The management of an organisation has a range of responsibilities bestowed on them. Below we take a look at the systems and laws that are in place to ensure that directors and officers are accountable in their role as leaders.
Directors and officers are appointed to manage all aspects of an organisation’s operations. In this respect, they have an obligation to ensure that it operates with the highest possible standards, complies with relevant legislation, and attends to appropriate housekeeping.
The importance of this is demonstrated in the recent Volkswagen diesel emissions scandal, whereby a third of the value of the company was wiped in a matter of days after it publicly announced that its cars were deliberately programmed cheat statutory environmental protection tests. This incident, in particular, has highlighted the potentially catastrophic consequences of directors and officers failing to stay informed of important matters by not adhering to robust reporting and compliance procedures.
This incident is obviously quite a special situation but it helps us to understand why management has formal responsibilities, beginning firstly with corporate governance.
Directors and officers oversee the management of an organisation by using a system of rules, practices and processes broadly known as corporate governance. Corporate governance ensures that directors and officers are fair, transparent and accountable in their dealings with an organisation’s stakeholders.
Corporate governance is important because stakeholders, by definition, are affected by an organisation’s activities, and therefore, are interested in the way it is managed. From an organisation’s perspective, effective corporate governance goes a long way to ensure that its management team is well informed about ongoing operations and that they are considering the effects of their actions on others.
Representing an organisation
One of the underlining principals of corporate governance is the fiduciary relationship that exists between the management of an organisation and the organisation itself. In this respect, directors and officers are appointed to make decisions on behalf of an organisation, and therefore, have a fiduciary duty to act and in the sole interests of the organisation.
A classic example of a fiduciary relationship is that between a lawyer and their client. A person engages a lawyer because they require advice on the law, a subject in which they are unfamiliar. A lawyer is considered to be an expert in matters of the law, and therefore, their client relies that the advice provided be accurate, free of bias and conflict of interest.
In much the same way, directors and officers owe a fiduciary duty to organisations they manage and are required to place the interests of the organisation ahead of their own.
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When managing the affairs of an organisation, directors and officers are required to perform their role with the greatest standard of care. In addition to fulfilling their fiduciary duties, the responsibilities inherited by management are often formalised in common law, civil law, socialist law and sometimes religious law.
These laws typically outline a director’s duties, as being a series of obligations for which all directors and officers must comply. Directors’ duties aim to provide leaders with a clear framework of what is expected of them, by an organisation and its stakeholders. The specific duties imposed on directors and officers vary between jurisdictions, however, a number of common themes exist.
In essence, the following core responsibilities must be fulfilled:
Duty to act with care, skill and diligence
Directors and officers are required to use reasonable care, skill and diligence in carrying out their duties. A basic level of managerial competence is required from all executives while a higher standard of care is expected from individuals with special skill or experience.
Duty to act in good faith & for a proper purpose
Executives must act in good faith and perform their duties in a way that best promotes the success of an organisation. By acting in good faith, directors and officers are required to operate with sincere and honest intentions, and for a proper purpose.
Duty to act within powers
Directors and officers are required to act in accordance with an organisation’s constitution and should not act outside their authority or use their powers for purposes for which they were not intended.
Duty to avoid conflicts of interests
Directors and officers must not place themselves in a position where there is a conflict, or possible conflict, between the duty they owe to an organisation and their own interests. Specifically, this applies to any situation where an executive could personally benefit (or profit) from exploiting property, information or other opportunities relating to an organisation’s activities.
Dealing with conflicts of interest: While obviously not ideal, conflicts of interest do arise from time to time. In these situations, the affected executive is required disclose their conflict of interest to the board of directors, who will then take this information into consideration when making their decisions.
Duty not to misuse position or information
Directors and officers have a duty not to share confidential information that they acquire as a result of their position. Information may be regarded as confidential when it is not in the public domain, is considered worthy of protection, and that the disclosure of such information could be to the detriment of the organisation or its stakeholders.
Duty to exercise independent judgement
Directors and officers are required to place themselves in a position where they can make informed and independent judgement. In this, they must remind themselves that they exist to represent the interests of the organisation, and not just one, or even a group, of like-minded stakeholders.
Duty to not to trade while insolvent
Management must have a complete understanding of an organisation’s financial position, and ensure that it does not trade whilst insolvent. To satisfy this, directors and officers must not allow an organisation to continue to trade, or incur further debts, with the knowledge that the debts cannot be paid when they become due.
To ensure the successful operation of an organisation, management is required to abide by its corporate governance standards, as well as fulfilling their fiduciary and directors’ duties. A failure to comply with these responsibilities can result in unhappy stakeholders, and leave directors and officers facing the risk of being held personally accountable for their actions.