Directors’ duties and dilemmas in real estate

From a director of a property management company to a real estate director with a developer, all in such a position will routinely grapple with dilemmas such as reconciling conflicts of interests, managing shareholders expectations, choosing between business strategies, or trying to rein in an overbearing CEO.

The ability to balance integrity and entrepreneurial skill in the face of uncertainty is part and parcel of the role. Often, there may be a multitude of options, with no obvious right decision. In such circumstances, it is important to bear in mind the legal basis on which decisions should be assessed, as set out in the Companies Act 2006. A director has a duty to:

• Act within the companies powers;
• Promote the success of the company for the benefit of its shareholders whilst also paying regard to various factors including the impact of company operations on the community and the environment and the interests of the company’s employees;
• Exercise independent judgment;
• Exercise reasonable skill, care and diligence;
• Avoid conflicts of interest;
• Not accept benefits from third parties; and
• Declare any interest in a proposed transaction or arrangement with the company.

From a governance perspective, directors are given guidance in the UK Corporate Governance Code, which sets standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders. In essence:

• The board must be entrepreneurial, driving the business forward, while also ensuring controls, checks and balances are in place;
• Risks are part of running a business and indeed profits are often described as the rewards of risk-taking, but they must be managed;
• The board needs to be informed about the operational aspects of the company but are not to interfere with its day-to-day running;
• The board must be sensitive to short-term issues but the overriding aim of long-term value creation should be considered.

These codes often lead to more dilemmas and commercial decisions that a director will need to deal with. For instance a real estate director may have an issue of independent judgment when deciding whether to procure new restaurant sites or to reinvest in existing restaurants within its portfolio of properties. If the director directly reports to the CEO who wants to expand rapidly, or owes their appointment to a significant shareholder who alternatively has a particular attachment to the restaurant, they may feel the need to depend on the goodwill of their boss for continued employment as a senior manager. These alternative loyalties may conflict with their director duties.

A useful strategy to counteract such a conflict is by ensuring that legislation, regulation and codes of best practice are kept at the forefront of every director’s mind. It is therefore vital to develop a process for board development, evaluation and renewal, thus allowing for continued director training and support.