Directors Responsibilities

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Factsheet covering Directors Responsibilities

Factsheet covering Directors Responsibilities

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  • 1. Directors’ Responsibilities Leslie Spiers Boardroom Dynamics
  • 2. Corporate problems? What’s this got to do with companies outside the FTSE 350? Does it mean yet more regulation?
  • 3. Corporate Governance as business improvement Internal improvements Systems Roles Processes External improvements Compliance Reputation
  • 4. The role of the Board in SME’s 2007 Research into SME’s Boards were often a legal formality Boards appear to contribute little of significance to business development Boards dealt with operational matters as opposed to strategic issues Boards dealt with short term goals (survival)
  • 5. Strategic versus operational planning
  • 6. Board structures and processes Lack of formal committees Few non-executive directors Lack of risk management systems Less advice from auditors as threshold for independent audit increases
  • 7. Governance and business improvement Risk reduction through identification and management Wider experience in decision-making Stakeholder engagement through identification and management
  • 8. Stakeholder groups Suppliers Shareholders Local Government Overseas Governments The Business Bankers Government Press Competitors Regulators Employees HMRC
  • 9. Further considerations Reputation management Greening of business (the business case for social responsibility and integrity) Corporate governance is about changing organisational cultures rather than regulations
  • 10. How then to determine board room competencies to develop excellence in direction?
  • 11. The business literature is unanimous Boards are no longer a cosy affair Proactive and transparent Growth in status of NEDs = more scrutiny Ultimately need honest, diverse opinions, courage, and knowledge to improve the board decisions BOARD FIT and mix of exec and non execs
  • 12. Board fit... depends on the business
  • 13. NED recruitment Historically poor Less than 4% have formal interview < 1/3 Chairs help NED prepare for the role Smoke filled rooms
  • 14. NED attributes 1 Breadth of experience Team player Well prepared Communicator Sharp mind Creative and visionary Focused on board improvement
  • 15. NED attributes 2 Committed Confident Independent Experience Challenge Supportive Focus on company performance Legal responsibility Conscience of shareholders
  • 16. Appointing executive directors Competent in 4 key areas – Results orientation – Strategic orientation – Collaboration – Independence But – Diversity vs. group think – Snakes in suits – psychopathy in the board room
  • 17. Who to appoint? Every instinct points you to appoint someone you like, and someone like you Diversity however gives you – Long term creativity – Allows you to match your markets Needs continual “management” See for model service agreement
  • 18. What is a Company? It is a separate legal entity It is recognised as a legal “person” It has personality & can act as a person It has a constitution It has long life potential It can claim under Human Rights Act
  • 19. What is the purpose of a Company? Designed to make profits to distribute To limit liability of investors Companies Ltd by guarantee can use surplus to the benefit of the company
  • 20. What are the features of a Company? It is separate from individuals in it It creates a separate person It has its own life and responsibilities It has members who subscribe capital It is set up by shareholders to protect themselves It is registered with Companies House It has regulations and officers to run its affairs
  • 21. The Company and its Directors Co Act 2006 says the primary duty of a director is to the Company, but also to recognise a duty to… – towards shareholders – towards trading partners – towards employees – towards the state Co has a decapitated head – the Board Board is the “thinking and controlling mind” Rail Track, Herald of Free Enterprise, Lyme Regis
  • 22. Stakeholder groups Suppliers Shareholders Local Government Overseas Governments The Business Bankers Government Press Competitors Regulators Employees HMRC
  • 23. Directors’ legal requirements Now codified in Companies Act 2006 “Enlightened shareholder Interest” – future and potential Act within your powers Promote the success of the company Have regard to other stakeholders Exercise independent judgment Exercise reasonable care, skill and diligence A general duty to avoid conflict of interest Insolvency
  • 24. 6 Factors not to be ignored 1. Likely long term consequences of a decision 2. Interests of employees 3. Need to foster relationships with suppliers & customers 4. Impact of the business in the community & environment 5. Maintaining high standards of business conduct 6. Need to act fairly between members
  • 25. Get or keep out of gaol No requirement for extensive paper trail Well prepared board papers that – Deal with relevant factors – Demonstrate these have been considered – Minute reflects the decision
  • 26. Who is a Director? Types of Director – Executive and Non Executive – Shadow – De Facto Must be at least 1 “natural person” on the board
  • 27. Prohibitions on acting as a director Undischarged bankrupts Under the Directors Disqualification Act 1985 Person under 16 years old (from Oct 2008) From April 2007 no upper age limit Articles may impose further disqualifications
  • 28. What is the Board for? "The job of the Board is all to do with creating momentum, movement, improvement and direction. If the Board is not taking the company purposefully into the future, who is?" Sir John Harvey-Jones
  • 29. The Board's key purpose Seek to ensure the company's success by collectively directing its affairs and meeting the legitimate interests of its shareholders and relevant stakeholders
  • 30. The Board's main functions Policy formulation Accountability and compliance Strategy and leadership Supervision of management Providing clarity – no mixed messages
  • 31. Responsibilities of the Board Accountability Policy Formulation To the company Stating Purpose To Owners EXTERNAL Creating Vision and Values To regulators and legislators To Stakeholders Developing corporate climate Ensuring Directorial Audit Monitoring the external environment Governance Review Cycle Strategy Review Cycle The Board Supervising Management Strategic Thinking Performance Management Market Positioning INTERNAL Budgetary Control Setting corporate direction Review of key business results Reviewing resources Organisational capability Setting implementation processes SHORT TERM LONG TERM Operations Review Cycle
  • 32. Accountability To ensure that the Company complies with laws & regulations and that management & employees comply with carrying out the Board's decisions Very onerous duties and different from management
  • 33. Governance The Board is the 'Mind & Will' of the Company In law – all directors are jointly responsible All directors are equal (technically) Executive powers are vested in the Board Board is always responsible for the Company's affairs Directors’ primary duties are owed to the Company Board must have regard for the shareholders and other interested parties
  • 34. Strategy Board needs to set tone, standards, values Board needs to agree common vision A Board Charter clarifies ToR Directors accept & utilise their differences Reward contributions towards achieving the overall vision Selecting the MD/CEO - personifies the Board's leadership
  • 35. Direction and management Direction Formulation of strategy Acquisition & allocation of overall resources Setting policies Establishing direction Emphasising the mission & the shared vision
  • 36. Direction and management Management Running the business Shorter term operational matters Financial, production, market management
  • 37. Power & responsibility R E S P P SHAREHOLDERS O O N S W BOARD I E B I R L MANAGEMENT I T Y
  • 38. Board composition & organisation "A Board may be composed of brilliant individuals and yet be ineffective. It can only fulfill its true potential as a Board if it is properly selected, organised and led." Good practice for directors – standards for the Board
  • 39. Board meetings Directors powers are collective Need a quorum to convene a board meeting No director must be excluded Right to inspect accounts and minutes Board minutes must be kept
  • 41. All – Executive Directors Board
  • 42. Majority Executive Directors Board
  • 43. Majority Non-Exec Directors Board
  • 44. All non-Executive Board
  • 45. Roles of chairman and Managing Director Difficult to be objective about the performance of management Roles ideally need different temperaments and motivations More difficult for Executive Directors to act in their director roles Confusion as to which hat is being worn in the boardroom Too much power in one person & two heads are better than one Under pressure, management take precedence over governance Above a certain size, there is too much for one person to do Exterior profile is narrower than with two persons One person is more vulnerable than two
  • 46. In Summary… Directors Establish clarity of mission, vision and values to lead the broad direction of the company Decide upon the strategies and structure to ensure the company's survival & prosperity Delegate to management and involve staff to effect implementation of strategy, policies & plans Exercise responsibility to shareholders and other interested parties to promote & meet their legitimate interests