Essential Corporate News - Week ending 25 October 2024

IoD: Code of Conduct for Directors

On 23 October 2024, the Institute of Directors (IoD) published a Code of Conduct for Directors (Code). The Code was initially prepared for the IoD by a Commission chaired by Lord McNicol of West Kilbride and it follows a consultation on the Code launched in June 2024.

• Purpose of the Code
• Structure of the Code
• Principles
• Outcomes
• Applying the Code
• Future developments

Purpose of the Code

The Code has been developed as a practical tool to help directors make better decisions and to provide those that run organisations with a behavioural framework to help them build and maintain the trust of the wider public in their business activities.

It is aimed at directors of organisations of all sizes in the private, public and not-for-profit sectors and is drafted as an individual commitment designed to complement other conduct mechanisms that directors may be subject to. The Foreword to the Code states that it "represents a voluntary commitment and is not intended to hold back directors or create a new burden of compliance". It comments that most of the undertakings in it are matters of common sense but that, at crucial moments, when key decisions have to be made, the Code may serve as a useful tool that directors can refer to when asking themselves the question: what would a responsible director do in this situation?

Structure of the Code

The Code is structured around six key "Principles of Director Conduct" (Principles). These Principles stem from the Seven Principles of Public Life (also known as the Nolan Principles), first published in 1995 by the Committee on Standards in Public Life.

Each Principle is underpinned by a number of specific "Undertakings" and the aim is that by applying the Principles and fulfilling the Undertakings, directors should be able to achieve the positive "Outcomes" which are set out in the Code.

Principles

The six Principles are as follows:

Principle 1: Leading by Example - demonstrating exemplary standards of behaviour in personal conduct and decision-making. There are six Undertakings relating to this, including that the director will exhibit high standards of personal conduct and professionalism.

Principle 2: Integrity - acting with honesty, adhering to strong ethical values, and doing the right thing. Nine Undertakings relate to this, including that the director will comply with the letter and spirit of applicable law and be willing to cooperate fully with regulatory authorities.

Principle 3: Transparency - communicating, acting and making decisions openly, honestly and clearly. Five Undertakings relate to this, including that the director will promote an open business culture which does not cover up wrong-doing or mistakes.

Principle 4: Accountability - taking personal responsibility for actions and their consequences. Six Undertakings relate to this, including that the director will understand the legitimate expectations of shareholders and other relevant stakeholders and engage appropriately with them.

Principle 5: Fairness - treating people equitably, without discrimination or bias. Eight Undertakings relate to this, including that the director will make decisions as objectively as possible and be alert to the risk of bias or groupthink.

Principle 6: Responsible Business - integrating ethical and sustainable practices into business decisions, taking into account societal and environmental impacts. Six Undertakings relate to this, including that the director will ensure that artificial intelligence and other technological innovations are utilised by the organisation in an informed and responsible manner.

Outcomes

The specified Outcomes are concerned with matters of respect, confidence, trust, reputation, relationships, resilience and legitimacy.

Applying the Code

A new section that was not in the draft Code, has been added at the back of the Code. It notes that the Code is a voluntary source of guidance for directors and if its recommendations are perceived as conflicting with mandatory requirements, such as those arising from legislation (for example, the statutory directors' duties in the Companies Act 2006), regulation, contractual obligations, professional standards or organisational rules, then the requirements of the latter should prevail.

It also notes that there is no formal enforcement mechanism associated with the Code but that organisations and their stakeholders may choose to use the Code to guide their own assessment of director actions and behaviour. Boards, as well as individual directors, are also encouraged to publicly commit to the Code. Possible mechanisms suggested are disclosure in annual reports and on websites, communication to employees and other stakeholders, and through social media. It is also reported that the IoD has developed a kitemark that can be used to publicly signify commitment to the Code.

Future developments

The IoD plans to review and update the Code on a periodic basis and to develop guidance on the Code which describes how it can be applied in a variety of real-life scenarios. This guidance will be published on its website.

(IoD, Code of Conduct for Directors, 23.10.2024)