The Institute of Directors(“IOD”) has recently announced its plans to introduce a code of conduct for directors to rebuild public trust in businesses. The plans follow in the wake of recent headline-making scandals at Carillion, BHS and P&O Ferries.
The proposed code would be voluntary which would automatically weaken its effectiveness, particularly when bearing in mind a survey of IOD members showed only 21% would support a voluntary code compared to 58% backing a mandatory code. However, the IOD states it believes a mandatory code would produce “a counterproductive focus on compliance” rather than allowing directors to focus on running the company.
The draft code released by the IOD focusses on nine key principles ranging from the directors personal conduct, a pledge for businesses reducing their carbon footprint as well as directors understanding their duties as directors. We have long believed that before any individual is appointed as a director they should pass a basic “director theory test” (akin to the driving test) so that directors know their basic duties and are aware of facts including:
- The difference between their property and that of the company.
- Exercising independent judgement and acting with reasonable care and skill – abdicating responsibility to other directors is not acceptable.
- Avoiding conflicts of interest.
Perhaps the most important is to recognise when the company is insolvent and how their duties change. Indeed, one of the points from the draft IOD code is “Maintain the financial viability of my organisation and, if that is no longer possible, take appropriate action to protect the interests of creditors”. When directors become aware their company is insolvent and cannot pay the debts when they fall due, they should seek advice as soon as possible to protect their position. In endorsing the IOD code, it cannot be a coincidence that many of the directors who find themselves under the threat of personal liability are, invariably, those who unwittingly breach their duties due to a lack of knowledge.
If you require any advice or assistance on any insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss and advise on your situation on 01604 212150 or email to email@example.com.