What lessons can company directors and their insurers learn from the Oscars? (Or for film buffs!)

Part 1: The Godfather: Takeaways from Don Corleone for company directors

In celebration of the 98th Academy Awards, our management liability experts explore directors' duties through the lens of Oscar‑winning films. With the benefit of some creative licence, we aim to bring the duties to life and distil key risk management tips designed to help boards, and those who insure them, strengthen governance, and evidence compliance in the face of regulatory and shareholder scrutiny.

In this, the first article in our series, we consider the s171 duty through the lens of The Godfather (1972).

Background

Twenty years ago, in the same year that "The Godfather" videogame was released, sections 171 to 177 of the Companies Act 2006 (CA) codified common law and equitable duties into seven core duties, usually called the general duties, which require directors to:

1. Act within their powers (s171)
2. Promote the success of the company (s172)
3. Exercise independent judgment (s173)
4. Exercise reasonable care, skill and diligence (s174)
5. Avoid conflicts of interest (s175)
6. Not to accept benefits from third parties (s176)
7. Declare their interest in proposed transactions or arrangements (s177)

In addition, directors have the creditor duty (aka the Sequana duty), requiring them to consider creditors' interests in certain circumstances, as well as certain other uncodified duties and those imposed by a wide variety of legislation such as insolvency, corporate reporting, environmental and health & safety. Directors owe these duties to the company in their position as fiduciaries and may also incur liability to the company, or to third parties, under contract or tort.

For those lacking a penchant for popular culture, the Oscars, formally known as the Academy Awards, are annual film awards presented by the Academy of Motion Picture Arts and Sciences to honour outstanding achievements in cinema.

The first duty: duty to act within powers (s171)

Section 171 requires a director to act in accordance with the company’s constitution (s171(a)) and to only exercise powers for the purposes for which they are conferred (s171(b)). Directors can breach s171(a) by failing to abide by the company's articles or special resolutions or by causing the company to make an unlawful distribution, for example. S171(b) does not set out how to ascertain a company's proper purpose, so common law principles apply. Case law makes it clear that this duty is aimed at preventing abuse of power, so is a subjective test. As such, even where the board has legal power (for example, to issue shares), using that power for an improper purpose (eg to dilute a particular shareholder or entrench control) can breach section 171(b).

In addition to acting outside the scope of the company's constitution, directors will be liable under s171 if they cause the company to do something beyond its powers or which it otherwise cannot lawfully do.

Common flashpoints that tend to generate claims include:

• Share issuances and buy‑backs.
• Use of board discretions under incentive plans.
• Delegations of authority and committee powers.
• Defensive measures in the face of takeovers or shareholder activism.

The film: The Godfather (1972)

Whilst recognising the film's depiction of criminal conduct and immoral practices, The Godfather can also be seen as a portrayal of institutional power, unwritten constitutions and the consequences of leaders treating powers as personal property. For D&O Insurers, if ever there was an example of needing to reserve rights in respect of a conduct exclusion, the Corleone's business practices may come to mind.

The Corleone family has its own constitutional framework, officeholders, powers and limits.  The constitutional framework includes traditions, rules and territory arrangements with other families and expectations about succession. Don Vito Corleone is the original chairman; his caporegimes as senior executives and consigliere Tom Hagen is something like a general counsel or company secretary. The Don can order deals, alliances and reprisals, but there are tacit limits, enforced by custom.

Several key plot points illustrate the requirements as set out in s171 of acting within one's powers. Michael, initially an outsider, gradually assumes control. As he consolidates power, the line between powers of the office and Michael’s personal agenda blurs. Decisions that should serve the family’s long‑term business interests become vehicles for settling personal scores. The infamous baptism sequence intercuts Michael’s assent to assassinations with his public acceptance of godparental responsibilities. He uses the full machinery of the organisation (resources, personnel, reputational capital) to achieve an essentially private aim: eliminating rivals and securing his personal dominance.

In company law terms, this is the archetype of an "improper purpose": using institutional powers to pursue personal objectives. Deals are done and broken without proper consultation with the other families; long‑standing understandings are ignored. The apparent short‑term success of these moves masks a legitimacy deficit that ultimately destabilises the entire structure.

Our top 5 risk management tips for directors to consider (and their insurers to keep in mind):

1. Schedule a regular constitutional audit to review the articles, shareholder agreements and delegations, and give directors a clear briefing on key powers, limits and consent requirements.

2. Build proper purpose into board templates by requiring board papers and minutes (especially around share capital and control) to spell out the statutory basis, primary purpose and business rationale for the decision.

3. Seek external advice when required by seeking external legal advice on higher‑risk actions such as defensive share issues, related‑party deals and control‑shifting restructurings.

4. Document your decision-making by preparing a statement of the purpose of each substantive exercise of powers.

5. Be clear about limits by preparing an internal guidance note on key duties and limits imposed by the company's constitution and keep this in an easily accessible place so that directors and officers, and anyone preparing briefings for the company, can refer to it. Make it a "living document" by assigning it an owner and scheduling regular reviews to avoid it falling out of date.

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