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Consultation Paper on Code of Conduct for Directors

July 03, 2024

The Institute of Directors (IoD) has published a consultation on a new, voluntary, code of conduct for directors. In this note we consider the aims of the code, the framework, the undertakings that directors may be asked to sign up to and the potential pitfalls.

The purpose of the Code is to help UK business win back that trust by embedding the values that are already adopted as a matter of course by most responsible business leaders. It is meant to offer a roadmap that can help individual directors make the right decisions for themselves and their organisations, often in the face of complex challenges and trade-offs. It is hoped that the Code may serve as a useful tool that directors can refer to when asking themselves the question: what would a responsible director do in this situation? However, our view is that it is essentially seeking to codify the Nolan Principles of Public Life, and the undertakings that directors are being asked to provide may prove helpful to potential claimants in employment tribunal litigation.

The introduction to the Code explains that the role of the director is associated with specific legal and regulatory responsibilities, including the general legal duties defined in the Companies Act 2006. The Code does not seek to add to these legal obligations. Nor is it associated with a formal enforcement mechanism. Rather, it is meant to set a bar for director conduct beyond the legal baseline as a means of enhancing the legitimacy and reputation of directorship in the eyes of society and stakeholders.

The Code represents a voluntary commitment and is not intended to hold back directors or create a new burden of compliance. Most of the undertakings contained within the Code are matters of common sense. The Code aims to help directors to fulfil their responsibilities by providing a clearly articulated statement of what good conduct looks

The Code Framework

The Code is structured around six key Principles of Director Conduct (‘Principles’). These Principles are inspired by the Seven Principles of Public Life (also known as the Nolan Principles), first published in 1995 by the Committee on Standards in Public Life.

Principles of Director Conduct:

  1. Leading by example: Demonstrating exemplary standards of behaviour in personal conduct and decision-making. Integrity:
  2. Acting with honesty, adhering to strong ethical values, and doing the right thing.
  3. Transparency: Communicating, acting and making decisions openly, honestly and clearly.
  4. Accountability: Taking personal responsibility for actions and their consequences.
  5. Fairness: Treating people equitably, without discrimination or bias.
  6. Responsible business: Integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts.

Each Principle is underpinned by a number of specific Undertakings. By applying the Principles and fulfilling the Undertakings, directors are well placed to achieve the positive outcomes. We set out each principle below.

Undertakings

Principle 1: Leading by example

As a director, I undertake to:

  • 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.
  • Devote sufficient time and attention to my role as a director.
  • Strive to develop my own competency and encourage that in others.

Principle 2: Integrity

As a director, I undertake to:

  • 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

As a director, I undertake to:

  • 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.
  • Communicate with stakeholders in a straightforward and accessible manner, providing proactive, relevant and timely information.
  • Be candid with stakeholders about the limits of transparency (such as information of a commercially sensitive nature).

Principle 4: Accountability

As a director, I undertake to:

  • Comply with my legal duties to the organisation, fulfil my delegated responsibilities, and take personal responsibility for my actions.
  • Be open to feedback and, where applicable, make improvements based upon that feedback.
  • Oversee and hold management to account.
  • 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, where appropriate, decline to serve on a board.

Principle 5:  Fairness

As a director, I undertake to:

  • Make decisions on an objective and evidence-based basis.
  • 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.
  • Promote 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.
  • 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

As a director, I undertake to:

  • Consider the consequences of my decisions for society, local communities and the environment.
  • Avoid prioritising the short-term financial interests of shareholders above the longer-term interests of the organisation as a whole.
  • Promote high business standards across the supply chain, particularly with regard to employment conditions and environmental impact.
  • Reject corrupt business practices.
  • Advocate for an organisational culture which values diversity and inclusion.

Our View

It is correct that many of the aspects of the Code are common sense, and one would expect that directors would carry out. We support the idea of providing guidance to directors in navigating difficult decisions. However, we consider that it might be helpful to do that by providing an advice line, or free guidance on specific topics.

Our view is that whilst the Code has not been designed to add to the regulations which already apply to directors, if a director signs the undertakings then the commitments given could prove helpful to claimants as part of any litigation – especially in the employment tribunal. Indeed, it would be almost a dream cross examination question to ask a director who has signed up to the Code of conduct, and what they understood by the undertakings which they signed up to. For example, regarding employment conditions, environmental conditions and how they advocated for an organisational culture which values diversity and inclusion.

The material contained in this article is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© Miller Rosenfalck LLP, July 2024