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Financial Expertise Trumps Legal Knowledge for Directors

Wednesday, 12 November 2014

PwC, one of the ‘Big Four’ auditing firms, found in its 2014 annual survey of directors that only 21% of respondents believed having ‘legal expertise’ was ‘very important’ to them. Notably, directors see the need to have financial expertise as a top priority, with 93% of respondents regarding it as ‘very important’. Also sitting above legal knowledge in terms of relative importance was expertise in other areas such as human resources, racial diversity, marketing and gender diversity.

With the breadth of issues they must manage, it is understandable that directors place a number of competing interests higher up their list of priorities than legal knowledge and it is perhaps beneficial to their lawyers at the same time. However, it is still important that directors do understand some of the fundamental legal responsibilities that are inherent in their position.

Directors’ Legal Duties

The major legal responsibilities required from directors are set out in the Companies Act 2006 for which the main rules provide that:

· They must act within their powers under section 171 by complying with the company constitution.

· They must promote the success of the company under section 172.

· They must exercise independent judgment under section 173.

· They must exercise reasonable care, skill and diligence under section 174.

· They must avoid conflicts of interests between the directors and the company under section 175.

· They must not accept benefits from third parties while performing their duties as a director under section 176.

· They must declare any interests in a proposed transaction under section 177.

Reliance on Lawyers, Accountants and Company Secretaries: is it Enough?

Evidently, there are many legal responsibilities that come with being a director. Yet perhaps why many disregard the importance of legal knowledge is because they simply rely on company secretaries, accountants and lawyers to keep them in line with any legal details or regulatory requirements they are subject to.

It is important to note that although directors must generally focus on making commercial decisions for the company, it is not always practicable or appropriate to rely on professional advisers. Lawyers can help identify the legal risks associated with contractual documentation or legal aspects of directors’ decision making but in the end it is the directors that make judgements and take board decisions. That is where confidence in a variety of subjects from finance to human resources to law is vitally important.

Despite its relatively low position on the list of directors’ priorities, legal knowledge remains important but where assistance is required it is always best to seek advice from a seasoned professional.

For specialist advice in relation to corporate or commercial legal issues contact Peter Gourri today by email or telephone 0207 611 4848.

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