Directors’ cut
“The new IoD Code of Conduct for Directors establishes the standard for good industry practice, requiring directors to review the actions they take in fulfilling their role as well as how they go about it. There are several practical measures that executive and non-executive directors can take to comply with best practice for responsible business in their own companies and to support compliance across their supply chains. ”
Company directors are subject to 7 basic statutory duties, as set out at sections 171 – 177 Companies Act 2006: a duty to act within their powers; a duty to promote the success of the company; a duty to exercise independent judgement; a duty to exercise reasonable care, skill and diligence; a duty to avoid conflicts of interest; a duty not to accept benefits from third parties; and, a duty to declare any interest in a transaction or arrangement. The duty to promote the success of the company at section 172 Companies Act 2006 indicates that, directors must have regard to factors including 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.
While the Financial Reporting Council’s UK Corporate Governance Code establishes principles and internal controls for listed companies which must report under the Listing Rules on a comply or explain basis, and is supported by UK Corporate Governance Guidance, when it comes to individual directors fulfilling their statutory duties, directors have little guidance.
High profile corporate scandals, such as the Post Office Horizon IT scandal, as well as criticisms of companies for placing immediate shareholder returns over investment to secure long-term sustainability, comply with legal and regulatory obligations or deliver business resilience, have served to undermine public trust and confidence in companies and their directors. Against this backdrop, in June 2024 the Institute of Directors consulted on a draft voluntary Code of Conduct for directors to promote high business standards.
On 23 October 2024, the Institute of Directors launched its Code of Conduct for Directors. While the Code is voluntary, as an expression of good industry practice which is stated to reflect “values that are already adopted as a matter of course by most responsible business leaders”, it could well form a benchmark against which shareholders, regulators and even the courts could assess directors’ conduct. It is also suggested that the Code could be of relevance to other organisational leaders, such as charity trustees.
The IOD’s recommendations for what constitutes best practice for directors are comprised of six principles of director conduct, inspired by the Principles of Public Life or Nolan Principles, each underpinned by several undertakings. Changes reflected in the final version of the Code of Conduct for Directors compared to the draft which was the subject of consultation are underlined.
Principle 1: Leading by Example
Demonstrating exemplary standards of behaviour in personal conduct and decision-making.
Exhibit high standards of personal conduct and professionalism.
Consider the impact of my behaviour on employees, fellow directors and other stakeholders.
Avoid behaviour which might adversely affect the reputation of my organisation, or which contradicts its values.
Treat everyone with respect, dignity and consideration, and demonstrate concern for their wellbeing and mental health.
Devote sufficient time and attention to my role as a director.
Strive to develop my own competency through continuing professional development and encourage that in others.
Principle 2: Integrity
Acting with honesty, adhering to strong ethical values, and doing the right thing.
Comply with the letter and spirit of applicable law and be willing to cooperate fully with regulatory authorities.
Deal honestly with all parties.
Place the interests of the organisation and its societal impact above my personal interests.
Be alert to perceived conflicts of interest and manage them when they arise.
Voice constructive challenge and disagreement on matters of concern.
Challenge words, behaviour or attitudes that fall below expectations.
Adhere to collective responsibility for agreed decisions.
Be prepared to resign from the board if a matter of conscience, judgement or good governance cannot be remediated through good business practices.
Safeguard confidential information unless appropriate disclosure has been authorised, and not make improper use of information.
Principle 3: Transparency
Communicating, acting and making decisions openly, honestly and clearly
Be open and transparent to the rest of the board and relevant stakeholders in respect of anything that might be perceived as affecting my objectivity (such as a conflict of interest).
Promote an open business culture which does not cover up wrong-doing or mistakes.
Encourage the adoption of ‘speak up’ mechanisms which enable employees and other relevant stakeholders to report concerns about any misconduct or actions that are not aligned to the organisation’s values.
Ensure that all communications with stakeholders are undertaken in a straightforward and accessible manner, providing accurate, relevant and timely information.
Be candid with stakeholders about the limits of transparency (such as when information is of a commercially sensitive nature or subject to legal restriction).
Principle 4: Accountability
Taking personal responsibility for actions and their consequences.
Comply with my legal duties to the organisation, take personal responsibility for my actions and share collective responsibility for the decisions of the board.
Be open to feedback and, where applicable, make improvements based upon that feedback.
Oversee and hold the organisation to account in respect of its performance and embodiment of the organisation’s values.
Understand the legitimate expectations of shareholders and other relevant stakeholders and engage appropriately with them.
Seek independent advice on matters of concern at an early stage and, where appropriate, call for action to protect the interests of creditors if the organisation is struggling financially.
Reflect on whether I have the knowledge and skills required to fulfil my role as a director and, if any material gaps cannot be remedied through appropriate training, decline to serve on a board.
Principle 5: Fairness
Treating people equitably, with no discrimination or bias.
Make decisions as objectively as possible and be alert to the risk of bias or groupthink.
Recognise and respect the legitimate interests of relevant stakeholders – including customers, employees, investors and suppliers.
Promote equality of opportunity in all business activities.
Encourage the fair treatment of suppliers and customers.
Champion diversity of thought, by being open to differing ideas and views.
Engender an inclusive culture where all employees can bring their best selves to work, and in which concerns they raise will be investigated without fear of adverse consequences.
Share credit with those contributing to successful outcomes, and provide constructive feedback where performance does not meet expected standards.
Advocate for reward and recognition structures that are fair, encourage ethical behaviour and support a longer-term perspective.
Principle 6: Responsible Business
Integrating ethical and sustainable practices into business decision-making, taking into account societal and environmental impacts.
Consider the consequences of my decisions for society, communities and the environment.
Manage risk in a responsible manner and avoid prioritising the short-term financial interests of shareholders over the longer-term resilience and strategic objectives of the organisation as a whole.
Promote high business standards across the supply chain, particularly with regard to employment conditions and environmental impact.
Ensure that artificial intelligence and other technological innovations are utilised by the organisation in an informed and responsible manner.
Reject corrupt business practices.
Advocate for an organisational culture which values diversity and inclusion.
While many of the undertakings relate to ways of working, compliance with Principle 6: Responsible Business in particular requires directors to address what they do, not merely how they do it.
Practical measures that executive and non-executive directors can adopt to comply with the undertakings under the responsible business principle include:
Establishing factors to be taken into account throughout the organisation in decision making, including the environmental and wider social impact and contribution to achieving the company’s objectives;
Conduct/requesting that management conduct equality impact assessments, community impact assessments and/or human rights impact assessments (as appropriate) and that the outcomes of these be included in board papers detailing options and proposing recommendations;
Conduct/requesting that management detail the environmental impact of recommendations and assess and detail whether alternative more environmentally friendly and/or sustainable options are available and the cost implications of those options in board papers;
Providing/requesting periodic reporting on risk areas including cyber risk, legal and compliance risk, people risk, third party risk and reputational risk and monitoring implementation of identified mitigations;
Conducting a review of the company’s anti-bribery and corruption programme, including its whistleblowing processes and protections;
Reviewing and implementing/requiring the implementation of procurement processes and standard terms and conditions of trade with third party suppliers that require the implementation and disclosure of policies and procedures on anti-bribery and corruption, cyber security, business resilience, minimum and/or living wage compliance, environmental protection and sustainability;
Ensuring the company supports third party suppliers, particularly micro-organisations and SMEs, to meet their obligations through the provision of training and knowledge sharing and opportunities for certification;
Review the organisation’s policy on artificial intelligence (AI), ensure staff receive training on the use of AI and that an AI governance programme is in place; and,
Promote fair recruitment practices and require completion of training for all recruitment panel members and managers at all levels throughout the organisation.
Download our Helping Hand primer on directors’ statutory duties and the Institute of Directors’ voluntary code of conduct for directors.
Review and implement our Helping Hand checklist on deploying artificial intelligence (AI) responsibly, safely and ethically.
Should you require support in understanding your obligations as a director, or in working with your organisation to establish a governance framework that enables you to comply with your statutory directors’ duties and the best practice established in the Institute of Directors’ voluntary Code of Conduct for Directors, please contact us.
Find out more about our ESG and human rights services.