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B5: The shadow trustee: When does advising become undue influence?

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Slides from breakout session B5: The shadow trustee: When does advising become undue influence?, from the NCVO Annual Conference which took place on 16 April 2018.

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B5: The shadow trustee: When does advising become undue influence?

  1. 1. THE SHADOW TRUSTEE: WHEN DOES ADVISING BECOME UNDUE INFLUENCE? DAN FRANCIS - NCVO STEPHANIE BIDEN - BWB SRABANI SEN OBE - FULLCOLOUR LOUISE THOMSON - ICSA Dinner sponsors: Media partner: Headline sponsor: Lead sponsor: Digital partner:
  2. 2. The shadow trustee: when does advising become undue influence? Stephanie Biden Partner, Bates Wells Braithwaite
  3. 3. Terminology - “shadow director” vs. “de facto director” Shadow directors Defined in the Companies Act 2006: “a person in accordance with whose directions or instructions the directors of the company are accustomed to act. A person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity” De facto directors People who act like trustees, i.e. who take or authorise action and who are held out as being trustees. Historically meant individuals who purported to have been appointed as trustees but by some defect had not been. However the law has developed somewhat, moving away from a narrowly technical definition of de facto directors to a definition relating to individuals ‘holding themselves out’ as being directors.
  4. 4. Companies and other types of charity The terms shadow and de facto trustees relate to company law regarding directors. So… The shadow and de factor trustee are characters of concern primarily for charitable companies limited by guarantee. But… The Charities (Protection and Social Investment) Act 2016 brought in new powers for the Charity Commission to disqualify charity trustees and senior managers of charities. Therefore… Senior managers of charitable companies, CIOs and charitable unincorporated associations and trusts should all understand the nature of their role and recognise the possible risk.
  5. 5. What is the risk? • Disqualification as a company director (charitable companies) • Disqualification as a charity trustee (any legal structure) • Potential personal financial liability (charitable companies, CIOs, charitable trusts “trustee de son tort”)
  6. 6. Why are we talking about this? Action taken by the Official Receiver against the former trustees of Keeping Kids Company and the charity's CEO in post at the time of its insolvency, Camila Batmanghelidjh. The OR is seeking Ms Batmanghelidjh’s disqualification as a company director on the basis that she was a de facto director of Keeping Kids Company.
  7. 7. How can senior managers manage? • Clear scheme of delegation to senior staff and list of matters reserved to the board. • Receiving a senior management team report at board meetings. • Use available guidance such as the Charity Governance Code, Charity Commission guidance and NCVO resources. • Section of each trustees’ meeting at which no staff are present.
  8. 8. What should trustees manage? • High level of responsibility and accountability among the individual members of the trustee board (no sleepy trustees). • Managing the public face and influence of the charity through the trustee board, rather than one charismatic leader. • Trustee authority on payments of a certain size. • If the trustees want to invite in other expertise/points of view consider formally appointing a new trustee following a skills audit or create a working party/subcommittee (if empowered by governing document) chaired by a trustee and answerable to the board.
  9. 9. CEO as Shadow Trustee: What’s the issue and why is it important? Srabani Sen OBE, CEO, Full Colour
  10. 10. What I’ll cover… • Perspectives • Definition • Issues • Why it matters • Conclusions
  11. 11. Perspectives Chair/Trustee Chief Exec Consultant
  12. 12. Definitions “Someone who acts as a director but doesn’t sit on the board” ICSA, the Governance Institute “A shadow director is someone who is not appointed as a director but who gives directions or instructions that the directors of the company are accustomed to act upon” ICAEW “They are someone (director) whose involvement is not publicly known” Someone quoted in an article whose name I can’t remember…
  13. 13. The issues that people talk about • Transparency • Accountability • Checks and balances • Legal stuff
  14. 14. The real issues • People don’t know what “CEO as shadow trustee” looks like in practice • People don’t consciously consider in “live” situations • Power • Trustees failing to stepping up Definition “A shadow director is someone who is not appointed as a director but who gives directions or instructions that the directors of the company are accustomed to act upon” ICAEW
  15. 15. Markers for what “CEO stepping into ST” can look like Trustees Chief Exec Other • Not reading papers • Taking papers at face value • Not getting to know org • Over-reliance/trust in execs • Presenteeism • Chairs that don’t know how to chair • Fear of asking the “idiot” question • Not understanding job of a trustee • Domineering CEOs • Blindspots • Crafting papers to get preferred decision • Inability to write effective board papers • Lining up friendly trustees to achieve preferred decision • Not understanding job of trustee • Collusion between CEO and Chair • Insufficient time at meetings for proper discussions • Bad agenda planning • Poor framing of decisions
  16. 16. People don’t consider it as a live/real time issue Lack of: • Recognising the symptoms • Time • Forum in which to raise it • Confidence • Anxiety about annoying the CEO • Belief that it really matters…
  17. 17. Appropriate execution of power • Is it clear who has power and when? • Formal schedule of delegation • Knowledge/ information/ expertise – who has it and how is it used • How do CEOs give up the power that comes with knowledge? • When is knowledge a cover for “paradigm”? • How much do trustees need to know to do their job? • What skills do trustees need – beyond “Lawyer/ accountant”? • Emotional/ personality dynamics • Levels of emotional intelligence/ influence • Emotion as excuse – “it’s all about the kids/ DV survivors/ disabled people” • Willingness on part of board to exercise power
  18. 18. Trustees knowing/ fulfilling role Not thought about it/ wrong reasons Right reasons/ poor knowledge of role Right Reasons/ good knowledge/ insufficient time Right reasons/ good knowledge/ enough time/ unhappy to challenge Right reasons/ good knowledge/ enough time/ happy challenge
  19. 19. Trustees can force CEOs into shadow trustee role Trustee Chief Exec Consultant • Not reading papers • Taking papers at face value • Not getting to know org • Over-reliance/trust in exec team • Presenteeism • Chairs that don’t know how to chair • Fear of asking the “idiot” question • Not understanding job of a trustee • Domineering CEOs • Blindspots • Crafting papers to get preferred decision • Inability to write effective board papers • Lining up friendly trustees to achieve preferred decision • Not understanding job of trustee • Collusion between CEO and Chair • Insufficient time/ bad agenda planning • Poor framing of decisions
  20. 20. Conclusions (Why these issues matter) • Reputation/ scrutiny/ trust • Context – we need to up our game in governance as a sector • How we deliver matters as much as what we deliver – • We know this at a theoretical level but don’t think about it enough in practice • Values…The clue’s in the name “shadow” trustee
  21. 21. Thank you srabani.sen1@gmail.com 07802 790634
  22. 22. Shadow directors and group structures Louise Thomson FCIS, Head of Policy (Not for Profit), ICSA: The Governance Institute NCVO, 16 April 2018
  23. 23. Charities and subsidiary companies  A charity may set up a non-charitable company to carry out various activities  A wholly owned subsidiary’s member/shareholder will be the parent organisation. The parent’s undertakings likely to include:  Holding 100% of voting rights at AGMs  Having the majority of voting rights at general meeting  Right to appoint/remove majority of subsidiary board  A contractual agreement between the parent and subsidiary  Power to exercise dominant control over subsidiary due to provisions in the governing document.
  24. 24. Directors duties – Companies Act 2006 S 171 - duty to act within powers S 172 - duty to promote the success of the company S 173 - duty to exercise independent judgement S 174 - duty to exercise reasonable care, skill and diligence S 175 - duty to avoid conflicts of interest S 176 - duty not to accept benefits from third parties S 171 - duty to declare interest in proposed transaction or agreement.
  25. 25. Subsidiary arrangements  Overlap in personnel – trustees, directors, staff  Separate identity  Financial independence  Lack of control  Shadow directors
  26. 26. Shadow directors and subsidiaries Defined as: A person in accordance with whose directions or instructions the directors of a company are accustomed to act is described as a 'shadow director' and thus treated as a director for the purposes of certain provisions. In groups of companies there is often a concern that the parent company may be regarded as a shadow director of a subsidiary. In this event the parent might find itself liable for the debts of the subsidiary should it become insolvent and be liquidated. Shadow directors are, of course, subject to the 'wrongful trading‘.
  27. 27. Impact If found to be acting as a shadow director an individual risks:  a liability to contribute to the company’s assets following the company’s insolvency  being disqualified from being a director following the company’s insolvency  criminal sanctions for breaches of directors’ duties  personal liability for breaches of directors’ duties.
  28. 28. Avoiding claims of shadow director in subsidiaries  Asserting control over all or part of the affairs of a subsidiary or being concerned in its day-to-day management should be avoided  All or substantially all of the directors of the subsidiary should be persons who are not employees or officers of the parent  An agreement between the parent and subsidiary providing for the subsidiary to have autonomy (and perhaps limiting the flow of information from subsidiary to parent) may be helpful  Individual members of the parent company board should avoid becoming personally involved in giving directions regarding the management of the subsidiary.
  29. 29. Thank you lthomson@icsa.org.uk @louiseicsa1
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