If discussions around directors’ duties were ever “just” dry academic topics, they are not today. Directors’ duties can no longer be thought of as detached from real life. If the Post Office scandal—one of many where directors fell disastrously short in their responsibilities—shows us anything, it is that directors’ acts or omissions can have terrible consequences affecting hundreds, even thousands, of individuals.

Consider the collapse of Carillion in 2018 (£5bn of liabilities), which led to more than 3,000 direct, and many tens of thousands of indirect, job losses. The collapse of BHS, which centred on the sale of the company for £1.00 to Dominic Chappell, cost 11,000 people their jobs and left a pension fund deficit of more than £570m. Chappell (shown at Companies House to have been a director of 28 companies) was ordered to pay £9.5m in compensation. These corporate failures raise issues that are not necessarily applicable to directors of SMEs or family-owned businesses. But there are some common strands noted below that apply to all directors.

An avalanche of regulation

One of many issues for directors of SMEs is the avalanche of rules, codes regulations and laws, covering everything from employment to the environment. Is focusing on the big picture for most SME company directors, most of the time, the only real option? Presumably yes, unless they feel they can ask for professional guidance every step of the way (which, realistically, they cannot).

Although using professional advisers won’t absolve directors from ultimate responsibility for their decisions, courts recognise that directors can’t be experts in everything, so they can take advice on specific matters. Against that, statutory duties of care, skill and diligence remain their own and can’t be delegated. If the advice seems incomplete or unclear, they must investigate further.

My three tips may seem trite but are not at all, as the impact of so many scandals ought to make clear.

1  Be curious

Don’t be seduced by ever growing ideas of groupthink. The former chair of a Whitehall agency responsible for taxpayers’ interests in the Post Office blamed the Horizon IT fiasco on a mixture of “incomplete curiosity” and a “toxic culture” at the state-owned company. He told the Post Office Inquiry that, in his view, what went wrong was partly down to a “closed, defensive culture” combined with incuriosity. “I’m afraid that when an incomplete curiosity … meets a toxic culture, bad things happen.” But numerous pressures make it ever harder to think outside the group, including primarily, I suggest, financial worries and ‘not wanting to make a fuss’.

2  Use common sense

It was a newspaper article that for me first connected common sense with a major scandal. The writer noted that had the then CEO of Post Office Limited, Paula Vennells, used some common sense instead of relying quite so much on her legal advisers, perhaps some of what resulted may have been different. I suggest common sense and pragmatism, too often ignored, are essential ingredients for directors.

Although the UK courts rarely use those words, the concepts are not ignored in current case law. For example, in BTI v Sequana (2022),  I suggest the Supreme Court recognised that directors should exercise balanced judgements in real world conditions. The Court seemed to recognise the reality of the different economic interests of a company in financial distress.

3  Apply the ‘smell test’

This crucial point arose during an inquiry chaired by the Hon. Justice Owen more than 20 years ago into the corporate failure of a large Australian insurance group. He suggested that companies must develop a culture of compliance including structures, programmes and procedures, but they must also commit to developing an ethical framework for their activities. He says these have to pass “the smell test”—does the transaction or activity smell right?  “Quite often the gut reaction to that will be the right one,” he said.

Too often companies take a tick-the-box approach to governance, but you have to stress the substance over the form. Owen wrote: “Ask the question—forget about issues of right and wrong—but what in the hell were they thinking? Did they ever apply the olfactory test? Did they ever go back and ask themselves, ‘What would my grandmother have thought of this?’”  And what is wrong with directors asking themselves that question?

I understand these three points may not be accepted by all, but as I suggested in my submissions to the Post Office Inquiry, as well as in a paper produced by an Institute of Directors working group last year, the smell test is all too often missing, as is any concept of common sense or curiosity.

Nick Gould is a partner at Impact Lawyers.