Directors must exercise reasonable care, skill and diligence when making decisions on behalf of the company.
This means that they must act in a way that a reasonable and prudent director would act in the same circumstances.
For example, a director who fails to take reasonable steps to investigate a potential investment before approving it could be found to have breached their duty to exercise reasonable care, skill and diligence.
A director must exercise the care, skill and diligence which would be exercised by a 'reasonably diligent person' with both:
- The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (the objective test); and
- The general knowledge, skill and experience that the director actually has (the subjective test).
The subjective test means that a particularly highly qualified or experienced director will be obliged to exercise a higher level of skill and expertise than would otherwise be required.
A person should not take on a directorship unless they are sufficiently qualified or experienced to be able to competently perform the duties for which they are appointed.