Oscars 2026: s173 Companies Act and The Big Short

In celebration of the 98th Academy Awards and the 20-year anniversary of the Companies Act 2006 (CA), we continue our series of examining directors' duties through the lens of an Oscar-winning film. This week, with the benefit of some creative licence, we consider how the duty to exercise independent judgment is explained through The Big Short: the 2015 film about the genesis of the 2008 financial crisis that won the Academy Award for Best Adapted Screenplay.

The third duty: duty to exercise independent judgment (s173)

The first article in our series explains what duties apply to company directors and considers s171 and The Godfather (1972); our second article discusses s172 and Jurassic Park (1993). This week, we look at s173, which requires directors to exercise independent judgment. The duty requires directors to resist succumbing to pressure from shareholders, other directors or advisors without exercising their own judgment. This is not intended to prevent directors from relying on advice, provided they exercise their own judgment in deciding whether or not to follow it.

Section 173 expressly permits directors to act in accordance with an agreement with the company that restricts the future exercise of discretion by its directors, for example, a provision in the company's constitution permitting nominee directors to follow the instructions of their appointor. However, in the absence of any agreement, directors must not simply agree to vote a certain way at board meetings regardless of the merits of the decision, they must independently consider what to do.

The film: The Big Short (2015)

The Big Short focusses on savant hedge fund manager Michael Burry, who anticipated the 2007 collapse once he realised that the US housing market was based on sub-prime loans. He then bets against (shorts) the mortgage bonds – these long-term swaps require hefty monthly payments which enrage his investors, but he ultimately makes a reported net profit of over $2.5 billion.

For illustration purposes, if we were to imagine Michael as a UK company director: his prescient assessment was out of step with the market and the very essence of independent decision-making. No one could accuse him of breaching his s173 duty!

He resisted pressure from the market, colleagues, and advisors. While the film shows senior bank executives relying uncritically on AAA ratings and contributed demand and continuing to issue and package sub-prime mortgages, "director" Michael refuses to accept that "everyone does it" is a rational justification and bases his strategy instead on his own independent original research into the data.

Pressured to accept that "the housing market never goes down", Michael considers the underlying data tells a different story: the loans are poor quality, and the system is more fragile than the market narrative suggests. This is an extreme example of what independent judgment can look like: challenging assumptions, digging into primary sources and not being satisfied with vague assurances.

Another example is when the film shows Michael being effectively told that the ratings agency will continue to rate the mortgage bonds as AAA to retain the banks' business. Relying solely on the ratings in that circumstance would be an abdication of independent judgment. Independent judgment would demand further steps, such as stress-testing, risk modelling, independent risk reports and internal escalation.

Across the film, senior figures essentially say, in various ways, "the market has never failed", "the products are safe: look at the ratings!" and "if it was really that bad, someone would have done something by now!" The film presents the market as suffering from herd mentality: short term profits are high, and no one wants to be that awkward voice. But the CA duties demand that directors do not treat industry custom or competitor behaviour as a substitute for their own judgement.

The s173 duty links s172 (promoting the success of the company), as s173 explains how directors properly perform s172: considering the long-term success of the company requires an independent and realistic assessment of future prospects. Similarly, a failure to probe when red flags are present could be a breach of s174 (acting with reasonable skill, care & diligence).

The importance for directors to exercise their independent judgment in the brave new world of AI powered software and technology cannot be underestimated. The Treasury Committee's recent report "Artificial intelligence in financial services" identified that the financial services sector “substantially outpaces” other sectors in AI adoption with some 75% of UK financial services firms now using AI technology. As we all become more reliant upon AI technology it will remain important for business leaders to exercise their own independent judgment.

Our top 3 risk management tips for directors to consider (and their insurers to keep in mind):

1. Make sure you understand the full context: before approving any proposal, ensure you understand the background, commercial rationale and any long‑standing practices, particularly where these pre‑date your involvement or concern complex products or structures. Listen to all views but ensure that the decision you make is a considered one that you are personally comfortable owning.

2. Document your decision making: do not rely on memory. Ensure that key decisions, the options considered, the information relied upon and the reasons for your conclusions are recorded contemporaneously. Contemporaneous records are often the most persuasive evidence in any subsequent internal review, dispute or regulatory enquiry.

3. Don't be afraid to back your own judgment: board roles inevitably involve balancing commercial pressures, time constraints and differing stakeholder expectations. The path of least resistance may be attractive, but you are appointed for your judgement, expertise and leadership. Where your assessment differs from the consensus, be prepared to articulate your reasoning and, where appropriate, to stand firm. 

We would be delighted to discuss and queries or comments arising from this article. Please contact Matt Watson in the first instance.