The new Charity Governance Code – does it go far enough?

August 4, 2017

In a move to bring charity governance in-line with the recommendations of the UK Corporate Governance Code, the best practice guide for the UK’s listed companies, the new Charity Governance Code is advocating external reviews for larger charities every three years, more openness and limits on how long trustees may serve.

CharityGovernanceCode

The new Charity Governance Code, which replaces the previous Code of Good Governance, outlines the high standards of governance that all charities and their trustees in England and Wales should aspire to.

“The code for the first time sets out clear aspirations for a charity board to meet. This code is a great stepping off point to help charities navigate the changes” Rosie Chapman, chair of the Charity Governance Code steering group

The Charity Commission is encouraging registered charities to use the code to tackle the governance challenges that the sector has faced over the last two years, most notably in the case of the failure of Kids Company.

“There is a clear consensus within the sector that we must focus more on governance. With this in mind, I envisage that we will soon see a commitment to following the Charity Governance Code become a requirement from many funders. Taking action now is a way of getting ahead of the game” Sir Stuart Etherington, chief executive of NCVO

The new code comes in two versions which share common principles and outcomes: one set of recommended practice applies to smaller charities and another to larger organisations – there is no single definition of what constitutes a small charity, the Small Charities Coalition defines small charities as those with an income under £1m, NCVO, on the other hand, define small as being income under £100,000, and that represents 80% of all registered charities.

The Charity Commission are keen to emphasise that good governance is not about ticking boxes, it is about attitudes and culture and putting the charity’s values into practice. How trustees make decisions and how well they understand what is going on are key to avoiding the pitfalls that have been highlighted in the negative press the sector has received over the last two years.

“The bottom line is, good governance is no longer an optional extra. It’s essential to charities’ effectiveness and probably their survival too. Charities need to be able to demonstrate that they take it seriously, allowing it to change the way they operate”

Charity trustees need to be less conservative, better informed and more supportive of their executives in order that their charities can realise their potential and maximise the difference they make by using good governance to develop and maintain their vision, mission, values and strategy to deliver their charitable objects.

As with the UK Corporate Governance Code and its principle of ‘comply or explain’, which is ultimately the responsibility of the shareholders, or owners, to enforce, the Charity Governance Code works on the principle of ‘apply or explain’ – the question is who is responsible for its enforcement? In most charities the closest thing to an owner is the member of the charity who is most likely to also be a trustee and therefore not the best people to be holding themselves to account. In practice the expectation is that funders will be expected to ensure that the charities they fund are well governed.

The code is built on the ‘foundation principle’ that all trustees should understand their legal duties, liabilities and responsibilities and should be committed to good governance. In practice it is not always the case that trustees take the time to fully understand their roles – something that the Charity Commission will continue to focus their efforts to try to improve.

The code then develops seven principles:

1.   leadership;

2.   integrity;

3.   decision-making;

4.   risk and control;

5.   board effectiveness;

6.   diversity;

7.   openness and accountability;

The key recommendations of the code include:

  • More oversight when dealing with subsidiary companies; registers of interests and third parties such as fundraising agencies or commercial ventures.
  • Where a charity uses third party suppliers or services – for example for fundraising, or data management, boards must ensure the work is in the charity’s interests and must regularly review agreements.
  • An expectation that the board will review its own performance and that of individual trustees, including the chair, every year, with an external evaluation for larger organisations every three years.
  • Boards should regularly review the sustainability of income sources and business models and their impact on achieving charitable purposes
  • Boards should regularly check charities’ key policies and procedures to ensure make sure that they still support, and are adequate for, the delivery of their aims, including key areas such as fundraising and data protection
  • No trustee should serve more than nine years without good reason.
  • Boards thinking carefully about diversity, how they recruit a range of skills and experience, and how they make trusteeship a more attractive proposition.
  • Boards should operate with the presumption of openness.
  • Stronger emphasis on the role of the chair and vice chair in supporting and achieving good governance.

The publication of the new code comes at a very critical time for the charity sector where high profile catastrophic collapses, data misuse and donor fatigue have all contributed to the need to focus on governance improvement.

Whilst the implementation of the code will undoubtedly lead to better levels of trustee understanding and engagement in the basics of good governance, will it address fundamental issues such as an evaluation of the public benefit achieved by a charity, known as the impact statement?

Charity trustees should also be encouraged to consider the risks involved in being too conservative and not taking strategic opportunities, particularly mergers or acquisitions with charities with similar objects.

The main test of the code will come from the cultural change required to move trustees from being dedicated volunteers but amateur board members to becoming much more professional in discharging their duties.


Is it time for a new model of charity governance?

May 24, 2017

KidsCompany

The recent news that the Government’s Insolvency Service has reportedly written to lawyers acting for Alan Yentob and other former Kids Company board members to warn them that it is minded to pursue disqualification proceedings against them, highlights the risks that charity trustees face and quashes the myth that their duties and liabilities are somehow lesser than those of their peers on boards in the private sector.

It also begs the question – are charity governance structures still fit for purpose?

In a damning report by MPs last year into the Kids Company’s collapse in 2015 they stated that there had been an “extraordinary catalogue of failures of governance and control at every level” and criticised the charity’s founder, Camila Batmanghelidjh, the other executives, the charity’s trustees and the charity regulators, the Charity Commission.

Under the newly harmonised ‘fit and proper persons test’ regimes charity trustees found to have fallen short in regard to their legal duties and responsibilities can also find themselves ineligible for future director roles in the private sector – if successful, disqualification proceedings could force former Kids Company chairman Yentob, for example, to relinquish his directorship of the television production business called I Am Curious, which he established last year.

And it is not just the collapse of Kids Company – mass resignations at the RSPCA, the investigation into fundraising methods following the suicide of 92 year-old Olive Cooke and criticism of commercial activities have shone a critical spotlight onto the activities of other high profile charities, with blame being put to a large extent on poor governance.

Two of the voluntary sector’s most prominent figures Sir Stephen Bubb, former Chief Executive of charity leaders’ network ACEVO and Sir Stuart Etherington, Chief Executive of charity umbrella group NCVO have said that the conventional trustee board model is not right for all charities and the sector should start thinking about a different form of governance for larger charities.

Addressing the question: Is Charity Governance in Crisis?, Bubb suggested that the traditional trustee board may not be effective for “those large organisations that have grown in size and structure so much that they almost resemble a new category”.

Although charities with over £100m turnover represent only 0.02% of the total number registered, they account for more than 18% of all charitable income.

Over the past 30 years in the commercial sector we have seen a sea-change in corporate governance, from the Cadbury report to the widespread adoption of the UK Corporate Governance Code, which has resulted in significant changes to board composition and boardroom behaviours.

This change in governance has not been mirrored by the voluntary sector. Oxfam treasurer Robert Humphreys has said: “The charity model at the moment I see as essentially being developed in the 19th century, in Victorian times, when a new wealthy middle class decided to set up trusts and foundations to address the problems they saw around them. That model, with trustees who are quite distant and not necessarily engaged, doesn’t stand well against the current focus on regulation, scrutiny and challenge.”

Earlier this year, the House of Lords select committee on charities’ published their report: Stronger Charities for a Stronger Society, The Lords committee was set up to look at charity governance and they concluded that good governance is fundamental and that charities need strong governance, with robust structures, processes and good behaviours to best serve their beneficiaries and their cause – this will be enshrined in the Charity Governance Code which is currently being updated.

Typically, most of the 200,000 plus registered charities in the UK are governed by a board of trustees, who may also be directors of the charity, who are volunteers, with no day to day responsibility for running the charity – they are therefore acting in a non-executive capacity.

The trustee/directors are also usually the members of the charity and if the charity is a company limited by guarantee they will act as guarantors for a sum as little as £1 each, as stated in the charity’s Articles of Association, which is only payable should the charity be wound up due to having become insolvent.

The most senior employer of the charity, who may have the title ‘Chief Executive’, is not usually a member of the board of trustees but attends board meetings as an observer.

This type of board arrangement contrasts with the unitary board structure adopted by listed commercial companies operating under the auspices of the UK Corporate Governance Code where there are equal numbers of executive and non-executive directors who all have the same legal duties and responsibilities.

The changes proposed by Sir Stephen Bubb and Sir Stuart Etherington would see the creation of unitary boards as standard for large charities, whereby their senior executives would become directors, with the introduction of payment for the non-executive directors/trustees.

Large charities Oxfam, Marie Curie and RNIB have backed this call for charities to be able to adopt a unitary board structure – Dr Jane Collins, Chief Executive of Marie Curie has said: “I’m sure it was fine years ago when the world was kinder perhaps, but now things are moving very fast. We have six meetings a year plus a two-day away day, so eight meetings a year. I can contact any of my trustees right away, but it’s not quite the same… I think a unitary board would be the way forward.”

Currently there is no reason why charity Chief Executives should not be director/trustees. As long as it is permitted by the charity’s Articles of Association and there is expressed permission from the Charity Commission then it can be done – and it does avoid the possibility of a charity CEO who regularly attends and participates in board meetings being considered to be a ‘shadow director’, having all the legal duties and responsibilities of a company director as set out in the UK Companies Act 2006.

Rachel Stancliffe, Chief Executive of the Centre for Sustainable Healthcare has been a member of the board of trustees since the charity was incorporated in 2011 – her status as a full-time paid employee of the charity and a director/trustee was approved by the Charity Commission when the charity was founded.

RNIB’s group director of resources Rohan Hewavisenti confirms that there is flexibility within the current charity structure; “We are now able to pay our trustees, even though it did take six months or a year to get that through the Charity Commission. And I think the unitary board structure is a really important one that trustees shouldn’t be excluded from having as an option.”

The rights charity, The Advocacy Project, has taken the decision to allow its Chief Executive, Judith Davey to join the trustee board. The 9 trustees took the decision on the basis of an independent report by consultancy Campbell Tickell, and a short presentation to the board by Rosie Chapman, governance consultant and former director of policy and effectiveness at the Charity Commission.

Campbell Tickell said that “on balance, we favour the inclusion of the chief executive on the board because it emphasises that responsibility for the success or failure of the organisation is shared by executives and non-executives. We have not found that it creates difficulties or conflicts of interest that cannot be managed with the right advice and careful preparation.”

The inclusion of the Chief Executive on the board of trustees addresses the apparently iniquitous situation whereby the person responsible for the day-to-day running of the charity has less responsibility in law than the unpaid trustees who may only meet as a board a few times a year – Camila Batmanghelidjh, the high profile head of Kids Company, was not a member of the charity’s board.

However, although it is possible and there are several examples of where it has happened, it is currently the exception rather than the norm to have charity Chief Executives on the board and charity trustees remain almost without exception, unpaid.

As with SMEs in the private sector, there is a recognition of the need for a pragmatic approach to the most effective governance structures for smaller charities but that does not rule out the unitary board which does not necessarily incur any additional cost and is probably no more than a recognition of what actually happens in the boardroom in practice.

Charity trustees do not necessarily need to be paid but they do need to be trained and made aware of their legal duties and responsibilities – and, despite the fact that they are volunteers, they should also be expected to attend and contribute to board meetings.

Along with a charity’s employees, trustees should also be set objectives and annually assessed on their attainment – they should be appointed for an agreed period, typically 3 years and members should take careful consideration when voting on trustees’ appointment and re-appointment.

There is also no reason why membership of the charity should not be expanded beyond the board of trustees – charity members attend the annual general meeting (AGM) and can vote on the appointment of trustees and the appointment of the charity’s auditors and they can and should hold the trustees to account.

There is no doubt that it is time to re-think charity governance not just for the large charities but for charities of all shapes and sizes The Victorian board of trustees may well still be appropriate for some charities but it is important that charities consciously choose a governance model that takes account of the significant improvement in corporate governance that has taken place in the private sector over the last 30 years and provides the right balance of challenge and support to make each charity a success and to avoid repetition of the public failings of charities such as Kids Company.

David Doughty is Chief Executive of Excellencia Limited, Chair of the registered charity The Centre for Sustainable Healthcare and Governance Consultant to the British Small Animal Veterinary Association.


How to become a Non-Executive Director – London 23 May 2017

May 12, 2017

Find out how you can obtain a Non-Executive Director position by booking a place on this interactive 1-day course.

non-executive director“A well structured and presented introduction to the responsibilities, challenges and attributes required of being a NED. It was thought-provoking. I have referred back to my copious comments in the comprehensive slide hand outs many times already”

Simon C Jones, Interim Transformation Leader and Hidden Value Discoverer

The How to become a Non-Executive Director course helps you to plan and prepare for your first NED position. It instils a real sense of what is expected of NEDs, and how you can meet the challenge.

This one-day interactive course is aimed at aspiring NEDs and covers essential knowledge about roles, responsibilities, strategy and corporate governance that are key foundations for a Non-Executive board role. It also considers up to date thinking on corporate governance and the responsibilities of owners, the board and employees.

This is followed by practical sessions on identifying NED opportunities, the process of obtaining a first appointment and performing due diligence before any position is accepted. There is emphasis on the importance of presenting your experiences with clarity and relevance.

This course identifies the various ways and circumstances in which non-executive directors can make an effective contribution to a board’s work. It also examines methods for their selection and reviews their motivation, induction and reward.

Who should attend?
Individuals who are currently a non-executive director; those seeking appointment as a non-executive director and those looking to appoint a non-executive director.

What to expect?

  • Clarifies how and why non-executive directors can strengthen a board
  • Provides practical guidance on how best to secure an appointment as a non-executive director

Course objectives
Participation on this course will provide you with the knowledge to:

  • Clarify the board’s role, purpose and key tasks
  • Appreciate the contributions that non-executive directors can make to the board in different types of company and situations
  • Recognise the qualities and experience needed to fulfil a non-executive director appointment
  • Appreciate appropriate methods for finding, selecting, appointing and rewarding non-executive directors
  • Understand the preparation required to interview for or be interviewed for the post of non-executive director

Course Leader: David Doughty CDir FIoD

David Doughty - Chartered DirectorThe course is delivered by David Doughty, a Chartered Director and highly experienced Non-Executive, Chief Executive, Chair, Entrepreneur and Business Mentor. David has extensive executive and non-executive experience in small and medium enterprises in private and public sectors. He is also a board level consultant to multi-national organisations and a Chartered Director Ambassador for the Institute of Directors. See his LinkedIn profile here: (https://uk.linkedin.com/in/daviddoughty)

Key Details
Duration: 1 day
Location:

Institute of Directors
116 Pall Mall
London
SW1Y 5ED 

Price
£330.00 (ex VAT)

Payment with Booking Price

£300.00 (ex VAT)

Partner Price*
£280.00 (ex VAT)

Book Now
To see course dates and to book your place now follow this link:

Course Registration
The fee includes lunch, refreshments and a copy of the course handbook

Attendance counts as 6 CPD hours of structured learning


*Discounts on Excellencia course fees are available for:


I’m an experienced NED but I’m not getting any new roles – what can I do?

May 12, 2017

CV Large

This is a question I get asked quite a lot – getting a foot on the Non-Executive Director ladder is difficult enough but it does not seem to get any easier once you have secured your first NED roles.

So how do you build on your NED, Governor or Trustee experience to create a Portfolio of NED roles?

The advice I always give is to start with your LinkedIn profile and look at what it says in your headline – that’s the strap-line that appears immediately below your name.

It doesn’t have to be your current or most recent job title, it could be something like “experienced Chair and Non-Executive Director” or “Independent Non-Executive Director” – something which most accurately describes your experience and what you have to bring to a board.

You may be one of the new breed of specialist NEDs so make sure that your headline contains your specialism such as “digital NED” or “sustainability NED”.

The next part of your LinkedIn profile to look at is the summary – make sure that every word earns its place in the one or two paragraphs which give a high-level overview of your skills, background and experience as a NED.

Make sure that the rest of your profile is complete and that your NED positions detail not only the type, size and sector of the organisation but also your role on the board, particularly if you were a member or chair of any board committees such as audit or remuneration.

Networking is a big part of securing your next NED role so it is a good idea to have some business cards printed which say the same thing as your LinkedIn headline and then get out networking and introduce yourself as a Non-Executive Director – the local IoD meetings are a good place to start but there are many other networks that are worth trying.

As there are usually many more NED candidates than there are jobs it is also a numbers game – so you will probably make a large number of applications and you will have to spend time on each one to make sure that you answer the questions posed in the job advert/specification and do some research on the organisation before writing your covering letter.

The increasing requirements for board diversity, whilst very welcome in terms of improving corporate governance, does mean that those of us who are “male, pale and stale” will have to work harder to be considered for new roles but if you take it seriously and spend time on your CV and covering letters then there is no reason why you cannot build a successful and rewarding NED portfolio.


Specialist NEDs

May 12, 2017

business-people-meeting-together l

There is a growing trend for Boards to seek specialist Non-Executive Directors

It used to be the case that a Non-Executive Director’s independence was their most desirable quality, these days, however, there is a growing trend for Boards to be looking for NEDs with a particular specialism especially where there is an obvious knowledge gap around the boardroom table in digital marketing or cybercrime for example.

Especially in sectors where technology or markets are evolving rapidly, it is vital for boards to be able to provide effective non-executive challenge to keep the executives on their toes and ensure that the business is seizing opportunities and not lagging behind the competition.

Specialist NEDs, particularly those whose specialisms are in one of the newer disciplines are also likely to be younger and from a more divers background than traditional Non-Executive Directors.

There is no need for the rise in specialist NEDs to threaten the non-executive nature of the role or the effectiveness of the unitary board as has been suggested by some Corporate Governance commentators – this trend is merely an expansion of the more common situation where a finance professional sits on the board as non-executive audit chair, to accommodate the rapidly changing environments most businesses operate in.

Specialist NEDs are more likely to keep themselves up to date with their subject than their fellow generalist NEDs on the board and are likely to command a premium in fees, especially in the newer and more sought after areas.

If you are a NED, or are looking to become a NED, with a background in Governance, Sustainability, Solvency, Digital, Remuneration or Start-ups, for example, then you should make sure that you highlight your specialism on your CV and LinkedIn profile


So You Want to Be a Non-Executive Director?

January 19, 2017

NED1

Are you thinking about becoming a non-executive director?

Do you have the skills to join the board as an independent non-executive director?

Do you know what the role entails?

The following frequently asked questions (and answers) should give you the information to help you understand more about what it takes to become a non-executive director.

What are Non-Executive Directors?

The first and most important thing to understand about non-executive directors (NEDs) is that there is no difference between executive and non-executive roles in the eyes of the law. This means that the legal duties and liabilities of a non-executive director, who may be engaged for as little as 1 day a month, are exactly the same as those of the full-time executive directors. For this reason it is essential to find out as much as you can about an organisation before accepting a non-executive appointment.

The second thing to understand is that the limited liability afforded by a limited company registered at Companies House only protects the exposure of the company’s shareholders. Directors, regardless of whether they are executive or non-executive, may face unlimited personal liabilities if the Board acts illegally.

What do Non-Executive Directors do?

The principal role of a non-executive director is that of Critical Friend to the organisation, someone who supports the executive directors and acts as an ambassador but is also able to view the Board objectively and challenge the organisational strategy.

Getting the critical friend balance right is the ultimate test of success for a non-executive director. The Board should work together as a cohesive team, of which non-executive directors should feel an integral part – however they should not get so close that they find it difficult to ask awkward questions about executive proposals or performance.

Whilst Executive directors are directors who are also employees of the company, Non-executive directors are officers of the company and not employees. This means that non-executive directors do not have the same employment rights as the company’s employees though HMRC will still expect your director’s fees to be paid via PAYE with NI deductions.

Unlike Executive Directors who work for the organisation on a day to day basis, usually being responsible for particular functions such as finance, technology, sales or marketing, NEDs have no line management responsibility and are there to ensure that the company is governed properly; that it complies with the right laws (of which there are many!), that its strategies are robust, that stakeholder interests are protected and subjected to the appropriate due diligence, particularly in the case of mergers or takeovers.

They are usually retained for a particular number of days per month, though in practice the actual number of days spent on the role usually exceeds this figure, they can serve for a particular period of time, usually multiples of three years, typically six years in total and remuneration varies from a pro-rata equivalent to the executive directors down to nothing other than reasonable expenses depending on the size of the organisation and whether it is in the private, public or not-for-profit sector.

There is currently much debate about the independence of non-executive directors and whether or not they should also receive share options or be shareholders in their own right. Whilst there are no hard and fast rules the guiding principle with regard to independence should be your ability to resign your position as a matter of principle, though this should always be a last resort. The acid test therefore is that the remuneration, shareholding or options should not form a major part of your income or investment portfolio so you are not financially dependent on retaining your position.

NEDs perform a variety of functions such as ensuring that pension funds are managed properly, audits are managed with integrity and that Executive remuneration and performance related bonuses are set at an appropriate rate. The exact nature of a NEDs role is very much dependent on the size of the organisation, the nature of its operations and the sector it is operating in.

In order to have a balanced board, NEDs will often have been recruited with particular skills, experience or background to fill a gap in the board’s overall capability. NEDs with specialist knowledge will often find themselves being asked to sit on special purpose committees, take part in strategic projects or mentor executive directors with functional responsibilities aligned to the NEDs specialist expertise.

Regardless of any specialist expertise NEDs must be independent, have integrity and the respect of the other board members, be prepared and able to look at the business from a ‘big picture’ perspective, be well informed and manage difficult decisions in a facilitative manner. The chemistry with other board members is vital. It is the Chairman’s responsibility to ensure that the Board functions as a team, with the NEDs functioning as a cohesive unit within the Board team.

NEDs should act in a mature and professional manner and be prepared to make a stand if they do not agree with the way the organisation is being run. Increasingly NEDs are obtaining professional qualifications such as the Institute of Directors’ Chartered Director qualification to demonstrate that they have the understanding and experience to undertake their non-executive duties in a thoroughly professional manner.

Why would you want to become a Non-Executive Director or Trustee?

Despite the fact that NED fees are often low or non-existent, the risks and responsibilities can often be significant, especially reputational risks, the time commitment is often more than expected and the role can expose you to risks of claims of negligence quite disproportionate to the rewards – yet there are many more candidates for NED positions than there are roles available.

People become Non-Executive Directors for various reasons.

  1. As part of a Portfolio Career, where they will have a number of part-time remunerated roles often combined with interim, consultancy or coaching and mentoring work
  2. In order to develop their boardroom skills, either in conjunction with or preparation for an executive role
  3. As a way of ‘giving something back’ – increasingly non-executive, trustee or governor roles with a social enterprise or other not-for-profit are seen as more effective ways of volunteering than high street fundraising or sponsored activities
  4. To ‘keep your hand in’ after you have stepped down from a senior executive role in a major corporate, large public or not-for-profit sector organisation.
  5. To be part of the excitement of the next generation of entrepreneurs on the board of a start-up or high growth business.

Provided I have the skills, how would I become one?

It is often said, especially by recruiters, that you cannot be a NED unless you already are one – so how do you get started on the NED career ladder?

The routes tend to be rather different depending on whether it is a public or voluntary sector appointment or whether it is for a private sector company. For many the holy grail of a highly remunerated NED appointment with a FTSE 100 company is well out of reach as many of these appointments rely heavily on the old boy network.

Public Sector

Public Sector NED vacancies, particularly in the NHS and housing associations, are advertised daily and although competition for these roles is still tough you will have a much better chance of success than when competing for the much rarer private sector roles. You can also gain very useful experience as a Charity Trustee or School or College Governor. In terms of corporate governance, especially strategic risk management, public and voluntary sector boards are streets ahead of the vast majority of private sector boards so your experience serving on these boards will prove invaluable as you develop your Non-executive director career.

All senior public appointments, including non-executive directors, should be governed by the overriding principle of selection on merit. They should be open to independent scrutiny and the recruitment process must be transparent and appointments are publicised openly. Search and Selection companies are often used pro-actively to ensure a strong list of interested candidates.

Private Sector

The vast majority of non-executive director vacancies in the private sector are not advertised so you will need to adopt a different strategy to secure a private sector NED appointment. By far the best way is to engage with a business at board level as a consultant or coach/mentor to the Chief Executive and over a period of time, typically 18 months, work towards being seen as a trusted advisor to the board. From this position it is only a short step to a non-executive seat at the board.

Extensive networking and raising your profile as an expert in your field via social media and speaking engagements are two ways to improve your chances of being seen as potential non-executive material in the private sector.

Where do I go from here?

There are a number of steps that you can take to enhance your chances of obtaining a NED position:

  1. Subscribe to NEDworks – you can sign up for their newsletter and NED vacancy notifications free of charge to receive regular mailings of NED vacancies in all sectors
  2. Join NEDworks – in addition to NEDworks mailings by registering for free membership you will gain access to the exclusive member’s only areas of the site including discussion forums, groups and resources
  3. Become a NEDworks Tier1 Member for only £30.00 (ex VAT) a year here to additionally receive: a free CV review to optimise your CV for NED vacancy applications; discounts off all Executive Transitions’ events and courses from Excellencia; notification of Non-Executive Director and Trustee positions as soon as they become available; searchable directory listing – enabling recruiters and head-hunters to find you access to exclusive Tier1 member’s only area
  4. Read How to write a Non-Executive Director CV here to find out how a NED CV differs from an executive CV
  5. Book a place on the next How to become a Non-Executive Director course from Excellencia

Is it time to enforce section 172 of the 2006 Companies Act?

August 8, 2016

philip greenLabour MP Frank Field, co-author of the 60-page report into the BHS collapse by the parliamentary business, innovation and skills select committee, has  raised concerns with Greg Clark, the Business Secretary, about possible gaps in Britain’s corporate governance regime.

After alleging that Sir Philip Green had “plundered” BHS’s pension schemes, he said that the committee’s report highlighted the need for tougher rules to apply to privately owned companies, and for watchdogs to be handed additional powers to enforce them.

Sir Philip Green, who was knighted in 2007 for services to the retail industry, was a director of BHS for fifteen years before selling the company to a three-times bankrupt for £1 less than a year before the company collapsed with 11,000 job losses and a pensions deficit affecting 20,000 former employees.

As a director of a UK limited company, Sir Philip was subject to the 2006 Companies Act, in particular, section 172, which states:

  1. Duty to promote the success of the company
    • 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—
      1. the likely consequences of any decision in the long term,
      2. the interests of the company’s employees,
      3. the need to foster the company’s business relationships with suppliers, customers and others,
      4. the impact of the company’s operations on the community and the environment,
      5. the desirability of the company maintaining a reputation for high standards of business conduct, and
      6. the need to act fairly as between members of the company.

Clearly, Sir Philip and the other BHS directors can be challenged for not complying with (a) the consequences of any decision in the long term – when taking over £400 million out of the company over a 15 year period, leaving it with a pensions deficit of over £500 million and selling the company on to people who were not capable of running the business were not actions that would promote the long-term sustainability of the business.

Or (b) the interests of the company’s employees, 11,000 of whom have lost their jobs and 20,000 former employees have reduced pensions

Or (c), (d), (e) and (f)

The Cabinet Office are reviewing Sir Philip’s knighthood but they will not consider reviewing his honour until any formal reviews or investigations which establish the facts of a case have been completed – these include investigations by the Serious Fraud Office, the Insolvency Service and the Financial Reporting Council who are examining PwC’s audit of the BHS.

So we may never see a prosecution for non-compliance with section 172 of the 2006 Companies Act as Sir Philip Green may well have been stripped of his knighthood and barred from being a company director by these other, more pressing investigations but it would have been a timely reminder to all company directors of their fiduciary duties, even if they are majority shareholders of the companies they direct.


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