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Directors' responsibilities

Lawmakers must strike the right balance between ensuring that company director responsibilities are not so burdensome as to stifle entrepreneurialism and that investors and creditors are properly protected against rogue operators. But, just as importantly, they must do so with clarity.

Allowing people to run their own businesses with the protection of limited personal liability is the foundation of most modern developed economies, and it is widely acknowledged that defining clear boundaries for the responsibilities of those who manage companies is vital in encouraging innovation and entrepreneurship.

If the responsibilities - and therefore the potential personal liabilities - are too great, the risks of failure will be too high and new business opportunities will not be exploited. It is equally important, however, that investors and creditors - and other third parties - have a reasonable expectation that companies (or rather those that run them) will behave responsibly, and will not use the cloak of limited liability to engage in reckless or even dishonest practices.

A good legal system has to strike the right balance, and has to do so with clarity. As to the question of balance, there is much work to be done across Europe.

The time when directors' duties are brought most sharply into focus is when a company gets into financial difficulties, and the European Private Equity and Venture Capital Association (EVCA) has recently issued a White Paper - highlighting its own lobbying priorities - which argues for reform across Europe. In essence, EVCA argues that only directors who are found guilty of negligent or fraudulent behaviour should be precluded from involvement in further business activity, unfavourably comparing the (relatively neutral) attitudes towards bankruptcy in the US to those in most of Europe. Although this is as much about culture and social stigma as it is about legal rules, the two go hand-in-hand and reinforce each other. For that reason EVCA is right to focus on laws, which too readily assume the unsuccessful businessman to be an incompetent (or even dishonest) one.

But perhaps as important as the rules themselves, is the clarity with which they are expressed. Here the UK has been at a disadvantage: its rules are derived from both judges and parliament and are not gathered together in any one place. Recent reform proposals - which look likely to become law over the next few years - have argued strongly for a single and clear statement of directors' duties, although the duties themselves will not fundamentally change. That is clearly welcome, and long overdue.

SJ Berwin has launched a new edition of its Business Guide to Directors' Responsibilities, a pragmatic and comprehensive guide to the duties of UK company directors, with a preface by the CBI's Director General, Digby Jones.

On 16 January 2002, the firm is hosting a seminar in London to accompany the Guide, which focuses on the responsibilities - and potential liabilities - of non-executive directors appointed to sit on the boards of portfolio companies by private equity houses. To receive further details of this breakfast seminar, please send an e-mail to simon.witney@sjberwin.com.