industry-specific obligations for certain classes of company such as financial market participants and energy companies.

There has been no recent concrete change with respect to the general duties of directors, as these already encompass ESG considerations to the extent that those considerations are relevant to the long-term success and sustainability of UK companies. However, there is a continuing trend to introduce specific obligations with respect to ESG matters. For example, UK premium and standard listed companies and issuers of global depositary receipts representing equity shares are now required to report on climate-related matters on a “comply or explain” basis by reference to the framework promulgated by the Task Force on Climate-related Financial Disclosures. The UK’s Financial Conduct Authority (‘FCA’) has indicated that it expects to consult in the future on a requirement to make reporting mandatory by removing the option to “explain” any non-compliance.

UK and overseas premium and standard listed companies are also required to include within their annual report, on a “comply or explain” basis, statements as to the achievement of certain targets for women and ethnic minority representation on the board of directors.  

As the UK focuses on trying to meet its stated commitments to reduce carbon emissions, we can expect a range of further rules and regulations which are designed to change the behaviour of private sector companies. These will create an additional burden for directors who are responsible for ensuring ESG compliance. For example, for financial years starting on or after 1 January 2024, directors of UK companies that are listed on EU regulated markets or those with subsidiaries or branches in the EU may need to consider whether they are required to (or should, from a reputational perspective) comply with non-financial sustainability reporting in line with the EU Corporate Sustainability Reporting Directive, which is more onerous than current UK rules given reporting will be required to be made based on a double (impact and financial) materiality basis and will be subject to third party audits. Directors of large UK public interest companies may also need to consider whether they wish to comply with the Taxonomy Regulation and Article 8 reporting requirements which would require statements to be included within their non-financial statement as to how and to what extent their company’s economic activities are associated with environmental sustainability. In addition, as part of the UK government’s commitment to achieve net-zero greenhouse gas emissions by 2050, it has established the Transition Plan Taskforce which has published various sector neutral and sector specific disclosure frameworks and guidance, aimed at creating a ‘gold standard’ for private sector climate transition plans, as well as informing the direction of any further enhancements required for listed company disclosures.

The disclosure and reporting obligations for directors in relation to ESG matters vary according to the size and nature of the company, the sector in which it operates, its activities and other factors. Some of the key obligations currently in place are as follows:

• Unless they qualify as small companies, UK companies are required to prepare a strategic report as part of their annual report and accounts, which broadly focuses on the disclosure of future strategy for the company and the key risks that it faces. For quoted companies, the strategic report must include information on environmental matters and policies, including the impact of the company’s business on the environment; employees; and social, community and human rights issues.
• For companies which are traded companies, as well as banks and insurance companies with more than 500 employees, the strategic report must contain information on environmental, employee, social, human rights, anti-corruption and anti-bribery matters. This includes details on the company’s business model, policies in relation to these matters and their outcomes; due diligence processes; the principal risks and impacts of the company’s business on such matters and how they are managed.
• In addition, unless the company qualifies as a medium-sized company, the strategic report must include a stand-alone “Section 172 Statement” which describes how the directors had regard to certain matters when carrying out their duty to promote the success of the company. This therefore requires companies to be open and transparent about their decision-making, with particular reference to the ESG stakeholder factors noted above.
• Companies with 250 or more employees must publish specific figures about their gender pay gap. In addition, listed companies with over 250 employees must also publish pay ratio information, comparing the pay of their CEO to the median, lower quartile and upper quartile pay of their UK employees.
• A company with a turnover exceeding GBP 36 million must publish a modern slavery statement, describing the actions it has taken to deal with slavery and human trafficking risks in its supply chain as well as in its own activities.
• Larger companies must disclose information on their carbon emissions and energy efficiency in their annual directors’ report. They must also include information in that report on how the directors have engaged with employees, and how they have had regard to the interests of employees and the interests of the company’s suppliers and customers during the relevant year.

Directors of most companies must also be mindful that any such reporting or disclosures need to comply with statutory and regulatory restrictions on communicating or advertising misleading claims regarding a company’s sustainability credentials or activities, failing which the CMA has authority to investigate. Directors of firms which are authorised by the FCA must also ensure compliance with the FCA’s new anti-greenwashing rules which require any claims regarding the sustainability of such firms’ products and services to be fair, clear and not misleading.

It is also possible for derivative claims to be brought by shareholders against company directors for breach of directors duties (see paragraph 13 below). A recent case  involved allegations that directors were mismanaging a company’s ESG related risks – while the court there did not grant permission for the claim to continue legally, the mere fact that such a claim is brought is likely to be highly publicised and may carry adverse reputational consequences. 

In addition, a series of court judgments involving ESG related matters, including the welfare of employees of overseas subsidiaries and environmental pollution caused by the actions of overseas subsidiaries, have held that while companies in a group are treated as separate legal entities, in some circumstances UK based parent companies (and their directors) may be found liable for the acts or omissions of their subsidiaries, including those located overseas. Factors which might be taken into account in coming to such a conclusion may include the degree of management, oversight or control exercised by the parent company over the overseas subsidiary, which could include any controlling features inherent in shared systems or group wide policies. Individual directors and boards should therefore be mindful to exercise their duties with the same degree of care regardless of whether those duties are in respect of a UK or an overseas entity. 

In the UK, companies have a single board, rather than a separate management board and supervisory board.

The board of a UK company may comprise both executive directors and non-executive directors. This guide concentrates on the rules applicable to executive directors; that is, directors who have an executive role within the company. However, in general, the law does not distinguish between executive and non-executive directors. Consequently, much of the information in this guide will apply equally to non-executive directors.

There are few restrictions on who can become a director. In particular (unless the company’s constitution requires it):

• an individual director is not required to be resident in the UK, and there is no nationality requirement (although for tax purposes, some companies may include a provision in their constitution as to the residency status of some or all of the directors);
• a public company must have at least two directors but a private company need not have more than one;
• whilst a sole director in a private company may also be a company secretary, the same individual cannot purport to act as both director and secretary at the same time/in relation to the same function. While a private company need not have a company secretary, a public company must appoint one;
• a director may be appointed to the board of more than one company (however they will owe the same general duties to each company and will need to observe the conflict rule explained below);
• a director does not need to be an employee of the company; and
• a director does not need to hold any shares in the company.

At the date of this guide, another company - whether incorporated in the UK or elsewhere - can be appointed as a director as long as at least one director is a natural person, but as part of reforms currently in the course of being implemented, corporate directors are to be banned except in certain cases. Only corporate entities with “legal personality” will be properly appointable as corporate directors, and their own directors will have to be natural persons who have been subject to an appropriate identity verification process. Only UK registered entities will be capable of being appointed a corporate director.

A director is required to disclose personal details to the company to be kept on a register of directors, including their full name and previous names, nationality, date of birth, usual residential address and a service address (which may be the company’s registered office). This information will also appear on the public register at Companies House, with the exception of (i) the director’s residential address and (ii) the day (but not the month or year) of the director’s birth, which are protected from public disclosure. Under new rules currently in the course of being implemented, directors will not be permitted to act as directors until their identity has been verified in accordance with vetting procedures to be introduced.

It is necessary to distinguish between appointment as a director and appointment as an executive, since each is legally a separate matter. The method for appointment of a director is determined by the constitution (that is, the articles of association) of the company, and in some cases by a separate shareholders’ or investment agreement. However:

• a director can normally be appointed either by the existing directors, or by resolution of shareholders; 
• in the case of a subsidiary, the parent is sometimes permitted to make an appointment by written notice to the company;
• notification of the appointment, authenticated by the director, must be filed with Companies House within 14 days of the appointment. No fee is payable for this. However, following implementation of the new legislation noted above, every director currently registered with Companies House will be required to complete a one-time identity verification process, and any first-time directors thereafter will be required to do so within 14 days of being appointed. A fee may be payable in connection with that process. Acting as a director without verification will result in a statutory offence being committed;
• the minimum number of directors is one (or such higher number as is prescribed by the articles of association;
• there is no maximum number of directors unless a maximum is prescribed by the articles of association.

For private companies, appointments are generally made on an open-ended basis, and not for a fixed term, as the term will be a function of the related contractual relationship. If desired, the articles of association can provide for fixed term appointments, with the option of reappointment at the end of the term.

Appointment as an executive director involves the creation of an additional contractual relationship. The forms which this can take are discussed below. This aspect of the appointment is normally a matter for the board.

Persons who have not been formally appointed but who in reality act as directors can be liable in the same way as directors who have been formally appointed. Also, persons in accordance with whose instructions or directions the board is accustomed to act can have certain obligations as “shadow directors”, especially if the company goes into insolvent liquidation. These obligations will include the general duties owed by directors (see below), where and to the extent they are capable of applying.

A director may resign their office at any time by notice to the company (although this may constitute a breach of their employment or consultancy contract). A director is always subject to removal by resolution of shareholders under a statutory procedure, which gives the director the right to protest. The articles of association (particularly in the case of a wholly-owned subsidiary) will often permit the parent company to remove a director by notice to the company, and will often provide that a director may be removed on the occurrence of certain events (such as in the event of bankruptcy, serious illness, or prohibition by law). It is unusual for directors to be able to remove one of their number from the board, although the board may resolve to terminate the director’s service contract, which might require the director’s immediate resignation as a director on termination. If directors are appointed for a fixed term, or are required to seek reappointment periodically, their appointment will terminate if they are not reappointed at the relevant time. The resignation or removal of a director must be notified to Companies House within 14 days of the cessation of their appointment.

As an internal matter, unless approved by the board (for example, by the delegation of powers to a managing director, or by the passing of a specific resolution), no director is entitled to commit or act on behalf of the company. In practice, directors are usually granted a level of delegated authority consistent with their role in the company. In particular, a managing director will have certain powers delegated to them by the board - sometimes these powers are almost as wide as those of the board itself. No separate filing is necessary in connection with the appointment of a managing director.

As regards third parties, a director will be regarded as having ostensible authority to bind the company in relation to transactions governed by English law, even if they have no actual authority to do so.

Consequently, a director acting without proper authority (and therefore in breach of their duties) may nevertheless cause the company to become liable to a third party, but not if the third party knows that the director is not authorised.

Generally, a company is permitted considerable flexibility regarding the operation of the board. All directors must be given notice of each meeting, although there are no specific requirements as to the form this should take, unless the company chooses to prescribe rules in its articles. Some companies’ articles provide that notice need  not be given to a director who is out of the country. This will often be inappropriate and can be changed. It is generally accepted that (unless prohibited by the articles) a board meeting may take place electronically such as by telephone or video link.

The articles usually permit the board to delegate most of its powers to committees, which may include non- directors, although this is unusual. Typically, such delegation is for specific purposes - for example, to allow the efficient handling of a crisis or a specific M&A transaction.

The articles of association often allow directors to appoint alternates - that is, a person (including, but not necessarily, another director) who can act as a director in the appointor’s absence. The alternate is regarded as a fully-fledged director (and, for example, is subject to the same disclosure requirements as a director and while acting as alternate owes the same duties to the company as a director does).

Appointment as a director does not of itself constitute a contract with the company. The articles of association will generally permit a director to receive remuneration on terms agreed by the board and to reimbursement of expenses. An executive director will also have a contractual relationship with the company:

• as an employee under a service agreement, or as a consultant providing services under a consultancy agreement; or
• through a company or firm which contracts with the company to provide the director’s services.

The tax treatment of these options is different in each case. Broadly, shareholder approval is required if the agreement gives the director a guaranteed term of more than two years (unless the company is wholly owned by another corporation). Termination of any such contract will not automatically terminate the directorship (although the contract may require that the director resigns in such circumstances). Termination of the directorship may constitute a breach of the related agreement.

It is important that directors realise - especially if they have other business interests - that it is not a simple matter to shift between roles and that their duties to the company will generally apply even when they are not specifically “wearing their director hat”. The Companies Act 2006 imposes duties relating to conflicts of interest: to avoid actual or potential conflicts of interest (especially in relation to the exploitation of property, information or opportunities that come to them by virtue of their role); not to accept benefits from third parties; and to declare any interest in a transaction or arrangement that the company proposes to enter into. A director must also declare their interest in an existing transaction or arrangement of the company, if not declared before it was entered into. As a rule, no breach will occur where the conflict is authorised by non-conflicted directors or by shareholders, or the relevant interest is appropriately declared, but the authorisation or the articles of association may impose restrictions that prevent the conflicted director from taking part in decision-making as regards the matter giving rise to the conflict.

In addition to the duties of directors as regards conflicts of interest, the Companies Act 2006 imposes a number of other general duties on directors: to act within their powers; to promote the success of the company; to exercise independent judgement; and to exercise reasonable care, skill and diligence. Of these, the duty to promote the success of the company is usually seen as the most fundamental. It requires a director to act in the way that the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so to have regard (amongst other matters) to:

• 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; 
• and the need to act fairly as between members of the company.

Directors are also subject to a wide range of statutory duties (for example, health and safety duties, anti-bribery obligations and other ESG driven requirements) and specific duties under the Companies Act 2006 (such as the duty to keep accounting records). There are also restrictions on certain dealings between the company and its directors (and persons connected with them), such as sale and purchase transactions, and loans to directors.

The director’s duties are owed to the company itself, rather than to its shareholders. In practice, when the company is solvent, this means acting in the best interests of the shareholders as a whole.

If the company is insolvent, or insolvency is imminent, or if the directors know or ought to know that insolvent liquidation or administration is probable, the duty to promote the company’s success means that, as well as looking to the interests of shareholders as a body, the directors must take due account of the interests of creditors as a body. There is a sliding scale: the worse the company’s financial difficulties become, the more important it is to consider the creditors. Once insolvent liquidation or administration is inevitable, the creditors’ interests exclude the shareholders’ interests entirely. The liquidator of an insolvent company has the power to review the conduct of the directors in the period leading up to the insolvency. Under s214 Insolvency Act 1986, a director of a company in insolvent liquidation may be ordered to make a contribution to the company’s assets if, at a time prior to the winding up of the company, they knew or ought to have concluded that there was no reasonable prospect that the company would avoid insolvent liquidation or insolvent administration. This is known as “wrongful trading”. A director may have a defence against a claim for wrongful trading if they took every step with a view to minimising losses for creditors.

A liquidator may also bring an action against the directors of an insolvent company in respect of fraudulent trading, misfeasance or breach of fiduciary duty, and therefore directors of a company in financial difficulties should be mindful of these potential risks.

As soon as the directors are aware that a company is in financial difficulty, they should seek external advice.

Directors owe their duties to the company and are therefore potentially liable to the company itself in respect of any breach of those duties. However, directors will not generally incur direct liability to individual shareholders. Most of the general duties under the Companies Act 2006 are fiduciary duties and as a result a director in breach may be liable to compensate or account to the company without the company having to prove a loss. As well as being liable to fines and other penalties for breaches of various statutory duties and offences (for example, under the Bribery Act 2010), directors can also be personally liable to the company in other ways, such as for making unlawful distributions of the company’s assets. It is also possible for directors to assume personal liability to third parties if the circumstances show that they held themselves out as doing so, or if they led the third party to believe that they had authority to act on the company’s behalf when in fact they did not.

As described above, the directors of a company which is threatened with insolvency must take the interests of creditors into account when carrying out their duties to the company. The key areas of liability of the directors of an insolvent company include:

• wrongful trading: if the company goes into insolvent liquidation, the directors can be ordered to contribute to the company’s assets where losses are increased as a result of their failure to stop the company from trading when there was no reasonable prospect of it avoiding the liquidation;
• fraudulent trading: if the directors carry on the business of the company with the intention to defraud creditors (including potential creditors) of the company or creditors of any other person or for any fraudulent purpose will be personally liable to contribute to the company’s assets;
• misfeasance: a liquidator, a creditor or a shareholder can recover money or damages from the directors of a company who have misapplied, retained or become liable or accountable for any money or property of the company, or have been guilty of misfeasance or breach of fiduciary or other duties in relation to the company.

A disqualification order may be made by the court against a director (or shadow director) of a company that becomes insolvent, if the director’s conduct as a director makes them unfit to be concerned in the management of a company. A disqualified director must not, without leave of the court, be a director of a company or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company for a specified period beginning with the date of the order.

There is a statutory regime for derivative claims, enabling members, subject to the court’s permission, to require action to be brought on behalf of the company against directors who are or have been in breach of their duties or have been negligent. In the case of private limited companies, the risk of legal action against directors for breach of duty is likely to arise only in the event of the company’s insolvency.

Generally, directors should actively manage risks by taking into account the following checklist:

• Training: Refresh awareness of general directors duties and any specific additional duties by undertaking training on directors’ duties and responsibilities on at least an annual basis.
• Engagement: Engage regularly with shareholders and stakeholders of the business, particularly regarding the activities of the business or its directors which relate to areas of heightened risk or public interest.
• Preparation: Keep abreast of the issues relevant for the company and its stakeholders, including the most topical risks relevant to the business and its directors, by diligently reading board papers, proactively asking questions, and consider seeking professional advice or assistance if necessary. 
• Meetings:  Ensure the board meets regularly and consistently and clearly documents board decisions, including the circumstances surrounding any issues discussed by the board, the factors which contributed to the decisions made and the substance of any professional advice obtained at the time.

A company is also permitted to purchase directors’ and officers’ insurance on behalf of its directors, and it is usual for such insurance to be put in place. In addition, a parent company may be able to provide a more extensive indemnity to the director than the company itself.

In addition, subject to certain restrictions , companies may grant indemnities to their directors in respect of certain third party liabilities in a civil action (such as damages, costs and interest)  as well as defence costs as the action proceeds, even if judgment is given against that director.

A company cannot indemnify a director for their liability to the company itself where judgment is given against the director, and directors cannot be indemnified for fines in criminal proceedings or penalties imposed by regulators, or the costs of defending criminal proceedings where the director is convicted. Although a company may agree to lend funds to a director for defending a claim by the company itself or any criminal proceedings, the loan must be repayable immediately if judgment is given against the director or they are convicted.