Transcript Role of the Company Director and the Board

Role of the Company Director and the
Board
Sport & Recreation Alliance
Presented by Paul Munden
2013
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Role of the company director & the
board
Course content
corporate governance
- the company’s legal and regulatory
environment
- the director’s role
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Preliminaries
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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!
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Paul Munden
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Commercial Law Barrister
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Chartered Director
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Company Secretary, Legal Director and Chief Executive
Business Link for London
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Non Executive Director NHS North Essex
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Board advisor General Teaching Council for England
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Chairman National Youth Music Theatre
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Legal Services Board
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Justice of the Peace
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Other previous appointments
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Non Executive Director Customer First UK Ltd
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Non Executive Chairman Soda Creative Ltd
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Introductions – delegates
 your
name
 your
role
 any
previous board experience?
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Role of the company director and the
board
Quiz
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Corporate governance – evolution
UK
 business life until mid 19th century
 introduction of limited liability – 1844
 business scandals – late 1980s
 1990s - emergence of corporate governance
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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
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The Enron approach!
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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”
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UK Corporate Governance Code
Application
- UK listed companies on main markets (also exemplar for other
organisations)
- “comply or explain”
Content
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leadership
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effectiveness
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accountability
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remuneration
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relations with shareholders
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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.
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Sarbanes Oxley Act 2002
Application
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publicly traded companies, their employees, officers &
owners
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auditors, lawyers, bankers, brokers & analysts of public
companies,
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mandatory – sanctions include fines and up to 20 yrs
imprisonment
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CEO & CFO personally responsible for accuracy of financial
reports
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Management must maintain effective internal controls
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Corporate governance – principal tenets
 Accountability
 Probity
 Transparency
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Shareholder rights
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shareholders own shares not companies
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shares bring rights:
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to a dividend, if paid
 to transfer ownership of shares
 to vote at a general meetings
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Directors’ relationship with shareholders
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fiduciary duties
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accountability
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powers of appointment & removal of directors
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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.”
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Direction vs ownership
Direction
who is a director?
directors’ authority
Ownership
general meetings/voting/shareholder agreements
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Company constitution
the organs of the constitution are:
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members (via general meetings)
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board of directors
legal distinction is clear, can become confused
in practice
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Direction, management & ownership
POWER &
AUTHORITY
RESPONSIBILITY
SHAREHOLDERS
Can be
BOARD
delegated
Can’t be
delegated
EXECUTIVE
MANAGEMENT
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Powers reserved to board – typical
content
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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
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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.
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Shareholders’ meetings
 all
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meetings are general meetings
annual general meeting
extraordinary general meeting
 business
conducted at general meetings
is:
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ordinary business, or
 special business
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Voting at member meetings
Meetings – AGM and EGM
 ordinary resolutions
 special/extraordinary resolutions
> 50%*
≥ 75%*
* of those present and voting (i.e. excl. abstentions)
Voting
 by show of hands
 by poll
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Role of the company director & the
board
Course content
corporate governance
- the company’s legal and regulatory
environment
- the director’s role
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The company’s legal and regulatory
environment
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features of a company
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different legal corporate forms
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disclosure of information and reporting
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corporate insolvency
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Limited Liability
Who benefits from the concept of
limited liability?
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Examples of board dilemmas
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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
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Constitutional documents
Memorandum of association
Articles of association
Tables A - F (CA 1985)
New Models (CA 2006)
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Memorandum of association
Company’s name 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)
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Articles of association
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share capital / rights
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transfer/ transmission of
shares
proceedings at directors’
meetings
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disqualification
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alteration of capital
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secretary
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general meetings
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dividends & reserves
procedures/voting
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accounts and audit
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borrowing powers
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capitalisation of profits
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appointment, powers
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winding up
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indemnity
& duties of MD
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Corporate forms in the UK
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private limited companies
with shares – most common
 limited by guarantee – trade assns/charities /clubs
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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)
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Corporate insolvency
When is a 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
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Wrongful trading
 trading
when the company has no
reasonable prospect of avoiding insolvent
liquidation
 penalties
 directors
may be personally liable to contribute
 disqualification for up to 15 years
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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
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Fraudulent trading
“knowingly carrying on the business of a
company with intent to defraud creditors or
potential creditors”
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intent
fraudulent - actual dishonesty/real moral blame
penalties
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directors may be personally liable to contribute
criminal offence - Unlimited fine/7 years in prison
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Fraudulent trading – examples
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actions/transactions by officers when they know
there are insufficient funds
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taking orders and deposits for transaction that
cannot be fulfilled
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playing one bank off against another
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large variations between balance sheet and
actual figures
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Paying off debts with directors’ guarantees
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Role of the company director & the
board
Course content
corporate governance
- the company’s legal and regulatory
environment
- the director’s role
-
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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
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Who is a director?
Director in law 
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“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 
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associate dtr, branch dtr, regional dtr, project dtr
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Breach of duties
Who can take action against directors?
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the company
 regulators
 the Crown
 shareholders (derivative claims)
 stakeholders
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Grounds for disqualification
Which of the following are grounds for
disqualifying a director?
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general misconduct
 unfitness
 fraudulent trading
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wrongful trading
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Disqualification
What is the maximum period for which a
director can be disqualified by the courts?
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10 years
 life
 life for a managing director
 15 years
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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)
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Case Studies
Disqualification of directors
questions
 what duties did the directors breach?
 were they unfit and would you have
disqualified them?
 if so, for how long?
 why?
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Directors’ duties
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historically – mainly common law
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codified in Companies Act 2006
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Directors’ General Duties
Companies Act 2006
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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
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The success of the company
Companies Act 2006
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:
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long term
 employees
 suppliers, customers and others
 community / environment
 company’s reputation
 need to act fairly as between all members
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Act within the powers
Does a director have unlimited authority?
No, he must
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act in accordance with the company’s constitution
only exercise his powers for the purpose for which
they were conferred
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Duty of care, skill & diligence
(derived from Section 214, Insolvency Act 1986)
Directors must exercise the same standard of
care, skill & diligence that would be exercised
by a reasonably diligently person with:
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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)
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Duty of care, skill & diligence
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directors need not give continuous attention to
company’s affairs
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directors can trust company officials to perform
duties properly delegated, but should monitor
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directors should attend board meetings
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Exercise independent judgement
Directors must exercise independent
judgement but:
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may take advice
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may act in accordance with the company’s
constitution incl. shareholders’ resolutions
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directors’ discretion may be fettered by the
terms of an agreement to which the company is
a party
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Avoid conflicts of interest
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Examples of conflicts:
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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
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Benefits from third parties
Directors may accept benefits from 3rd
parties if:
it “cannot be regarded as likely to give rise
to a conflict of interest”
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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)
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Declaration of personal interests
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CA 06 distinguishes three types
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transactions/arrangements to which the company
is not a party
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proposed transactions./arrangements to which
the company will be a party
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existing transactions/arrangements to which the
company is a party
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Directors’ duties – to purchasers of
shares
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directors and the company are liable for
untrue/misleading statements or omissions
which induces persons to acquire shares
e.g. in a prospectus
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directors, as well as the Company, are
personally liable for the particulars in a
prospectus.
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Directors’ duties – to customers,
suppliers and others
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directors are not normally liable on contract
unless:
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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
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Role of the chairman
Articles of Association
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elected by the board
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chairman of the board
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also acts as chairman of general meetings
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may have a casting vote
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Chairman’s role – dual focus
Internal
External
board leadership
board membership
board direction
board monitoring
responsibility for people
provision of information
reporting financial results
wider representational role
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Role of the managing director
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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
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Role of executive director
two accountabilities:
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company director - joint & several liability
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functional responsibility - reporting to & supporting
MD
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Myths about NEDs
NEDs should be done away with altogether
it is dangerous nonsense to assume that parttime NEDs know enough to spot problems
Lord Young
NEDs are about as much use as Christmas
tree decorations
Tiny Rowland
NEDs are like a bidet: no-one knows what
they do, but they add a touch of class
Michael Grade
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Role of NEDs – 11 ‘C’s
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contributor
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challenger of executives’ 
proposals
contact provider
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confidante
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conciliator
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checker of Board
processes
crisis manager
coach/mentor to
executive directors
consultant
compensation
conscience of the
company
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NED independence
UK Corporate Governance Code
They must not:
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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
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Senior independent non-executive
director
Which of the following does the UK Corporate
Governance Code state are appropriate roles for a
senior independent NED?
sounding board for the chairman
intermediary for the other directors
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
a)
b)
c)
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Role of company secretary
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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
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Appointment of directors
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executive directors
 contract
of employment/service agreement
recognises dual status of director and
employee
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non-executive directors
contract required – usually a letter from
the chairman (Higgs Review contains
specimen)
 no
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Appointment of directors
Private companies:
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
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Removal of directors
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‘vacation’ by statute
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failure to take up a share qualification
bankruptcy
disqualified by court order
under 16 years old (CA2006)
other methods typically included in Articles
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resignation
absence (typically six months)
receiving orders made against
mental disorder
removal by written notice (Listed co/subsid.)
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Removal of directors
Section 168 Companies Act 2006
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members wishing to remove give special notice of
ordinary resolution
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company sends copy of resolution to the director
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board meeting convenes general meeting
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director may speak at meeting
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board may make representations to the members
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proposer may only make representations to the
general meeting
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What next?
Complete all Certificate 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
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Applying the knowledge
All IoD course leaders and consultants can provide:
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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
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Additional 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 skills
For all enquiries please contact your tutor or call the
IoD Key Account Team on
020 7766 8845
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