Over the past two decades, insulin resistance has been considered essential to the aetiology of type 2 diabetes mellitus (T2DM). However, insulin resistance does not lead to T2DM unless it is accompanied by pancreatic β-cell dysfunction, because healthy β cells can compensate for insulin resistance by increasing in number and functional output. Furthermore, β-cell mass is decreased in patients with diabetes mellitus, suggesting a primary role for β-cell dysfunction in the pathogenesis of T2DM. The dysfunction of β cells can develop through various mechanisms, including oxidative, endoplasmic reticulum or hypoxic stress, as well as via induction of cytokines; these processes lead to apoptosis, uncontrolled autophagy and failure to proliferate. Transdifferentiation between β cells and α cells occurs under certain pathological conditions, and emerging evidence suggests that β-cell dedifferentiation or transdifferentiation might account for the reduction in β-cell mass observed in patients with severe T2DM. FOXO1, a key transcription factor in insulin signalling, is implicated in these mechanisms. This Review discusses advances in our understanding of the contribution of FOXO1 signalling to the development of β-cell failure in T2DM.