1Role of the Company Director and theBoardSport & Recreation AlliancePresented by Paul Munden2013
2Course content- corporate governance- the company’s legal and regulatoryenvironment- the director’s roleRole of the compa...
3Preliminaries name cards/business cards introductions – course delegates course format mix of presentations, exercise...
4Paul Munden Commercial Law Barrister Chartered Director Company Secretary, Legal Director and Chief ExecutiveBusiness ...
5Introductions – delegates your name your role any previous board experience?
6Role of the company director and theboardQuiz
7Corporate governance – evolutionUK business life until mid 19th century introduction of limited liability – 1844 busin...
8The Enron approach! Normal capitalism: “You have two cows. You buy a bull.Your herd multiplies, the economy grows - you ...
9UK Corporate Governance CodeApplication- UK listed companies on main markets (also exemplar for otherorganisations)- “com...
10Corporate governance – internationallyOECDcorporate governance codes should: promote transparent and efficient markets...
11Sarbanes Oxley Act 2002Application- publicly traded companies, their employees, officers &owners- auditors, lawyers, ban...
12Corporate governance – principal tenets Accountability Probity Transparency
13Shareholder rights shareholders own shares not companies shares bring rights: to a dividend, if paid to transfer own...
14Directors’ relationship with shareholders fiduciary duties accountability powers of appointment & removal of director...
15Direction vs ownershipDirectionwho is a director?directors’ authorityOwnershipgeneral meetings/voting/shareholder agreem...
16Company constitutionthe organs of the constitution are:- members (via general meetings)- board of directorslegal distinc...
17Direction, management & ownershipSHAREHOLDERSBOARDEXECUTIVEMANAGEMENTPOWER &AUTHORITY RESPONSIBILITYCan bedelegatedCan’t...
18Powers reserved to board – typicalcontent board appointments/removal terms of reference - boardcommittees remuneratio...
19Shareholders’ meetings all meetings are general meetings annual general meeting extraordinary general meeting busine...
20Voting at member meetingsMeetings – AGM and EGM ordinary resolutions > 50%* special/extraordinary resolutions ≥ 75%** ...
21Course content- corporate governance- the company’s legal and regulatoryenvironment- the director’s roleRole of the comp...
22The company’s legal and regulatoryenvironment features of a company different legal corporate forms disclosure of inf...
23Limited LiabilityWho benefits from the concept oflimited liability?
24Examples of board dilemmas entrepreneurial vs. prudent control confusion regarding the role of the board short term v...
25Constitutional documentsMemorandum of associationArticles of associationTables A - F (CA 1985)New Models (CA 2006)
26Memorandum of associationCompany’s name including ltd / plc / SECountry of registrationMembers’ liability is limitedShar...
27Articles of association share capital / rights transfer/ transmission ofshares alteration of capital general meeting...
28Corporate forms in the UK private limited companies with shares – most common limited by guarantee – trade assns/char...
29Corporate insolvencyWhen is a company deemed to be insolvent?a. When a company’s liabilities exceed its assetsb. When a ...
30Wrongful trading trading when the company has noreasonable prospect of avoiding insolventliquidation penalties direct...
31Wrongful trading – examples directors acting unreasonably ornegligently by entering into contracts withknowledge of the...
32Fraudulent trading“knowingly carrying on the business of acompany with intent to defraud creditors orpotential creditors...
33Fraudulent trading – examples actions/transactions by officers when they knowthere are insufficient funds taking order...
34Course content- corporate governance- the company’s legal and regulatoryenvironment- the director’s roleRole of the comp...
35The director’s role directors’ duties consequences of a breach of duty roles and types of director section, appointm...
36Who is a director?Director in law  “any person occupying the position of director by whatever name called” executive ...
37Breach of dutiesWho can take action against directors? the company regulators the Crown shareholders (derivative cla...
38Grounds for disqualificationWhich of the following are grounds fordisqualifying a director? general misconduct unfitne...
39DisqualificationWhat is the maximum period for which adirector can be disqualified by the courts? 10 years life life ...
40Effect of disqualification acting whilst disqualified criminal offence individual is personally liable for debts incu...
41Case StudiesDisqualification of directorsquestions what duties did the directors breach? were they unfit and would you...
42Directors’ duties historically – mainly common law codified in Companies Act 2006
43Directors’ General DutiesCompanies Act 2006- to act within powers- to promote the success of the company….- to exercise ...
44The success of the companyCompanies Act 2006 long term employees suppliers, customers and others community / environ...
45Act within the powersDoes a director have unlimited authority?No, he must act in accordance with the company’s constitu...
46Duty of care, skill & diligence(derived from Section 214, Insolvency Act 1986) the general knowledge and skill expected...
47Duty of care, skill & diligence directors need not give continuous attention tocompany’s affairs directors can trust c...
48Exercise independent judgementDirectors must exercise independentjudgement but: may take advice may act in accordance ...
49Avoid conflicts of interest Examples of conflicts: family companies nominee directors a director on the board of two...
50Benefits from third partiesDirectors may accept benefits from 3rdparties if:it “cannot be regarded as likely to give ris...
51Bribery Act 2010Offences1. Bribing another person (sec 1)2. Receiving a bribe (sec 2)3. Bribery of a foreign official (s...
52Declaration of personal interests CA 06 distinguishes three types transactions/arrangements to which the companyis not...
53Directors’ duties – to purchasers ofshares directors and the company are liable foruntrue/misleading statements or omis...
54Directors’ duties – to customers,suppliers and others directors are not normally liable on contractunless: director ha...
55Role of the chairmanArticles of Association elected by the board chairman of the board also acts as chairman of gener...
56Chairman’s role – dual focusInternalboard leadershipboard membershipboard directionboard monitoringresponsibility for pe...
57Role of the managing director- Formulating strategy- Liaising with the chairman- Developing a business portfolio in line...
58Role of executive directortwo accountabilities: company director - joint & several liability functional responsibility...
59Myths about NEDsNEDs should be done away with altogetherit is dangerous nonsense to assume that part-time NEDs know enou...
60Role of NEDs – 11 ‘C’s contributor challenger of executives’proposals contact provider confidante conciliator chec...
61NED independenceUK Corporate Governance CodeThey must not: have been an employee of the company in previous 5 yrs. hav...
62Senior independent non-executivedirectorWhich of the following does the UK CorporateGovernance Code state are appropriat...
63Role of company secretary convening board and general meetings minute taker writing up statutory books filing statut...
64Appointment of directors executive directors contract of employment/service agreementrecognises dual status of directo...
65Appointment of directorsPrivate companies:Any person who is willing to act as a director, and is permitted by law todo s...
66Removal of directors ‘vacation’ by statute failure to take up a share qualification bankruptcy disqualified by court...
67Removal of directorsSection 168 Companies Act 2006 members wishing to remove give special notice ofordinary resolution...
68What next?Complete all Certificate modulesTake the Certificate exam& gain the Certificate in Company Direction(Exam prep...
69Applying the knowledgeAll IoD course leaders and consultants can provide: On-site support Coaching or mentoring Board...
70Additional services Consultancy services Consultancy on all aspects of directing a company effectively Board evaluati...
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  • Chartered director Who is taking the exam
  • Until mid 19 th century, only companies in existence were created by state or crown Individuals traded on their own account or in partnership If business failed: Individuals were thrown into debtors ’ prison and family was put into the poorhouse Imagine owning shares in Lehman Brothers – not only lose investment but liable for company ’s debts This was not conducive to the industrial revolution Stock Companies Act 1844 introduced means to register a company and introduced concept of limited liability 20 years ago no such things as corporate governance ? Definition “the system by which companies are directed and controlled” UK Business scandals – Maxwell Corporation; BCCI; and Polly Peck (Asil Nadir) US business scandals – Enron; Worldcom; Tyco; Madoff Cadbury: first UK report on Financial Corporate Governance 1992 Greenbury: transparency of directors pay 1995 Hampel: Ronnie Hample produced first combined code 1998 Turnbull: Masterpiece on internal control – audit, risk etc Higgs: Role of the NED Smith: audit committees Leading to 2 nd Combined Code in 2003 then updated 2006 – now code for 2008 UK gone down principles route - US used legislative approach ? Sarbanes Oxley Act
  • Saudi Corporate Governance Code
  • Summary of Selected Sarbanes-Oxley Act Provisions Affecting Public Companies and Registered Accounting Firms Establishes the PCAOB to oversee the audit of public companies that are subject to the securities laws. Registered accounting firms cannot provide certain non-audit services to public company if the firm also serves as the auditor of the financial statements for the public company. Examples of prohibited non-audit services include bookkeeping, appraisal or valuation services, internal audit outsourcing services, and management functions. Listed company audit committees are responsible for the appointment, compensation, and oversight of the registered accounting firm, including the resolution of disagreements between the registered accounting firm and company management regarding financial reporting. Audit committee members must be independent. For each annual and quarterly report filed with SEC, the CEO and CFO must certify that they have reviewed the report and, based on their knowledge, the report does not contain untrue statements or omissions of a material fact resulting in a misleading report and that, based on their knowledge, the financial information in the report is fairly presented. In each annual report filed with SEC, company management must state its responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting, and assess the effectiveness of its internal control structure and procedures for financial reporting. The registered accounting firm must also attest to, and report on, management ’s assessment of the effectiveness of its internal control over financial reporting. Public companies must disclose in periodic reports to SEC whether the audit committee includes at least one member who is a financial expert and, if not, the reasons why.
  • Accountability: to shareholders taking account of stakeholders such as employees, customers, suppliers and communities Probity: how honest does a director have to be? Transparency: Enron
  • Even collectively, shareholders do not own the company They own a bundle of rights on which a monetary value can be placed Mistress example Come back to this after next exercise
  • What is the difference between a duty and a fiduciary duty? Directors are not mandated delegates of the shareholders. If they were, it would imply that they should forego whatever powers of individual judgement they might have, in order to fall in with the wishes and demands of the shareholders. A director who was merely the mouthpiece of the shareholders, would, by fettering his or her discretion in that way, be failing in his or her duty to act in the best interests of the company.
  • In practice, even 160 years on the distinction can become confused, particularly in SMEs Member and director roles different Q name distinctions Some small companies don ’t distinguish between board and general meetings – problems – 1. voting powers 2.general meeting isn’t the place to run the business 3. Directors negligent if they let major s/holder make all the decisions because they confuse s/holder voting rights in general meeting with Board meetings Q what are members options if they don ’t like what a board is doing?
  • Q Board owes responsibility to who? Members, employees, outside world Q How do members delegate power and authority to the board? Articles Q How does the board delegate power and authority to management? Schedule of reserved matters (see later)
  • Required for listing companies by Combined Code – read CC quote pg78 RCD Should be expressed in writing and reviewed by whole Board annually Should be reflected in any limits of authority from Board to exec management and to other tiers of management – Scheme of Delegation Otherwise confusion – e.g. who has the power to enter into a property lease Remember: apparent authority will bind the company!!
  • Q under CA2006 – in what circumstances does a company have to have an AGM each year if articles require / if public company Q Which two resolutions have to be dealt with at a general meeting rather than written res removal of director or auditor Q Ordinary business % >50% Special at least 75%
  • Voting – 2 methods - By show of hands – one vote per person By poll – one vote per voting share
  • Corporate veil excercise Discussion around the concept of the corporate veil and in what circumstances might the veil be lifted exposing directors to personal liability.
  • 2 routes Off the shelf company – change memo/articles and name Company formation – Oct 2009 New default articles for private company by shares and by guarantee and public company – used if no articles filed at co house
  • Company name – Q restrictions? Similar names, sensitive names/words, International etc Q why county of registration? Objects clause must be sufficiently wide to avoid directors acting outside their authority (ultra vires) “ to carry on business as a general commercial company” Initial signatories to Memorandum are referred to as subscribers, rather than members New default articles for private company by shares and by guarantee and public company – used if no articles filed at co house Oct 09: Memorandum – historic document recording subscribers (and in a co Ltd by shares confirmation that each is to take one or more shares) and the form of company – all else moved to articles (no need for an objects clause at all – except for Charities)
  • Standard format – Table A –attached to Companies Acts 1948 & 1985 CA2006 articles for private & public ltd cos and guarantee cos Appointment, powers and duties – exam fodder Borrowing: new rules in CA2006 – raised to £10K (£15K credit transactions) without approval from members Indemnity – company should indemnify directors against actions against them where acting in good faith (even by shareholders) but only if they win D&O Cover
  • Companies limited by shares – by far the most common Companies limited by guarantee – charities and clubs - £1 - £100 – shares in share co have value whereas members of CLG have no value Can be used for trading (Network Rail example) normally restrictions of distribution of profits/winding up - can avoid Ltd – charities often use guarantee companies as articles comply Community interest companies – since July 2005 – public good – asset lock – governed by CIC regulator – no tax advantages – can be Ltd or CLG CIOs – (charities act 2006 – early 2011) - single registration with Charity Commission not Co House – single accounts regime Incorporated by charter – IoD, ICSA, ICAEW, RICS, universities Incorporated by statute - 2003 statute created mechanism for NHS Foundation Trusts (emphasis on good NEDs by Monitor) SE – must trade in at least 2 EU countries Unlimited companies – exempt from filing accounts annually – might be used for asset holding between individuals
  • C
  • IA 1986 s214 enables the court to declare a director liable to contribute to the assets of an insolvent company if at some earlier time the director knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. If proved then the director may be held liable unless the court is satisfied that he “took every step” to minimise the loss to creditors Even if the management accounts are not up to scratch – other signs may be enough to trigger liability DGK Contractors Ltd (the court held that the fact that one supplier put them on stop and the others were pressing for payment should have led them to institute some form of financial control at that point) Q: At the point a company is not able to pay their debts as they fall due; the board should do what? Take advice preferably from licensed insolvency practitioner or suitably experienced lawyer (liability insurance). Contribution will generally be the additional debt incurred by the company from the point the directors should have cased to trade. The order may not be divided equally between the directors but they have joint and several liability.
  • Paying off debts with directors ’ guarantees
  • Co is separate legal entity, but law requires it to have directors who take responsibility for its affairs, actions and transactions Any person occupying ….. Gives the court the power to determine who is a director Common to refer to different status (exec/NED), but law does not recognise any difference Q define difference between NED and exec role? Part time, no executive role, not an employee Nominee director – appointed by major share/stakeholder Q to whom does a nominee owe a duty? Alternate – Articles permit a director to appoint an alternate to fill his/her place on a temporary basis Q duty? Q would you take on role if you were not aware of the issues surrounding the decision you might have to make? Shadow director – a person holding an influential position who gives the directors instructions which they are accustomed to follow (Usinor/Banks) Q problems for the shadow director as opposed to 288 director insurance, certainty Director by name: SMC Electronics v Akher Pg56 RCD – could the SMC enforce the contract Court considered three questions: Did Bennett had actual express authority under his contract of employment – job title Director PSU sales – you must perform such duties as may be reasonably associated with your job title – yes Did he have implied authority – job title alone confirmed implied authority Did he have apparent authority – Bennett ’s name and title on company note paper and cards gave apparent authority.
  • 15yrs
  • Almost guaranteed to come up in the exam Explain common law – now codified in CA2006 common law still relevant for interpretation
  • Q: What does success look like 10 years ago not defined but thought to be the maximisation of profits now increase stakeholder value
  • The legal Position of Stakeholders discuss enforcement – the directors owe their duty to the company so while a company is solvent only the company (shareholders or minority shareholders through a derivative action) may take action against a director for failing in their duty – not for example employees, suppliers etc.
  • Lord Black – treated company jet as if it were his – treated the profits made on the company flat on Park Avenue as his
  • “ Higher of the actual skill possessed by a director or the skill reasonably expected of such a director” leading case Re Jan of London Ltd (Hoffmann) “ a 30 yr qualified accountant must, as a director, show the care and skill of a 30 yr qualified chartered accountant, whereas those directors who might not be amongst the sharpest knifes in the drawer cannot hide behind their subjective stupidity; they must show the care, skill and diligence that a sensible observer would expect of such a director of such a company”
  • Continuous attention: e.g. NEDs Trust: Q how does this work in practice can trust FD report but must still question and probe where appropriate
  • Advice: Directors should have access to independent advice paid for by the company May act in accordance with shareholder res/articles: to the extent directors powers are fettered they clearly can ’t exercise independent judgement Agreements: only where contracts are entered into before D joins the board – also can bind nominee directors to remove some of the conflict
  • Potential conflict situations must be declared and authorised by the board (standing declaration) Q what happens when a conflict arises interested director should not vote or count in the quorum
  • Change to slide – remove authorised by members “ A director must not accept a benefit from a third party conferred by reason of his being a director or his doing or not doing anything as a director” Corporate hospitality? Hospitality register – board code of business ethics should set out precise guidance
  • Secret Profits not a party: Re (Hastings) Ltd 1948 (pg 257 Co Dir text book) It can be seen that even where the company did not lose out by the personal interest or even where it made a profit as a result, any profit made by the directors will be treated as a secret profit and repayable to the company. Under CA2006 the interest must be declared to the directors before the transaction takes place. This duty will normally include connected persons
  • Elected by the board not the shareholders Chairman of the board not the company but acts as chairman of general meetings
  • Previously said that Chairman ’s role has external focus – this was an oversimplification. Prominent health authority chair: Don ’t: do the CE role (often underperformed when in executive position) duck/put off difficult issues blame others for failings (different to holding to account) have too cosy a relationship with CEO defer uncritically to the technical experts on the board (ask the idiot question) monopolise the lime light bully bring personal issues into the board arena forget people ’s names fail to recognise NEDs going native
  • Q Is CEO or MD recognised in law? MD has no special board powers unless granted by the articles. See Mitchell and Hobbs (pg 125 RCD) Two directors Radford and Pearce – Co Sec Mill – Radford 66% Mill and Pearce 17% each - Mill withdrew £3.9K to stop Radford misusing – placed with accountants – Radford took action against Mill on behalf of the company. Mill argued that Radford had no authority to commence action against him on behalf of the board. Court agreed Board as a whole had been delegated powers to manage the company and this included control over litigation. No special powers in articles conferred on MD and cannot be inferred because board had allowed Radford to act as MD on other matters. Case shows that majority shareholders who hold the office of MD cannot ignore the board’s authority.
  • At board al execs equal – at exec meeting subject to line management of MD Q how does an exec director mange any conflict between their duty to the company and to their line manager? Problem with internal promotions to the board – don ’t understand the their expanded role and duty to the company as a whole
  • Foundation Trust example – Monitor requires NEDs to effectively challenge before status granted Some NEDs are predisposed to accept what the executive team tell them – self congratulatory (be wary of benchmarking) Accessing different types of input in collecting data – e.g. walk the floor (difficult for executives to do) Supportive challenge Don’t ambush the executive at board meetings Don’t question from your own point of view (soapboxing)
  • C 1&2 I have no knowledge of health sector but still expected to challenge – NEDs should always be a governance expert Combined Code – independent advice at company’s expense
  • Higgs criteria for independence – uproar when brought in CC 2003 – financial press reported it had found two NEDs who had served 41 & 42 yrs! Found on page 129 RCD – Not all NEDs have to be independent but membership of board committee require independence e.g. audit and recommended in Rem Likely exam Q – according to the CC which of the following are not features of NED independence - serve as a director for more than 6 years Senior Independent NED Q what significance shareholder comms; NED lead
  • C is not a role found in the Code See A.4.1 and A.4.2
  • Harvey-Jones: ‘A company secretary should have considerable personal integrity and be seen to stand for probity and right within the company. The secretary should be seen to “side with the angels” and be prepared to state when the occasion demands that “I fear that while what we are doing is within the letter of the law we are not within the spirit”. They have to be trusted by everyone. It is a bloody tough job.’ Chair and Co Sec: UK Corp Gov Code B:5 ‘ Under the direction of the chairman, the company secretary’s responsibilities include ensuring good information flows within the board and its committees and between senior management and non-executive directors, as well as facilitating induction and assisting with professional development as required. ‘ The company secretary should be responsible for advising the board through the chairman on all governance matters.’
  • Exec directors of a limited company are a director of the limited entity having been appointed by the shareholders (under table a board appoints and s/holders ratify) have executive responsibilities by virtue of their contract of employment/service agreement BUT Table A (Article 84) provides that if a director ceases to be a director, his service contract terminates as well. BUT without prejudice to any claim for damages for breach of contract NEDs on the other hand not employees but note tax position PAYE
  • Companies formed under CA 2006 (post Oct 09) These model articles differ from the old Table A Articles in that in new articles draw no distinction between a director appointed by the members to fill a vacancy or as an additional director. There is also no requirement that a director must be recommended by the existing board, or that notice must be given by a member of the intention to propose a new director for appointment, before an appointment is made by members. Nor is there a requirement for directors to retire by rotation, so there is no need to determine the order in which directors retire. Most share companies will be governed by the existing Table A Articles, but members may resolve at any time to use the new form articles.
  • Must ensure employment rights not violated – might be lawful to remove as director but not as an employee. Some directors waive their employment rights in return for a long notice period 1 yr.
  • Outright resignation is rare – in fact you should probably never resign. Resignation, with a negotiation, is normal route But sometimes, director will not go voluntarily Process Removal involves members giving “special” notice to the Company (28 days) Board convenes general meeting (14 days notice) Director has right of representations at meeting
  • Workshop p munden_slides_may13

    1. 1. 1Role of the Company Director and theBoardSport & Recreation AlliancePresented by Paul Munden2013
    2. 2. 2Course content- corporate governance- the company’s legal and regulatoryenvironment- the director’s roleRole of the company director & theboard
    3. 3. 3Preliminaries name cards/business cards introductions – course delegates course format mix of presentations, exercises, questions,discussion style – informal & participative timings – start, breaks, finish being a director law & best practice must be tailored to individual circumstances IOD Folders fun!
    4. 4. 4Paul Munden Commercial Law Barrister Chartered Director Company Secretary, Legal Director and Chief ExecutiveBusiness Link for London Non Executive Director NHS North Essex Board advisor General Teaching Council for England Chairman National Youth Music Theatre Legal Services Board Justice of the Peace Other previous appointments Non Executive Director Customer First UK Ltd Non Executive Chairman Soda Creative Ltd
    5. 5. 5Introductions – delegates your name your role any previous board experience?
    6. 6. 6Role of the company director and theboardQuiz
    7. 7. 7Corporate governance – evolutionUK business life until mid 19th century introduction of limited liability – 1844 business scandals – late 1980s 1990s - emergence of corporate governance- Cadbury, Greenbury, Hampel (1992-1997)- 1stCombined Code on Corporate Governance (1998)- Turnbull (1999, 2005)- Higgs, Smith,- Combined Codes (2003 - 2008)- UK Corporate Governance Code 2010-
    8. 8. 8The Enron approach! Normal capitalism: “You have two cows. You buy a bull.Your herd multiplies, the economy grows - you sell the bull& retire” Enron capitalism: “You have two cows. You sell three ofthem to your publicly listed corporation using letters ofcredit opened by your brother-in-law at the bank where heworks. You then execute a debt/equity swap with anassociated general offer to the public so that you get allfour cows back with tax exemption for five cows. The milkrights for six cows are transferred via an intermediary to aCayman Islands company secretly owned by your chieffinancial officer who then sells the rights for seven cowsback to your listed company. Your annual report states thatyour corporation owns eight cows, with an option on sixmore”
    9. 9. 9UK Corporate Governance CodeApplication- UK listed companies on main markets (also exemplar for otherorganisations)- “comply or explain”Content- leadership- effectiveness- accountability- remuneration- relations with shareholders
    10. 10. 10Corporate governance – internationallyOECDcorporate governance codes should: promote transparent and efficient markets protect shareholder rights promote the equitable treatment of shareholders recognise the rights of stakeholders ensure timely & accurate financial, performance,ownership and governance reporting set out the board’s role for strategic guidance andmonitoring and their accountability to the company.
    11. 11. 11Sarbanes Oxley Act 2002Application- publicly traded companies, their employees, officers &owners- auditors, lawyers, bankers, brokers & analysts of publiccompanies,- mandatory – sanctions include fines and up to 20 yrsimprisonment- CEO & CFO personally responsible for accuracy of financialreports- Management must maintain effective internal controls
    12. 12. 12Corporate governance – principal tenets Accountability Probity Transparency
    13. 13. 13Shareholder rights shareholders own shares not companies shares bring rights: to a dividend, if paid to transfer ownership of shares to vote at a general meetings
    14. 14. 14Directors’ relationship with shareholders fiduciary duties accountability powers of appointment & removal of directors delegated powers – not mandated delegates“The business of the companyshall be managed by the directorswho may exercise all the powersof the company.”
    15. 15. 15Direction vs ownershipDirectionwho is a director?directors’ authorityOwnershipgeneral meetings/voting/shareholder agreements
    16. 16. 16Company constitutionthe organs of the constitution are:- members (via general meetings)- board of directorslegal distinction is clear, can become confusedin practice
    17. 17. 17Direction, management & ownershipSHAREHOLDERSBOARDEXECUTIVEMANAGEMENTPOWER &AUTHORITY RESPONSIBILITYCan bedelegatedCan’t bedelegated
    18. 18. 18Powers reserved to board – typicalcontent board appointments/removal terms of reference - boardcommittees remuneration/change ofauditors press releases communications withshareholders dividend payments changes to internal controlor risk managementarrangements accounting policies disposal or acquisition ofmajor assets major contracts andinvestments treasury management andcapital policies strategies and budgets pension arrangements policies – e.g. people,health & safety, conduct,compliance.
    19. 19. 19Shareholders’ meetings all meetings are general meetings annual general meeting extraordinary general meeting business conducted at general meetingsis: ordinary business, or special business
    20. 20. 20Voting at member meetingsMeetings – AGM and EGM ordinary resolutions > 50%* special/extraordinary resolutions ≥ 75%** of those present and voting (i.e. excl. abstentions)Voting by show of hands by poll
    21. 21. 21Course content- corporate governance- the company’s legal and regulatoryenvironment- the director’s roleRole of the company director & theboard
    22. 22. 22The company’s legal and regulatoryenvironment features of a company different legal corporate forms disclosure of information and reporting corporate insolvency
    23. 23. 23Limited LiabilityWho benefits from the concept oflimited liability?
    24. 24. 24Examples of board dilemmas entrepreneurial vs. prudent control confusion regarding the role of the board short term vs. long term commercial need vs. responsibility to others conflicts of interest directors of subsidiary companies directors of JV companies directors of family companies
    25. 25. 25Constitutional documentsMemorandum of associationArticles of associationTables A - F (CA 1985)New Models (CA 2006)
    26. 26. 26Memorandum of associationCompany’s name including ltd / plc / SECountry of registrationMembers’ liability is limitedShare capitalSubscribers’ signaturesCompany’s objects (if required, in articles post Oct 09)
    27. 27. 27Articles of association share capital / rights transfer/ transmission ofshares alteration of capital general meetingsprocedures/voting borrowing powers appointment, powers& duties of MD proceedings at directors’meetings disqualification secretary dividends & reserves accounts and audit capitalisation of profits winding up indemnity
    28. 28. 28Corporate forms in the UK private limited companies with shares – most common limited by guarantee – trade assns/charities /clubs public limited companies community interest companies (CIC) – public good corporations formed by statute or by charter charitable incorporated organisation (CIO) societas europeae (SE) unlimited companies – rare, exempt from filing a/cs, tax adv limited liability partnerships (LLP)
    29. 29. 29Corporate insolvencyWhen is a company deemed to be insolvent?a. When a company’s liabilities exceed its assetsb. When a company’s current liabilities exceed its fixedassetsc. When a company is unable to pay its debts as andwhen they fall dued. When company goes into liquidation at a time whenits assets are insufficient to pay its debts and thecost of winding up
    30. 30. 30Wrongful trading trading when the company has noreasonable prospect of avoiding insolventliquidation penalties directors may be personally liable to contribute disqualification for up to 15 years
    31. 31. 31Wrongful trading – examples directors acting unreasonably ornegligently by entering into contracts withknowledge of the company’s affairs andavoiding the facts directors failing to meet their duties
    32. 32. 32Fraudulent trading“knowingly carrying on the business of acompany with intent to defraud creditors orpotential creditors”intentfraudulent - actual dishonesty/real moral blamepenalties directors may be personally liable to contribute criminal offence - Unlimited fine/7 years in prison
    33. 33. 33Fraudulent trading – examples actions/transactions by officers when they knowthere are insufficient funds taking orders and deposits for transaction thatcannot be fulfilled playing one bank off against another large variations between balance sheet andactual figures Paying off debts with directors’ guarantees
    34. 34. 34Course content- corporate governance- the company’s legal and regulatoryenvironment- the director’s roleRole of the company director & theboard
    35. 35. 35The director’s role directors’ duties consequences of a breach of duty roles and types of director section, appointment, induction and removalof directors leadership
    36. 36. 36Who is a director?Director in law  “any person occupying the position of director by whatever name called” executive non-executive directors nominee director alternate director shadow director – “someone in accordance with whose instructions theboard is accustomed to act”Director by name  associate dtr, branch dtr, regional dtr, project dtr
    37. 37. 37Breach of dutiesWho can take action against directors? the company regulators the Crown shareholders (derivative claims) stakeholders
    38. 38. 38Grounds for disqualificationWhich of the following are grounds fordisqualifying a director? general misconduct unfitness fraudulent trading wrongful trading
    39. 39. 39DisqualificationWhat is the maximum period for which adirector can be disqualified by the courts? 10 years life life for a managing director 15 years
    40. 40. 40Effect of disqualification acting whilst disqualified criminal offence individual is personally liable for debts incurredby company (any person acting on theinstructions of a disqualified person may also bepersonally liable)
    41. 41. 41Case StudiesDisqualification of directorsquestions what duties did the directors breach? were they unfit and would you havedisqualified them? if so, for how long? why?
    42. 42. 42Directors’ duties historically – mainly common law codified in Companies Act 2006
    43. 43. 43Directors’ General DutiesCompanies Act 2006- to act within powers- to promote the success of the company….- to exercise independent judgement- to exercise reasonable care, skill and diligence- to avoid conflicts of interest- not to accept benefits from third parties- to declare interest in proposed transaction orarrangement
    44. 44. 44The success of the companyCompanies Act 2006 long term employees suppliers, customers and others community / environment company’s reputation need to act fairly as between all membersA director of a company must act in the way he considers, ingood faith, would be most likely to promote the success of thecompany for the benefit of its members as a whole, and in doingso have regard (amongst other matters) to:
    45. 45. 45Act within the powersDoes a director have unlimited authority?No, he must act in accordance with the company’s constitution only exercise his powers for the purpose for whichthey were conferred
    46. 46. 46Duty of care, skill & diligence(derived from Section 214, Insolvency Act 1986) the general knowledge and skill expected of aperson having the same functions (objectivetest) the general knowledge, skill and experiencethat the director actually has (subjective test)Directors must exercise the same standard ofcare, skill & diligence that would be exercisedby a reasonably diligently person with:
    47. 47. 47Duty of care, skill & diligence directors need not give continuous attention tocompany’s affairs directors can trust company officials to performduties properly delegated, but should monitor directors should attend board meetings
    48. 48. 48Exercise independent judgementDirectors must exercise independentjudgement but: may take advice may act in accordance with the company’sconstitution incl. shareholders’ resolutions directors’ discretion may be fettered by the termsof an agreement to which the company is a party
    49. 49. 49Avoid conflicts of interest Examples of conflicts: family companies nominee directors a director on the board of two competingcompanies a director leaving the board of one companyto set up a competing business
    50. 50. 50Benefits from third partiesDirectors may accept benefits from 3rdparties if:it “cannot be regarded as likely to give riseto a conflict of interest”
    51. 51. 51Bribery Act 2010Offences1. Bribing another person (sec 1)2. Receiving a bribe (sec 2)3. Bribery of a foreign official (sec 6)4. Failure of commercial organisations toprevent bribery (sec 7)5. Connivance (Sec 14)
    52. 52. 52Declaration of personal interests CA 06 distinguishes three types transactions/arrangements to which the companyis not a party proposed transactions./arrangements to whichthe company will be a party existing transactions/arrangements to which thecompany is a party
    53. 53. 53Directors’ duties – to purchasers ofshares directors and the company are liable foruntrue/misleading statements or omissionswhich induces persons to acquire sharese.g. in a prospectus directors, as well as the Company, arepersonally liable for the particulars in aprospectus.
    54. 54. 54Directors’ duties – to customers,suppliers and others directors are not normally liable on contractunless: director has signed cheques, purchase orders & promissorynotes where the company’s name does not appear legibly not clear director is contracting as an agent director exceeds his authority before the company is incorporated performance personally guaranteed by director fraudulent or negligent misstatements
    55. 55. 55Role of the chairmanArticles of Association elected by the board chairman of the board also acts as chairman of general meetings may have a casting vote
    56. 56. 56Chairman’s role – dual focusInternalboard leadershipboard membershipboard directionboard monitoringresponsibility for peopleprovision of informationExternalreporting financial resultswider representational role
    57. 57. 57Role of the managing director- Formulating strategy- Liaising with the chairman- Developing a business portfolio in line with strategy- Delivering the business plan- Establishing planning and control systems- Ensuring objectives and standards are understood- Monitoring results against plans- Taking remedial action- Leading management and employees- Managing the company today to day
    58. 58. 58Role of executive directortwo accountabilities: company director - joint & several liability functional responsibility - reporting to & supportingMD
    59. 59. 59Myths about NEDsNEDs should be done away with altogetherit is dangerous nonsense to assume that part-time NEDs know enough to spot problemsNEDs are about as much use as Christmastree decorationsNEDs are like a bidet: no-one knows whatthey do, but they add a touch of classLord YoungTiny RowlandMichael Grade
    60. 60. 60Role of NEDs – 11 ‘C’s contributor challenger of executives’proposals contact provider confidante conciliator checker of Boardprocesses crisis manager coach/mentor toexecutive directors consultant compensation conscience of thecompany
    61. 61. 61NED independenceUK Corporate Governance CodeThey must not: have been an employee of the company in previous 5 yrs. have had a material business interest with the company inprevious 3 years receive income, other than director’s fees participate in company’s share option or performance relatedremuneration/pension schemes have close family ties with Company’s advisers, directors orsenior employees have conflicting cross directorships represent significant shareholders serve as a director for more than 9 years
    62. 62. 62Senior independent non-executivedirectorWhich of the following does the UK CorporateGovernance Code state are appropriate roles for asenior independent NED?a) sounding board for the chairmanb) intermediary for the other directorsc) deputising for the chairman when not availabled) available to shareholders if they have concernswhich are not resolved through usual channelse) taking the lead role in appraising the chairman’sperformance
    63. 63. 63Role of company secretary convening board and general meetings minute taker writing up statutory books filing statutory returns communicating with shareholders dealing with share transactions compliance board adviser assisting the chairman
    64. 64. 64Appointment of directors executive directors contract of employment/service agreementrecognises dual status of director andemployee non-executive directors no contract required – usually a letter fromthe chairman (Higgs Review containsspecimen)
    65. 65. 65Appointment of directorsPrivate companies:Any person who is willing to act as a director, and is permitted by law todo so, may be appointed to be a director -(a) by ordinary resolution, or(b) by a decision of the directorsClause 17 model articles for private share companiesPublic CompaniesAt the first annual general meeting all the directors must retire from office.At every subsequent annual general meeting any directors -(a) who have been appointed by the directors since the last annualgeneral meeting, or(b) who were not appointed or reappointed at one of the precedingtwo annual general meetings, must retire from office and may offerthemselves for reappointment by the membersClause 21 model articles for public companies
    66. 66. 66Removal of directors ‘vacation’ by statute failure to take up a share qualification bankruptcy disqualified by court order under 16 years old (CA2006) other methods typically included in Articles resignation absence (typically six months) receiving orders made against mental disorder removal by written notice (Listed co/subsid.)
    67. 67. 67Removal of directorsSection 168 Companies Act 2006 members wishing to remove give special notice ofordinary resolution company sends copy of resolution to the director board meeting convenes general meeting director may speak at meeting board may make representations to the members proposer may only make representations to thegeneral meeting
    68. 68. 68What next?Complete all Certificate modulesTake the Certificate exam& gain the Certificate in Company Direction(Exam prep sessions & 1-2-1 coaching are available if required)Attend the 3-day Diploma module -Developing Board PerformanceTake the Diploma exam& gain the Diploma in Company DirectionProgress to Chartered Director
    69. 69. 69Applying the knowledgeAll IoD course leaders and consultants can provide: On-site support Coaching or mentoring Board consultancy or any other in-house training servicesto help you to apply the knowledge within yourorganisation.Please ask your course leader for further details
    70. 70. 70Additional services Consultancy services Consultancy on all aspects of directing a company effectively Board evaluation Bespoke programmes on corporate governance, finance, strategy,marketing, people, change or specific company roles Individual coaching or mentoring Development programmes for: Specific roles such as Chairman, MD, FD, non-exec, trustee Running a successful small business Leadership skills Business presentation skills Negotiation skillsFor all enquiries please contact your tutor or call theIoD Key Account Team on020 7766 8845

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