Question

In: Accounting

Assume you have been invited to be a Director of your chosen company. As you are...

Assume you have been invited to be a Director of your chosen company. As you are new to the role (being on a Board of Directors of an Issuer) discuss the legal requirements, ethical considerations and best practice to be effective in this role of Director.

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Expert Solution

A company acts through two bodies of people – its shareholders and its board of directors. The board of directors are in charge of the management of the company’s business; they make the strategic and operational decisions of the company and are responsible for ensuring that the company meets its statutory obligations. Your role as an individual director is to participate in board meetings to enable the board to reach these decisions and make sure that the company’s obligations are fulfilled. To enable companies to grow and thrive, directors need to be both risk managers and responsible risk takers.

Following are the legal requirements of a director:-The directors of a company have a fiduciary duty to the company, the shareholders and the employees as a whole.Directors have inter alia the following statutory duties:

  • The duty to act in accordance with the articles of association of the company.
  • The duty to act in good faith to promote the objects of the company.
  • The duty of care, skill and diligence and to exercise independent judgment.

Best practice and legal requirements

  • Directors can rely on information and professional or expert advice, but only if they act in good faith, make proper inquiry and have no knowledge such reliance is unwarranted
  • A director of a company may act in the best interests of that company’s parent company (even though it may not be in the best interests of the company itself) but only if permitted to do so by the company’s constitution
  • Directors have a legal duty to exercise their powers and perform their duties with the care, diligence and skill that a reasonable director would exercise in the same circumstances. This includes taking steps to ensure you’re properly informed about the financial position of the company and ensuring you understand your responsibilities taken on behalf of the company.
  • Directors can be held liable for reckless trading, agreeing to a company incurring an obligation without reasonable grounds to believe the company can perform the obligation, and not exercising care, diligence and skill when exercising powers or performing duties

Ethical Requirements of a Director:-

  1. Confidentiality-Directors, officers and employees shall maintain the confidentiality of information entrusted to them by the Company and any other confidential information about the Company, its business, customers or suppliers, that comes to them, from whatever source, except when disclosure is authorized or legally mandated. For purposes of this Code, “confidential information” includes all non-public information relating to the Company, its business, customers or suppliers.
  2. Integrity of Records and Public Reporting.-Directors, officers and employees should promote the accurate and reliable preparation and maintenance of the Company’s financial and other -records. Diligence in accurately preparing and maintaining the Company’s records allows the Company to fulfill its reporting obligations and to provide stockholders, governmental authorities and the general public with full, fair, accurate, timely and understandable disclosure. In this regard, directors, officers and employees (where applicable) should: (a) accurately document and account for transactions on the books and records of the Company; and (b) diligently maintain reports, vouchers, bills, invoices, payroll and service records, business measurement and performance records and other essential data. Senior financial officers must also ensure that they produce, or cause to be produced, full, fair, accurate, timely and understandable disclosure in reports filed with the Securities and Exchange Commission and other public communications.

  3. Conflict of Interest.-Directors, officers and employees must ethically handle actual or apparent conflicts of interest between themselves and the Company. Any situation that involves a conflict of interest with the Company should be disclosed promptly. Employees should report the conflict of interest by bringing it to the attention of their supervisor or by calling the Chief Financial Officer. Directors and officers should bring the conflict of interest to the attention of the Chair of the Audit Committee, who may consult with inside or outside legal counsel as appropriate.

  4. Exercise independent judgment- Directors must exercise independent judgment and make your own decisions.This does not prevent you from acting in accordance with the company’s constitution or an agreement which the company has entered into.

  5. Not accept benefits from third parties-Director must not accept a benefit from a third party given because you are a director or because you do (or do not do) anything as a director. This duty is not infringed if your acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest

  6. Promote the success of the company-Director must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.Success will generally mean a long-term increase in value but fundamentally it is up to each director to decide, in good faith, whether it is appropriate for the company to take a particular course of action.

  7. Compliance with Laws, Rules and Regulations.-Directors, officers and employees shall comply with all laws, rules and regulations applicable to the Company, including insider trading laws. Transactions in Company securities are governed by the Company’s Insider Trading Policy


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