Directors’ Duties: Key Obligations and Emerging Challenges

Directors play a vital role in steering a company’s success while ensuring legal compliance with Australian corporate law. Failure to meet these responsibilities can result in civil or criminal liability. This article outlines key director obligations and recent developments impacting corporate governance.

Fiduciary Duties

Directors owe a range of fiduciary duties to their company and shareholders, including the duty to:

• act honestly
• not misuse insider information or position
• avoid conflicts of interest
• not abuse corporate opportunities
• exercise care and diligence
• avoid insolvent trading
• maintain proper accounts and records

Key Challenges for Directors in 2025

The evolving corporate landscape presents new challenges and heightened responsibilities for directors. Below are some key focus areas influenced by recent legal and policy developments:

• Climate Change and Environmental, Social and Governance (ESG)

While mandatory ESG reporting is gradually being introduced based on business size and revenue, it is not yet compulsory for SMEs. However, stakeholder expectations are rising, with consumers, investors and partners increasingly favouring businesses that prioritise sustainability. Directors should therefore consider assessing and integrating ESG principles where feasible and consider sustainability strategies that align with long-term business objectives.

• Cybersecurity and Data Privacy

SMEs are frequent targets of cyber threats due to limited security resources. The Privacy and Other Legislation Amendment Bill 2024 introduces tiered civil penalties, enhanced enforcement powers, and stricter compliance requirements for businesses handling personal data. Directors should therefore take an active role in overseeing data security, reassess data handling practices, and implement stronger cybersecurity measures to ensure compliance and mitigate regulatory risks.

• Insolvency Risks Amid Economic Uncertainty

With ongoing economic instability, directors should closely monitor financial health, proactively manage risks and ensure compliance with solvency obligations. Contingency planning and early intervention can help prevent insolvency and protect both the company and its directors from legal consequences.

Practical Tips for Directors

Recent guidance emphasises these best practices for effective governance and minimising risk exposure:

• Embedding a compliance culture: promote legal awareness and responsibility across the organisation;
• Address red flags promptly: promptly investigate and address warning signs, such as deviations from policies or unexplained financial irregularities;
• Effective risk management: define risk thresholds and escalation protocols to ensure timely reporting of significant issues to the board;
• Commit to ongoing education: Stay updated on regulatory updates and industry best practices.

By acting diligently, in good faith, and in the company’s best interests, directors can mitigate legal risks and contribute to long-term organisational success.