Entering the codified world – Code of Conduct for directors

The Institute of Directors (IoD) has recently published a consultation paper on a Code of Conduct for Directors (the Code) to assist directors in making better decisions given their increasingly "vital, complex and challenging" roles and responsibilities.

The IoD recognises that in recent times we have seen several corporate "scandals and controversies" which have tarnished the reputation of business leaders. The IoD Director General, Jonathan Geldart specifically identified the Post Office, Carillion and BHS as corporate failings that have exerted a negative effect on the esteem in which business leadership is held. The recent ruling by the High Court which ordered one of the former directors of BHS to repay at least £50m following the collapse of the UK retailer is another example of corporate mismanagement. 

The IoD previously pioneered the Code of Professional Conduct for Directors back in 1998 and for several years it was a condition for IoD membership. Nowadays, the IoD Code of Professional Conduct only applies to those who have obtained the professional qualification of Chartered Director status. The new Code is intended to apply to all directors and is not going to be linked to a professional qualification. 

The Code is intended to help directors build and maintain the trust of the wider public in their business activities and is said to be inspired by the Nolan Principles of Public Life which were first published back in 1995. In the same year that eBay debuted and OJ Simpson was acquitted in the "trial of the century", the Committee on Standards in Public Life released the seven principles that were intended to apply to anyone who works as a public officeholder. Some might say that the principles of selflessness, integrity, objectivity, accountability, openness, honesty, and leadership have aged better than some of the fashion trends of the mid-90s. 

The Code is designed to provide some guidance for the directors when they ask themselves: "What would a responsible director do in this situation?", and it is followed by a "principles-undertakings-outcomes" approach. 

1. The six key principles (principles) set out by the Code are: 
2. Leading by example - demonstrating exemplary standards of behaviour in personal conduct and decision-making,
3. Integrity - acting with honesty, adhering to strong ethical values, and doing the right thing,
4. Transparency - communicating, acting and making decisions openly, honestly and clearly,
5. Accountability – taking personal responsibility for actions and their consequences,
6. Fairness – treating people equitably, without discrimination or bias, and;
7. Responsible Business – integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts.

Under each principle, the Code sets out various undertakings. Directors are encouraged to apply and fulfil those undertakings and, through this practice, it is hoped that the directors are well equipped to achieve the desired outcomes.

Directors are now facing increased regulatory scrutiny and are having to deal with economic pressures leading to mounting numbers of insolvencies. At first glance, the thought of having to comply with, what could be seen as, further red tape may not be welcomed by many directors. However, the Code is clear that it is not intended to add to existing legal obligations. Nor is it associated with a formal enforcement mechanism. Instead, it is intended to set "a bar for director conduct beyond the legal baseline as a means of enhancing the legitimacy and reputation of directorship in the eyes of society and stakeholders."

The voluntary nature of the Code has its critics, including the ICAEW who has suggested it amounts to "little more than virtue signalling without some means of enforcement." The ICAEW has commended the Code as "well-meaning" but has questioned its effectiveness. In contrast, the ICAEW's own Code of Ethics is enforceable and places greater scrutiny on directors who are also Chartered Accountants. However, the Code was never intended to be a further regulatory burden on directors. If the Code is seen as more of a carrot than a stick in terms of encouraging directors to set themselves a higher standard of conduct, then we can see it has a place amongst the wider regulatory frameworks at play. 

If directors adhere to the voluntary Code it is likely to mitigate some potential exposures. For example, principle five, fairness, sets out that directors will "promote equality of opportunity in all business activities." The HR teams across the land may welcome the Code's focus on the promotion of fairness amongst employees. 

However, some of the principles need to be considered in a wider context given directors often face competing interests. For example, principle six, responsible business, sets out that directors should "consider the consequences of my decisions for society, local communities and the environment." On the face of it, this appears hard to argue against. However, this must be balanced against the reality that directors have a statutory requirement to promote the success of their company and so could face potential claims by disgruntled shareholders if their decision making was overly influenced by their wider social considerations. This balancing act was noted in the court's recent dismissal of the ClientEarth derivative action claim with the judge noting that, "the impact of Shell's operations on the community and the environment is a matter which the directors are required to weigh in the balance… whether they be the adoption of a strategy or its implementation, are part of the decision making process by which the directors manage Shell's business."

We can see the Code being used as a guidance note or point of reference for directors that can be integrated into their decision-making processes. For those smaller companies that fall within the 99% of non-listed UK companies, having an easily digestible list of principles may prove useful. The IoD identified that a code of conduct for the director community is strongly supported by IoD members. In a members’ survey conducted in May 2022, 78% of respondents agreed that directors should be subject to a code of conduct - either on a mandatory or voluntary basis.

We can also see that some companies may adopt the voluntary Code which could be used as a marketing tool to demonstrate the company's commitment to being a responsible business. A note of caution to any companies that do take this approach; they will of course need to practice what they preach. It would be somewhat of an unfortunate outcome if companies marketed themselves as being a responsible business under principle six of the Code in respect of their ESG capabilities which could then potentially land themselves falling foul of wider regulatory scrutiny. The FCA's anti-greenwashing rules and guidance from earlier this year is one example of a potential pitfall for directors that overplay their company's environmentally friendly credentials. 

The IoD has welcomed comments and feedback from businesses and the general public, and the consultation is open for responses until 16 August 2024. The deadline for responses will post-date the imminent General Election and the IoD has noted that: "whoever wins the next general election, we look forward to working with them to create a resurgent UK economy in which individual companies and directors can succeed and flourish." 

This article was first published in Law360