What it means to be a good director — business.govt.nz

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What it means to be a good director

As a director of your company, you need to know everything you’re responsible for. This includes typical tasks and legal duties. As well as staying out of trouble, being a good director will help your company run well, stay afloat, and keep a good reputation.

Quiz

Assess your director skills

If you’re a director of your company, you’re responsible for a wide range of things. Take this quiz to test your understanding of your duties.

If you own a company, you have at least one director. It could be you.

If you own a company, you have at least one director. It could be you.

Who is a director

A director is someone who’s responsible for leading and overseeing a company. As a director, you have a set of legal and ethical duties and also a range of important tasks you’re expected to do.

Every registered company must have at least one director. You need to tell the Companies Office who your directors are and provide accurate details about them. The director must agree in writing to be a director and have their name (and other details) recorded on the Companies Register.

You may have become the first director when you registered your company with the Companies Office. If your company is small, one director may be all you need.

What it means to be a director (external link) — Companies Office

If you are a sole trader who isn’t registered as a company, you aren’t technically a director — but many director duties are good practice for sole traders too.

You can take on other directors

You can choose other people to be directors as well as you (or instead). You might want to take on new directors when you feel it’s the right time to expand your board. For example, if you need investment to develop a new product, or valuable expertise to move into a new market.

Choose directors based on their skills, attributes and experience, the strategic objectives of your company, and what help the existing directors need to govern the company effectively. Directors don’t need any formal qualifications, but they must meet a set of requirements. For example, you can’t be a director if you’re currently bankrupt.

Who can be a director (external link) — Companies Office

The power to take on directors sits with the shareholders. Shareholders are people who own the company between them. If you own the company outright, you’re the only shareholder. You get to decide whether to take on a new director and who to choose. If the company has more than one shareholder, a majority must agree. Companies with written constitutions often have a formal method for making decisions.

When you take on a new director, it’s a good idea to give them a letter to explain their responsibilities. The letter might include things like:

  • how much time they’ll need to spend on the role
  • what they’ll need to do, including at board meetings if you have them
  • whether they’ll serve on any committees
  • any pay or other benefits they’ll receive.

You could be a director without realising it

Being a director doesn’t just depend on whether ‘director’ is in your job title, or what your records at Companies Office say. As an employee, you can be considered a director if you have any director-like roles or tasks, such as making decisions that are usually a director’s responsibility.

For example, you might be giving business advice to your husband or wife, who's the director of the company. Do they generally accept what you say without using their own judgement? Then you’re responsible for your advice, just like someone who’s formally a director. If you give bad advice, following it without properly assessing could get both of you into trouble.

Typical tasks for a director

A director's tasks can include:

  • setting up and monitoring the company’s big picture, eg strategy, risk management, and employee wellbeing
  • setting up policies and making decisions
  • filing legal documents
  • calling meetings, eg to review how the business is operating
  • keeping records
  • setting up contracts with suppliers, lenders and others
  • following all the laws relevant to your company.

For example, your company might want to sign up with a new logistics company to deliver your products. As a director, you advise any other directors about the idea and check they agree. You arrange for a staff member to do some research and recommend a supplier and service plan. After checking their recommendation makes sense, you sign the contract.

Your first duty as a director is to ‘act in good faith’ — to do what’s best for the company.

Your first duty as a director is to ‘act in good faith’ — to do what’s best for the company.

Your legal duties as a director

No matter what size your company is, the basics of being a director are the same. As a director you have ethical, legal and commercial duties. You set an example for the whole organisation.

Your duties as a director are important, and protect you and the company from possible problems. Directors who fail in their duties can get the company into trouble. In some cases they can get in trouble themselves.

You can’t avoid your duties by being a ‘sleeping’ or ‘silent’ director. All directors are responsible for all duties — you can’t just relax about duties you think other directors have taken care of. You need to stay aware of what’s going on even if you don’t control the day-to-day affairs of the company. 

Like most business owners, you probably care deeply about your company. This means that fulfilling your director duties should come naturally.

You have a legal duty as a director to:

  • act in good faith
  • have a duty of care
  • use your powers for good
  • follow the Companies Act and your constitution
  • be able to meet your commitments
  • trade sensibly to protect your creditors
  • use company information appropriately.

You can read about these duties below.

Act in good faith

Acting in good faith means always doing what you think is best for the company. This is an important guiding principle to keep in mind whenever you’re making decisions.

What’s best for the company is up to your judgement. But claiming you’re acting in good faith is no defence for poor decision-making or behaviour.

For example, doing what’s best for the company doesn’t stop you looking after your employees if your company downsizes or stops trading. You must talk to them about changes that may affect their employment.

You must manage any conflicts of interest. These are situations where a director has two or more interests that may clash. For example, if you part-own a supplier you have two interests — the supplier and the buyer. As a supplier, you want to make as much money as possible when you sell your product. As a buyer, you want to get the best possible value from all your suppliers. These two interests conflict.

Conflicts of interest exist wherever someone has competing interests, whether or not they act on them. You don’t have to avoid them altogether, but you need to identify them, declare them, and manage them.

Conflicts of interest practice guide (external link) — Institute of Directors

Have a duty of care

Being a director is not just an honorary or symbolic role. You must take an interest in the company and understand its operations. You can’t rely on other directors to do the work for you. If you are in a group of directors, each with a different area of focus, you must take an interest in all the areas — not only the one you consider yours.

As a director, you must make decisions with care and skill. Think for yourself, challenge assumptions, and don’t feel pressured to agree with other directors.

It can be useful to seek expert advice on complex topics, but always use your own judgement. For example, if you think the advice you receive is incomplete, you could ask for more detail before making a decision.

If the company has more than one director, your duty of care could include coming to board meetings or other strategy meetings. To prepare, read the relevant information in advance, follow the agenda, and note any actions.

Even an informal meeting should be documented. You should keep up to date with the company’s situation and outlook. For example, if the company is forecasting a downturn, you might challenge whether a new idea is affordable.

Use your powers for good

Use your powers as a director in a positive way, and don’t go beyond the powers you’ve been given. For example, you shouldn’t interfere with a manager’s work by giving their staff direct instructions.

If your company is owned by shareholders, you can’t issue more shares to reduce how much influence a troublesome shareholder has, even if you believe it’s the best option for the company.

Follow the Companies Act and your constitution

You need to comply with the Companies Act 1993. As well as setting out your powers and duties as a director, the Act covers things like:

  • issuing, distributing, and transferring shares
  • keeping accounting records and reporting on finances
  • reporting to shareholders, eg with annual reports
  • dealing with debt or shutting down.

A constitution is a document that sets out the rights, powers and duties of your company, your directors and your shareholders. For example, a constitution might say how often the board of directors meets and how any votes are decided. Not all companies have a constitution, but if you have one you need to follow it.

Choosing the right people for your governance team can help you be sure you understand all the requirements and do the right thing.

Be able to meet your commitments

Before committing your company to anything, you must believe you’ll be able to meet the commitment. Don’t let your company commit to something you don’t believe it can do. For example, your company must not take an order it can’t fulfil, or agree to buy a property without being able to afford it.

Trade sensibly to protect your creditors

Always make sure you can pay your debts. Your company shouldn't do anything that will cause serious loss to anyone it owes money to.

For example, a company might pay suppliers’ invoices at the last possible minute, using money earned after those supplies were used up. If the company stopped trading, they’d be unable to pay any of the outstanding invoices. They might decide to delay other spending until the company is in a better financial position. Some new projects have to wait, but they’re relieved not to be putting their suppliers’ income at risk.

Keep the company’s financial records up to date and ensure you understand them. If you don’t understand financial statements, ask a professional for help. Your decisions need to be based on what the company can afford to do in order to meet its promises to creditors.

If your company gets into financial trouble, seek expert advice. As a director, you may be personally liable for any debts if you cause the company to trade recklessly.

Use company information appropriately

Be careful how you use information about the company and who you give it to. You can use reports and other information provided by employees, advisers, experts and other directors. Take into account their skills, knowledge and authority when deciding how much to rely on it. Only use or give away information:

  • for the company’s purposes
  • as required by law
  • when telling someone whose interests you represent, eg discussing plans with an investor
  • when telling someone whose instructions you must follow, eg explaining your company’s financial health when applying for a loan
  • when it’s not likely to put the company at a disadvantage.

For example, you must not use company information to benefit yourself, such as selling stock-market shares before the company publicly announces a loss. This is known as insider trading, whether you do it yourself or leak the information to someone else. If you have a formally defined board of directors, they must authorise any use of sensitive information.

Visual guide: Your duties as a director

Case study

Winning twice could mean losing

Amit runs a small tech company that develops apps for other companies. He’s looking to work with larger clients. He pitches for two projects with nationwide chains and is offered both of them. They’d both fit in with his business plan, but he knows he only has enough staff to work on one of them.

Amit’s tempted to accept both jobs and figure out how to make it work later. He chats to his advisor Liza about the situation and what he’s thinking. Liza warns him not to over-commit. She says he’d be misleading the clients because he knows he’s likely to run into resourcing trouble. Failure would be bad for his reputation in the long run. Liza advises Amit to accept one project and be transparent with the other client about his limited capacity.

Amit follows Liza’s advice. He offers to pick up the second project later if that still works. The client agrees to this proposal.

Caring about the success of your company should make fulfilling your director duties easy.

Caring about the success of your company should make fulfilling your director duties easy.

Case study

Should the Kiwi Paper Company go carbon-neutral?

Jim’s the new managing director of the Kiwi Paper Company. He’s investigating ways he can make the company more environmentally sustainable. He becomes interested in installing solar panels on the factory roof to provide renewable electricity. He feels like this could be the first step to eventually taking the company carbon-neutral.

However, when he figures out the sums, Jim realises that the monthly payments on the panels will leave a very small profit margin each month. He isn’t comfortable running the company without a financial cushion. He rethinks his plans and decides to set carbon-neutrality as a long-term goal.

Jim identifies signing up to a renewable energy provider as a good short-term solution. This allows him to outsource the risk of generating the renewable energy while still taking steps to be more sustainable.

Laws that affect your company

As well as keeping up with your director duties, you need to follow laws relevant to your company. For example, you need to keep your staff safe at work, treat them well and give them what they’re entitled to, eg sick leave and holiday pay. You need to pay the right tax, and operate in a way that’s honest and transparent.

You also need to make sure the products you sell are safe, fit for purpose and of good quality. Depending on the sector your company is in, you might need to follow other laws too. For example, if you run a restaurant, you need to follow food safety requirements.

Case study

Mai rethinks her approach to directing

Mai’s Wellington-based food truck company has been doing well for a few years now. She’s thinking about recruiting teams to work in new trucks in other New Zealand cities. She started off running a small truck by herself, as a way to work with her love of cooking. She enjoys the practical side of cooking and interacting with customers. However, as the company’s popularity increased through word of mouth, she bought a larger truck, recruited staff and found herself spending more time on administrative tasks.

While Mai is on holiday, her niece Samantha tells her that some of the employees have been using the deep-fat fryer without being trained. Mai knows that the fryer can be dangerous. To keep her staff safe, she needs to make sure they have all the safety information they need.

Mai realises that her duties as a director are about more than just her own actions. She needs to make sure her employees act properly too. She needs to create procedures to ensure the truck is run safely while she’s away. She can’t rely on everything ‘being in her head’ anymore. This will become even more important when she expands the company into other cities, as she can only be in one place at a time.

When she gets home from her holiday, Mai prints out all of the health and safety processes needed to run the truck. She laminates them and pins them up in the right places around the truck, so her employees see them every day. She trains each staff member to make sure they understand the risks of using the deep fat fryer. She also organises a first-aid training course for her staff to do together, and makes sure they know where the first-aid kit is.

Develop your director skills

Keen to learn more about being a director? The Institute of Directors has a range of resources you can use.

Develop your director skills (external link) — Institute of Directors

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