Exactly what should directors do?

August 26, 2014

For the first time in law, the 2006 UK Companies Act sets out what a company directors duties are

Companies Act 2014The 2006 Companies Act, which set out to streamline and simplify UK Company law, ended up being one of the largest pieces of legislation ever written!

However, it did, for the first time, specify exactly what a Company Director’s duties are (which apply equally to both Executive and Non-Executive Directors), as follows:

  1. To act within powers
  2. To promote the success of the company
  3. To exercise independent judgement
  4. To exercise reasonable care, skill and diligence
  5. To avoid conflicts of interest
  6. Not to accept benefits from third parties
  7. To declare interest in proposed transaction or arrangement with the company

To take them one by one – To act within powers – how does a director know what powers he or she is required to act within?

A good place to start is the Articles of Association (previously known as the Memorandum and Articles or ‘Mem and Arts’) – when was the last time you looked at these? When did your board last review them to make sure that they are still appropriate? These, together with any shareholder agreements, contracts, covenants and other items form the company’s constitutional documents which define your powers as a director.

If you haven’t looked at these for a while, or worse still, have never looked at them, then ask your Company Secretary for copies as soon as possible.

Next – To promote the success of the company – prior to the 2006 Act it used to be the case that company directors were responsible to shareholders and providing they endeavoured to ensure a decent return on the shareholders investment then they were complying with their duties.

Following the ‘unacceptable face of capitalism’ scandals of Lonrho and Slater Walker in the 1970s and the corporate failures of the ’80s leading to the Cadbury Report and the UK Corporate Governance Code it became clear that company directors had much wider duties which are now enshrined in the 2006 Companies Act, especially in respect of promoting the success of the company.

To promote the success of the company – having regard (amongst other matters) to:

  • The likely consequences of any decision in the long term;
  • The interests of the company’s employees;
  • The need to foster the company’s business relationships with suppliers, customers and others;
  • The impact of the company’s operations on the community and the environment;
  • The desirability of the company maintaining a reputation for high standards of business conduct; and
  • The need to act fairly as between the members of the company

Clearly, the new act, which applies equally to Executive and Non-Executive company directors in the UK, establishes a legal duty for directors to avoid short-termism in their strategic decision making and take into account the legitimate interests of their staff, suppliers, customers, the community and the environment as well as their shareholders.

With regard to the need To exercise independent judgement – it is important that, regardless of job title or board role or independence, all directors come to the boardroom table as equals, with joint and several liability for the decisions that they make and that they are not unduly swayed or influenced in making those decisions.

All directors are expected To exercise reasonable care, skill and diligence – which means that they should devote sufficient time to their role (which limits the number of directorships any individual may hold) and come to every board meeting well prepared, having read all the board papers and where possible, having had off-line conversations with fellow directors about key strategic matters.

Turning up to board meetings late and trying to read the papers during the meeting for the first time is unlikely to lead to an effective contribution to decision making or a satisfactory discharge of your duties as a company director.

Holding more than one board position or running your own business whilst serving on the board of another company are likely to compromise your legal duty To avoid conflicts of interest – whilst it is not always possible to avoid conflicts of interest, you should be aware of the possibility and alert the board when conflicts are likely to occur.

A well run board will have a Register of Interests, which will be reviewed annually, containing a list of all directors’ outside interests. The standing agenda for each board meeting should include an item for Declarations of Interests, at which point directors should declare if they have an interest in an agenda item. Often, if this is the case, the director will formally leave the meeting whilst the matter is being discussed and will only re-join once a decision has been made.

All directors should be aware of the requirement Not to accept benefits from third parties – compliance with this aspect of the act can be demonstrated by maintaining a Gifts and Hospitality register and ensuring that there is a company-wide policy on entertainment paid for by third parties.

Finally, directors need to comply with the requirement To declare interest in proposed transaction or arrangement with the company – most commonly this covers property transactions or contracts with businesses that a director has an interest in. The sphere of interests that need to be declared also usually includes the director’s spouse, children and immediate family.

If you are a company director and you have been aware of your duties under the 2006 Companies Act and you have been complying with them then you can be satisfied that you are acting within the law – if not, then you should review how you and your board operates to make sure that you are discharging your director’s duties correctly.


Is your board dysfunctional?

August 22, 2014

Does your board have directors who trust each other, are committed, are comfortable with conflict, hold each other to account and are focused on results?

Corporate GovernanceIf not, your board is likely to have some degree of dysfunctionality and is possibly in need of an intervention.

I have been working with boards of organisations of all sizes in all sectors for a number of years and most of them exhibit some degree of dysfunctionality,

I use a board evaluation and diagnostic tool based on the book by Patrick Lencioni, The Five Dysfunctions of a Team, to discover the level of dysfunctionality within a board.

The foremost dysfunctionality is; Lack of Trust – if there is no trust on the board, directors will:

  • Conceal their weaknesses and mistakes from one another.
  • Hesitate to ask for help or provide constructive feedback.
  • Hesitate to offer help outside their own areas of responsibilities.
  • Jump to conclusions about the intentions and aptitudes of others without attempting to clarify them.
  • Fail to recognise and tap into one another’s skills and experiences.
  • Waste time and energy managing their behaviours for effect.
  • Hold grudges.
  • Focus time and energy on politics, not important issues.
  • Dread meetings and find reasons to avoid spending time together.

The next dysfunctionality is; Fear of Conflict, The symptoms of this dysfunctionality in boards is that they will have boring meetings, create environments where back-channel politics and personal attacks thrive and ignore controversial topics that are critical to board success. They will also fail to tap into all the opinions and perspectives of board members and waste time and energy on posturing and interpersonal risk management.

The third dysfunctionality is where a board Fails to Commit to being a Team – this results in:

  • Ambiguity among the board about direction and priorities.
  • Missed opportunities due to excessive analysis and unnecessary delay.
  • A lack of confidence and fear of failure.
  • Revisiting discussions and decisions again and again.
  • Second-guessing among directors.

Dysfunctional boards are unable to create clarity around their direction and priorities and cannot align directors around common objectives. They move forward with hesitation and are unable to learn from mistakes.

Fourth, a board that Avoids Accountability:

  • Creates resentment among directors who have different standards of performance.
  • Encourages mediocrity.
  • Misses deadlines and key deliverables.
  • Places an undue burden on the Chair as the sole source of discipline.
  • Does not ensure poor performers feel the pressure to improve.
  • Does not identify potential problems quickly by questioning each other’s approaches without hesitation.

Finally, if a board is not Focused on Results, the organisation will stagnate or fail to grow, rarely defeat competitors, lose achievement-oriented employees, be easily distracted and encourage individualistic behaviour where board members focus on their own careers and individual goals.

So what should boards be doing?

Directors who can agree with most of the following are likely to be sitting on more effective boards:

  • Board members are clear on what is expected of them.
  • Board meeting agendas are well planned so that the board is able to get through all necessary board business.
  • Most board members come to meetings prepared.
  • Written reports to the board are received well in advance of meetings.
  • All directors participate in important board discussions.
  • Different points of view are encouraged and discussed.
  • All directors support the decisions reached.
  • The board has a plan for the further development of directors.
  • Board meetings are always interesting and frequently fun.

How many of the above statements are you able to agree with?

If you disagree with a number of them, the likelihood is that you are a member of a dysfunctional board … and If your business has a dysfunctional board, it is also likely to be a dysfunctional business.


Is your Board fit for business?

March 11, 2013
excellencia FootAnstey
Is your board

Fit for Business?

 

Find out how you can add value to your business with a corporate governance health check

Wednesday 22 May 2013, Foot Anstey, 100 Victoria Street, Bristol BS1 6HZ

5:30pm to 8:00pm

Come along to this Free event organised by leading law firm Foot Anstey and leadership development company Excellencia to find out how good corporate governance can add value to your business.

If you are the Chair, Chief Executive, Finance Director or Company Secretary of a growing business then this event will help you to understand how you can assess the effectiveness of your company’s board and the value that qualified independent non-executive directors can add.

Programme:

17:30 Registration and networking
18:00

Welcome from the Chair and introductions

Judith Levy150 Judith Levy

Group Chairman, Vistage

18:05

Good corporate governance makes good business sense

 BoD_steve-hill150 Steve Hill

Chartered Director, Managing Director at Systems Engineering and Assessment Ltd. Bristol

18:25

Company Secretarial  compliance –the benefits

 SimonLevington150 Simon Levingston

Consultant – Foot Anstey. Chartered Secretary in Public practice providing advice & support to directors and companies

18:45

Having an independent Non-Executive Director on your board is essential for growth

 BFoss150 Bryan Foss

Independent Non-Executive Director, Risk & Audit Chair, Board And Business Development Adviser, Visiting Professor Bristol Business School

19:05

A dysfunctional board means a dysfunctional business

 DD150 David Doughty

Chartered Director, Chief Executive at Excellencia

19:25 Refreshments and networking
20:00 Close
VistageIoD logo plain

Although the event is free, places are limited – to book your place on-line now click here


How best to choose and get the most out of an audit committee.

October 9, 2012

 

What criteria should be used in selecting an audit committee?

The fundamental criterion for the selection of audit committee members is that they are independent non-executive directors. It is important that at least one of the members of an audit committee has a financial background and it is essential that all audit committee members have a basic understanding of financial matters.

The audit committee must operate independently of any executive management processes and be seen to be operating with a high degree of objectivity. It is considered good practice for the audit committee to consist of at least three non-executive directors, with a quorum of two. The Chairman of the organisation should not be a member of the audit committee.

The audit committee Chairman should be a senior non-executive director – not the Chairman of the organisation’s board and not a newly appointed non-executive director.

The Chairman of the organisation, the Chief Executive, other executive directors and senior managers will often attend audit committee meetings at the invitation of the audit committee Chairman. It is quite common for the Finance Director to regularly attend audit committee meetings.

The audit committee Chairman will plan the agenda on an annual rolling basis and will invite specific executives or senior managers to attend on particular occasions to provide assurances and explanations regarding their areas of functional responsibility.

Normally, representatives from the internal and external audit providers, together with the Company Secretary will regularly attend committee meetings and there should be a designated note-taker, who will not be one of the non-executive directors,

How can independent non-executive directors (INEDs) best serve an audit committee?

The purpose of an audit committee is to give confidence to the Board in the reliance it places on its sources of assurance. The role of the independent non-executive director members of the audit committee is to critically review the organisation’s governance and assurance processes at a sufficient level of detail to enable the Board to operate strategically with confidence in the day to day management of the organisation.

Audit committee members need to be mindful that if ever there was a crisis in the organisation then one of the first questions people will ask is “what were the audit committee doing?” They should be asking themselves “what could go wrong?” and do we have the right controls in place to either prevent things from going wrong or to address them rapidly and effectively if they do. The independent non-executive directors on the audit committee need to make sure that the risk and performance management systems are fit for purpose and that they are underpinned by an Assurance Framework.

The Assurance Framework is the ‘lens’ through which the Board examines the assurance it requires to discharge its duties. The key question Board members need to ask is ‘How do we know what we know?’ The Assurance Framework should provide the answer.

Audit committee members, rightly, focus on internal financial control matters and the annual audit takes up a significant amount of their time. However, they also need to look at risk, quality and performance to ensure the Board has sufficient assurance in non-financial metrics as well as the financial ones.

Other duties of an audit committee member include ensuring that there is a culture which encourages the reporting of serious incidents and near-misses with a clear whistle-blowing policy; critically evaluating the performance of internal and external auditors and taking part in the selection and recommendation for appointment or re-appointment of the auditors to the Board

How could professional organisations help to improve the quality of audit committees?

Organisations can improve the quality of audit committees by:

  • Issuing guidance on the role, responsibilities and duties of an audit committee member
  • Issuing guidance on the selection criteria for audit committee members and working with recruiters and search and selection providers to ensure that they are clearly articulated to potential recruits
  • Lobbying for the adoption of a recognised qualification such as the Institute of Directors’ Chartered Director as the pre-requisite for audit committee members
  • Providing training and on-going support for audit committee members to ensure that they have sufficient CPD (the Chartered Director requirement is 30 hours per annum)

How can an audit committee work best with internal and external auditors?

The audit committee agrees the annual programme of work for the internal and external auditors together with the associated costs. Performance against these programmes is then monitored by the audit committee on a regular basis.

It is essential that the audit committee has a good working relationship with the internal and external audit providers as they can provide both assurance and insight into the management arrangements within the organisation.

The Head of Internal Audit is required to provide the audit committee with an annual opinion on the overall adequacy and effectiveness of the organisation’s risk management, control and governance processes.

The audit committee is also responsible for making recommendations to the Board about the appointment or re-appointment of the internal and external auditors.

Representatives of both the internal and external auditors will normally attend most audit committee meetings though there may well be a private session of the committee before the main meeting from which the internal and external auditors are excluded. The audit committee Chairman is also likely to have contact with the internal and external audit team leads outside of committee meetings if there are urgent matters to be discussed or concerns that need to be raised.

Directors often serve on multiple companies. What effect can this have on their oversight?

It is quite common for non-executive directors to serve on more than one Board and they may well serve on multiple audit committees. In these circumstances the normal ‘conflict of interests’ procedures should apply and there should be a standing item at the beginning of the audit committee agenda calling on members to declare any areas of possible conflict of interest in the matters to be discussed on the agenda. There should also be a register of interests for all directors which should be reviewed annually.

Non-Executive Directors should also avoid, where possible, being members of the audit committees of two organisations in the same sector who are possible in competition with each other.

Providing that any potential conflicts of interest are dealt with in an open and transparent manner then it can be an advantage for non-executive directors to be members of multiple audit committees as they can bring experience of best practice and different ways of working.

What sort of training programmes exist for INEDs that could help companies move towards international best practices?

The ideal training program for independent non-executive directors is the Chartered Director qualification from the Institute of Directors. This should be a pre-requisite for all company directors.

Additionally there are the Certificate and Diploma in Company Direction from the Institute of Directors, the Financial Times Non-Executive Director Certificate and Non-Executive Director courses from Excellencia.

Audit committees should review their performance annually and consider their own training needs to ensure that members have the skills to perform their role effectively.

Every audit committee member should have an appropriate understanding of finance, internal control, governance, risk, quality, performance and assurance, which will need to be kept up to date as legislation and best practice changes.

 


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