UK directors' duties: IOD issues guidance on the importance of sustainable business practice

The Institute of Directors (IOD) has recently unveiled its "Code of Conduct for Directors": a new framework which provides guidance on the standards of behaviour expected of company directors to help build and maintain public trust, including when it comes to matters of corporate sustainability.   

Today's company directors have to navigate a complex series of trade-offs where there is increasing public scrutiny of company activities and ever more frequent allegations that individuals have not acted with integrity. No greater example of this can be found than in the recent slew of high-profile criticism of companies whose directors are accused of misleading the public about their company's green credentials.

General duties of directors

The general legal duties of directors were codified in the Companies Act (CA) 2006 and their meaning and effect has been interpreted by plentiful case law over the years. But a strict adherence to the statutory obligations does not guarantee that the actions of a director will escape public criticism.

Section 172 CA 2006 sets out a director's duty, acting in good faith, to act in a way which they consider will promote the success of the company for the benefit of its members as a whole. This requires taking into account a range of matters, from relationships with suppliers to the potential impact of the company's operations on the environment.

Even acting in good faith, however, a director might be criticised for taking too narrow a view of what is "good conduct" or for failing to give due priority to one matter over another.

Core principles in new code

The IOD's new Code of Conduct is formulated around six core principles of director conduct: leading by example, integrity, transparency, accountability, fairness and responsible business. It is underpinned by "undertakings" which reflect the practical implementation of the principles. 

It is the responsible business principle which is of particular note.

The code describes "responsible business" as "Integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts …. on society and planet".  This involves "ensuring environmentally safe, ethical and equitable working conditions and products" and "striking a balance between financial performance and societal impact."

In the Code, the IOD asks directors to undertake not just to consider, among other things, the consequences of their decisions "for society, communities and the environment", but to promote high business standards across the supply chain, particularly with regard to environmental impact, and to avoid prioritising short-term financial interests of shareholders over longer term resilience and strategic objectives.

The societal and environmental impact of a director's decision are not just matters to which directors should give a nod when reflecting on their section 172 duties. Failing to integrate ethical and sustainable practices into business decisions will potentially be a breach of this core principle.  

What does this mean in practice for directors?

While the IOD is clear that the Code is voluntary and is not intended to create a new burden of compliance on directors,  the Code provides a helpful practical steer for compliance with existing legal obligations in relation to the environment, in the form of the undertakings.

Given the widely acknowledged adverse societal and environmental impact of greenwashing, it would be no surprise that authorising or overseeing activity which misleads third parties about the actions taken by directors to adopt environmentally sustainable practices and minimise adverse environmental impact will likely cause a director to fall foul of the "responsible business" principle. 

Moreover, as the Code reflects best practice, it follows that a breach of it, or a failure to maintain its standards, may amount to evidence of a breach of statutory duties. This is particularly relevant in the ESG sphere, where the precise bounds of directors' duties have not yet been thoroughly tested in the English courts, and this question remains firmly in the public spotlight.

It is not unprecedented for a court, in considering whether a director has acted in breach of duty, to review guidance from august bodies such as the IOD or the International Centre for Settlement of Investment Disputes. Any director wishing to ensure their conduct remains beyond reproach would be well-advised to review the IOD Code and comply with it.