New duties from 1 October 2007

Duty to act within their powers

This states that a company director must act only in accordance with the company’s constitution, and must only exercise powers for the purposes for which they were conferred.

Duty to promote the success of the company

This duty replaces the previous duty of directors to act ‘in good faith and in the best interests of the company’.
The new principle states that a company director must act in such a way that he or she feels would be most likely to promote the success of the company (ie. its long-term increase in value), for the benefit of its members as a whole. However, the director must also consider a number of other factors, including:

• The likely long-term consequences of any decision
• The interests of company employees
• Fostering the company’s business relationships with suppliers, customers and others
• The impact of operations on the community and environment
• Maintaining a reputation for high standards of business conduct
• The need to act fairly as between members of the company.

Duty to exercise independent judgment

A director has an obligation to exercise independent judgment. This duty is not infringed by acting in accordance with an agreement entered into by the company which restricts the future exercise of discretion by its directors, or by acting in a way which is authorised by the company’s constitution.

Duty to exercise reasonable care, skill and diligence

This duty codifies the common law rule of duty of care and skill, and imposes both ‘subjective’ and ‘objective’ standards. A director must exercise reasonable care, skill and diligence using their own general knowledge, skill and experience (subjective), together with the care, skill and diligence which may reasonably be expected of a person who is carrying out the functions of a director (objective). So a director with significant experience must exercise the appropriate level of diligence in executing their duties, in line with their higher level of expertise.