Directors’ duty training is an essential and straightforward first step companies can take to help their directors understand their responsibilities, duties and potential liabilities.

One client told us that directors’ duty training completely changed the way its board discussed important matters, particularly when considering whether decisions were genuinely in the best interests of the company.

The real-world consequences of corporate failure

The Post Office scandal is one of several examples in which directors and senior decision-makers appear to have fallen disastrously short of the standards expected of them. It demonstrates how directors’ acts and omissions can affect hundreds, or even thousands, of individuals.

Consider also the collapse of Carillion plc in 2018. The company failed with more than £5 billion of liabilities, resulting in more than 3,000 direct job losses and many tens of thousands of indirect job losses.

The collapse of BHS followed its sale for £1.00 to Dominic Chappell. The failure cost approximately 11,000 people their jobs and left a pension fund deficit of more than £570 million. Chappell, who was recorded at Companies House as having been a director of 28 companies, was subsequently ordered to pay £9.5 million in compensation.

These major corporate failures raise issues that may not always apply directly to directors of SMEs or family-owned businesses. However, there are several common principles that are relevant to directors of companies of every size.

The challenge facing SME directors

One of the greatest difficulties facing SME directors is the avalanche of rules, codes, regulations and legislation they are expected to navigate. These obligations cover almost every aspect of business life, from employment and data protection to financial reporting and environmental responsibilities.

For many SME directors, focusing on the bigger picture may be the only realistic option. It is rarely practical or affordable to seek professional advice at every stage of every commercial decision.

If professional advice appears incomplete, unclear or inconsistent with the available information, directors should ask further questions and investigate the matter properly.

With that in mind, there are three practical principles that every director should consider.

1. Be curious and challenge groupthink

Directors should remain curious, ask questions and avoid being seduced by groupthink. A board in which everyone agrees too quickly—or where individuals feel unable to challenge the majority—may fail to identify significant risks.

The former chair of a Whitehall agency responsible for protecting taxpayers’ interests in the Post Office attributed the long-running scandal to a combination of “incomplete curiosity” and a “toxic culture”.

“I’m afraid that when an incomplete curiosity meets a toxic culture, bad things happen.”

There are many pressures that can make it difficult for directors to think independently or challenge a prevailing view. Financial concerns, personal relationships and a reluctance to “make a fuss” may all discourage necessary questions.

2. Use common sense and pragmatism

Common sense and pragmatism are too often ignored, yet they are essential ingredients in effective decision-making.

Although UK courts may not frequently use the words “common sense”, the underlying concept is not absent from their judgments. In the 2022 case of BTI v Sequana, for example, the Supreme Court appeared to recognise that directors must exercise balanced judgments in real-world commercial conditions.

The Court acknowledged the different and sometimes competing economic interests that arise when a company is experiencing financial distress.

3. Apply the “smell test”

The third principle is to apply what is sometimes called the “smell test”.

This point arose during an inquiry chaired by the Honourable Justice Owen more than 20 years ago into the corporate failure of a major Australian insurance group.

Justice Owen suggested that companies must develop a culture of compliance supported by appropriate structures, programmes and procedures. However, he also argued that they must establish an ethical framework for their activities.

A proposed transaction or course of action should not only satisfy formal governance requirements—it should also pass the smell test. Put simply: does it feel right?

“Ask the question—forget about issues of right and wrong—but what 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?’”

There is nothing wrong with directors asking themselves that question. Too many companies adopt a tick-box approach to governance, concentrating on whether the correct forms and procedures have been followed rather than considering the substance of what is being proposed.

Substance over form

These three principles may not be accepted by everyone. However, the impact of repeated corporate scandals demonstrates why curiosity, common sense and ethical judgment must play a central role in boardroom decision-making.

As I suggested in a paper produced by an Institute of Directors working group in 2024, the smell test is too often missing from corporate governance discussions. The same may be said of common sense and curiosity.