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Workshop p munden_slides_may13
This document provides an overview of a training course on the role of company directors and boards. It discusses topics that will be covered such as corporate governance, the legal and regulatory environment, and the director's role. An introduction is given by the presenter Paul Munden, outlining the format and goals of the participative course. The document then provides background on corporate governance codes internationally and in the UK, as well as the roles and responsibilities of directors, boards, and shareholders. Key concepts around directors' duties, conflicts of interest, and insolvency are also summarized.
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Workshop p munden_slides_may13
- 1. 1 Role of theCompany Director and the Board Sport & Recreation Alliance Presented by Paul Munden 2013
- 2. 2 Course content - corporategovernance - the company’s legal and regulatory environment - the director’s role Role of the company director & the board
- 3. 3 Preliminaries name cards/businesscards 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 Paul Munden CommercialLaw Barrister Chartered Director Company Secretary, Legal Director and Chief Executive Business 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 Introductions – delegates your name your role any previous board experience?
- 6. 6 Role of thecompany director and the board Quiz
- 7. 7 Corporate governance –evolution UK 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) - 1st Combined Code on Corporate Governance (1998) - Turnbull (1999, 2005) - Higgs, Smith, - Combined Codes (2003 - 2008) - UK Corporate Governance Code 2010-
- 8. 8 The 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 of them to your publicly listed corporation using letters of credit opened by your brother-in-law at the bank where he works. You then execute a debt/equity swap with an associated general offer to the public so that you get all four cows back with tax exemption for five cows. The milk rights for six cows are transferred via an intermediary to a Cayman Islands company secretly owned by your chief financial officer who then sells the rights for seven cows back to your listed company. Your annual report states that your corporation owns eight cows, with an option on six more”
- 9. 9 UK Corporate GovernanceCode Application - UK listed companies on main markets (also exemplar for other organisations) - “comply or explain” Content - leadership - effectiveness - accountability - remuneration - relations with shareholders
- 10. 10 Corporate governance –internationally OECD corporate 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 and monitoring and their accountability to the company.
- 11. 11 Sarbanes Oxley Act2002 Application - publicly traded companies, their employees, officers & owners - auditors, lawyers, bankers, brokers & analysts of public companies, - mandatory – sanctions include fines and up to 20 yrs imprisonment - CEO & CFO personally responsible for accuracy of financial reports - Management must maintain effective internal controls
- 12. 12 Corporate governance –principal tenets Accountability Probity Transparency
- 13. 13 Shareholder rights shareholdersown shares not companies shares bring rights: to a dividend, if paid to transfer ownership of shares to vote at a general meetings
- 14. 14 Directors’ relationship withshareholders fiduciary duties accountability powers of appointment & removal of directors delegated powers – not mandated delegates “The business of the company shall be managed by the directors who may exercise all the powers of the company.”
- 15. 15 Direction vs ownership Direction whois a director? directors’ authority Ownership general meetings/voting/shareholder agreements
- 16. 16 Company constitution the organsof the constitution are: - members (via general meetings) - board of directors legal distinction is clear, can become confused in practice
- 17. 17 Direction, management &ownership SHAREHOLDERS BOARD EXECUTIVE MANAGEMENT POWER & AUTHORITY RESPONSIBILITY Can be delegated Can’t be delegated
- 18. 18 Powers reserved toboard – typical content board appointments/ removal terms of reference - board committees remuneration/change of auditors press releases communications with shareholders dividend payments changes to internal control or risk management arrangements accounting policies disposal or acquisition of major assets major contracts and investments treasury management and capital policies strategies and budgets pension arrangements policies – e.g. people, health & safety, conduct, compliance.
- 19. 19 Shareholders’ meetings allmeetings are general meetings annual general meeting extraordinary general meeting business conducted at general meetings is: ordinary business, or special business
- 20. 20 Voting at membermeetings Meetings – 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 Course content - corporategovernance - the company’s legal and regulatory environment - the director’s role Role of the company director & the board
- 22. 22 The company’s legaland regulatory environment features of a company different legal corporate forms disclosure of information and reporting corporate insolvency
- 23. 23 Limited Liability Who benefitsfrom the concept of limited liability?
- 24. 24 Examples of boarddilemmas 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 Constitutional documents Memorandum ofassociation Articles of association Tables A - F (CA 1985) New Models (CA 2006)
- 26. 26 Memorandum of association Company’sname including ltd / plc / SE Country of registration Members’ liability is limited Share capital Subscribers’ signatures Company’s objects (if required, in articles post Oct 09)
- 27. 27 Articles of association share capital / rights transfer/ transmission of shares alteration of capital general meetings procedures/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 Corporate forms inthe 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 Corporate insolvency When isa company deemed to be insolvent? a. When a company’s liabilities exceed its assets b. When a company’s current liabilities exceed its fixed assets c. When a company is unable to pay its debts as and when they fall due d. When company goes into liquidation at a time when its assets are insufficient to pay its debts and the cost of winding up
- 30. 30 Wrongful trading tradingwhen the company has no reasonable prospect of avoiding insolvent liquidation penalties directors may be personally liable to contribute disqualification for up to 15 years
- 31. 31 Wrongful trading –examples directors acting unreasonably or negligently by entering into contracts with knowledge of the company’s affairs and avoiding the facts directors failing to meet their duties
- 32. 32 Fraudulent trading “knowingly carryingon the business of a company with intent to defraud creditors or potential 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 Fraudulent trading –examples actions/transactions by officers when they know there are insufficient funds taking orders and deposits for transaction that cannot be fulfilled playing one bank off against another large variations between balance sheet and actual figures Paying off debts with directors’ guarantees
- 34. 34 Course content - corporategovernance - the company’s legal and regulatory environment - the director’s role Role of the company director & the board
- 35. 35 The director’s role directors’ duties consequences of a breach of duty roles and types of director section, appointment, induction and removal of directors leadership
- 36. 36 Who is adirector? 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 the board is accustomed to act” Director by name associate dtr, branch dtr, regional dtr, project dtr
- 37. 37 Breach of duties Whocan take action against directors? the company regulators the Crown shareholders (derivative claims) stakeholders
- 38. 38 Grounds for disqualification Whichof the following are grounds for disqualifying a director? general misconduct unfitness fraudulent trading wrongful trading
- 39. 39 Disqualification What is themaximum period for which a director can be disqualified by the courts? 10 years life life for a managing director 15 years
- 40. 40 Effect of disqualification acting whilst disqualified criminal offence individual is personally liable for debts incurred by company (any person acting on the instructions of a disqualified person may also be personally liable)
- 41. 41 Case Studies Disqualification ofdirectors questions what duties did the directors breach? were they unfit and would you have disqualified them? if so, for how long? why?
- 42. 42 Directors’ duties historically– mainly common law codified in Companies Act 2006
- 43. 43 Directors’ General Duties CompaniesAct 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 or arrangement
- 44. 44 The success ofthe company Companies Act 2006 long term employees suppliers, customers and others community / environment company’s reputation need to act fairly as between all members A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:
- 45. 45 Act within thepowers Does a director have unlimited authority? No, he must act in accordance with the company’s constitution only exercise his powers for the purpose for which they were conferred
- 46. 46 Duty of care,skill & diligence (derived from Section 214, Insolvency Act 1986) the general knowledge and skill expected of a person having the same functions (objective test) the general knowledge, skill and experience that the director actually has (subjective test) Directors must exercise the same standard of care, skill & diligence that would be exercised by a reasonably diligently person with:
- 47. 47 Duty of care,skill & diligence directors need not give continuous attention to company’s affairs directors can trust company officials to perform duties properly delegated, but should monitor directors should attend board meetings
- 48. 48 Exercise independent judgement Directorsmust exercise independent judgement but: may take advice may act in accordance with the company’s constitution incl. shareholders’ resolutions directors’ discretion may be fettered by the terms of an agreement to which the company is a party
- 49. 49 Avoid conflicts ofinterest Examples of conflicts: family companies nominee directors a director on the board of two competing companies a director leaving the board of one company to set up a competing business
- 50. 50 Benefits from thirdparties Directors may accept benefits from 3rd parties if: it “cannot be regarded as likely to give rise to a conflict of interest”
- 51. 51 Bribery Act 2010 Offences 1.Bribing another person (sec 1) 2. Receiving a bribe (sec 2) 3. Bribery of a foreign official (sec 6) 4. Failure of commercial organisations to prevent bribery (sec 7) 5. Connivance (Sec 14)
- 52. 52 Declaration of personalinterests CA 06 distinguishes three types transactions/arrangements to which the company is not a party proposed transactions./arrangements to which the company will be a party existing transactions/arrangements to which the company is a party
- 53. 53 Directors’ duties –to purchasers of shares directors and the company are liable for untrue/misleading statements or omissions which induces persons to acquire shares e.g. in a prospectus directors, as well as the Company, are personally liable for the particulars in a prospectus.
- 54. 54 Directors’ duties –to customers, suppliers and others directors are not normally liable on contract unless: director has signed cheques, purchase orders & promissory notes 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 Role of thechairman Articles of Association elected by the board chairman of the board also acts as chairman of general meetings may have a casting vote
- 56. 56 Chairman’s role –dual focus Internal board leadership board membership board direction board monitoring responsibility for people provision of information External reporting financial results wider representational role
- 57. 57 Role of themanaging 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 Role of executivedirector two accountabilities: company director - joint & several liability functional responsibility - reporting to & supporting MD
- 59. 59 Myths about NEDs NEDsshould be done away with altogether it is dangerous nonsense to assume that part- time NEDs know enough to spot problems NEDs are about as much use as Christmas tree decorations NEDs are like a bidet: no-one knows what they do, but they add a touch of class Lord Young Tiny Rowland Michael Grade
- 60. 60 Role of NEDs– 11 ‘C’s contributor challenger of executives’ proposals contact provider confidante conciliator checker of Board processes crisis manager coach/mentor to executive directors consultant compensation conscience of the company
- 61. 61 NED independence UK CorporateGovernance Code They must not: have been an employee of the company in previous 5 yrs. have had a material business interest with the company in previous 3 years receive income, other than director’s fees participate in company’s share option or performance related remuneration/pension schemes have close family ties with Company’s advisers, directors or senior employees have conflicting cross directorships represent significant shareholders serve as a director for more than 9 years
- 62. 62 Senior independent non-executive director Whichof the following does the UK Corporate Governance Code state are appropriate roles for a senior independent NED? a) sounding board for the chairman b) intermediary for the other directors c) deputising for the chairman when not available d) available to shareholders if they have concerns which are not resolved through usual channels e) taking the lead role in appraising the chairman’s performance
- 63. 63 Role of companysecretary 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 Appointment of directors executive directors contract of employment/service agreement recognises dual status of director and employee non-executive directors no contract required – usually a letter from the chairman (Higgs Review contains specimen)
- 65. 65 Appointment of directors Privatecompanies: Any person who is willing to act as a director, and is permitted by law to do so, may be appointed to be a director - (a) by ordinary resolution, or (b) by a decision of the directors Clause 17 model articles for private share companies Public Companies At 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 annual general meeting, or (b) who were not appointed or reappointed at one of the preceding two annual general meetings, must retire from office and may offer themselves for reappointment by the members Clause 21 model articles for public companies
- 66. 66 Removal 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 Removal of directors Section168 Companies Act 2006 members wishing to remove give special notice of ordinary 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 the general meeting
- 68. 68 What next? Complete allCertificate modules Take 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 Performance Take the Diploma exam & gain the Diploma in Company Direction Progress to Chartered Director
- 69. 69 Applying the knowledge AllIoD course leaders and consultants can provide: On-site support Coaching or mentoring Board consultancy or any other in-house training services to help you to apply the knowledge within your organisation. Please ask your course leader for further details
- 70. 70 Additional services Consultancyservices 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 skills For all enquiries please contact your tutor or call the IoD Key Account Team on 020 7766 8845
Editor's Notes
- #4 Chartered director Who is taking the exam
- #8 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
- #11 Saudi Corporate Governance Code
- #12 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.
- #13 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
- #14 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
- #15 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.
- #17 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?
- #18 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)
- #19 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!!
- #20 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%
- #21 Voting – 2 methods - By show of hands – one vote per person By poll – one vote per voting share
- #24 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.
- #26 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
- #27 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)
- #28 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
- #29 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
- #30 C
- #31 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.
- #34 Paying off debts with directors ’ guarantees
- #37 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.
- #40 15yrs
- #43 Almost guaranteed to come up in the exam Explain common law – now codified in CA2006 common law still relevant for interpretation
- #44 Q: What does success look like 10 years ago not defined but thought to be the maximisation of profits now increase stakeholder value
- #45 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.
- #46 Lord Black – treated company jet as if it were his – treated the profits made on the company flat on Park Avenue as his
- #47 “ 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”
- #48 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
- #49 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
- #50 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
- #51 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
- #53 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
- #56 Elected by the board not the shareholders Chairman of the board not the company but acts as chairman of general meetings
- #57 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
- #58 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.
- #59 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
- #60 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)
- #61 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
- #62 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
- #63 C is not a role found in the Code See A.4.1 and A.4.2
- #64 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.’
- #65 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
- #66 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.
- #67 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.
- #68 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