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.


How many FTSE 100 Boards can one man chair at the same time? Part 2

August 21, 2014

Following on from my previous post about Sir John Peace who seemed to be able to chair 3 FTSE 100 Boards at the same time SABMiller have announced the appointment of Jan du Plessis, who is currently the chairman of Rio Tinto, as chairman – which will make him chairman of two FTSE 100 companies.

corporate governanceShareholders of both companies will be relieved to learn that Mr du Plessis has agreed to give up his non-executive directorship of Marks & Spencer when he takes up his post with SABMiller in 2015.

Whilst not exactly prohibited by the UK Corporate Governance Code, the code does say that directors should be able to devote sufficient time to the role in order to discharge their legal responsibilities.

Being chairman of one FTSE 100 Board is time consuming enough – chairing two would seem to be a very demanding proposition indeed

How many FTSE 100 Boards can one man chair at the same time?

August 19, 2014

Given the demands of chairing a FTSE 100 board, I would have thought the answer to that question is just the one. This is not the case for Sir John Peace though, who currently chairs 3 – and all of them in some degree of trouble with their shareholders.

Standard Chartered chairman Sir John PeaceAdmittedly he has just stood down from one of them; Experian but up till now he has been juggling this demanding role at Standard Chartered, Experian and Burberry – and all three companies have been criticised by their shareholders recently.

The problems at Experian revolve around the perceived lack of independence of the Non-Executive Chair – with Sir John’s replacement Don Robert being moved up from Chief Executive being regarded as poor corporate governance practice. The value of independence is seen to be a fresh pair of eyes that can take an objective view of the business – clearly not the case with a Chairman who has been in the business for 40 years handing over to the current Chief Executive.

Sir John’s problems at Burberry were brought into sharp focus by the recent shareholder revolt with 53% of the investors voting against the £20 million pay package for Chief Executive Christopher Bailey.

Now we learn that shareholders at Standard Chartered are unhappy with the performance of Chief Executive Peter Sands following two profit warnings in seven months.

The UK Corporate Governance Code suggests that two is the maximum number of FTSE 100 Chair positions that anyone can hold at one time and that they should be independent in order to exercise objective judgement.

I would say that Sir John Peace has clearly demonstrated the wisdom of this advice even if he has not heeded it himself.

FRC: next steps for corporate governance

January 4, 2012

The Financial Reporting Council has published its first annual review on how the UK Corporate Governance Code and the Stewardship Code, introduced in 2010, are being implemented, and has also outlined its plans to consult in 2012 on amendments to both Codes and related FRC guidance.

UK Corporate Governance Code

The FRC reviewed 60 corporate governance statements over the past year and noted the high take up of new Code provisions, such as annual election of directors and use of external advisers to conduct board evaluations. It was also pleased to see that many chairmen made a personal statement in the annual report and that many committee chairmen adopted the same approach for the report on their committees.

However, the FRC expresses concerns about the following:

  • The explanations provided by some companies that do not comply with the UK Corporate Governance Code. Whilst the majority provide good explanations, a minority do not and occasionally provide no explanation at all. The FRC is currently holding discussions with companies and investors to identify common criteria that companies can refer to when preparing their comply or explain statements.
  • Business model, strategy and risk. Whilst recognising improvements by companies when disclosing principal risks and uncertainties in their business reviews, the FRC considers that more effort is needed in relation to risk and how it is mitigated and managed. It stresses that companies should focus on strategic risks and the major operational risks inherent in their business models and strategies, rather than general risks applicable to all companies.
  • Reporting by audit committees. The FRC notes that very few audit committees report key decisions taken or judgments made and limit themselves to repeating their terms of reference. In the FRC’s view, their reports are “unenlightening” and this threatens to undermine confidence at a time when there is “considerable scepticism about the effectiveness of audit and audit committees”.
  • Reporting by remuneration committees. Similar criticisms can be made of remuneration committees. Companies need to be more transparent about the link between remuneration policy and strategy and its approach to risk in the current climate.

UK Stewardship Code

The FRC notes that over 230 asset managers, owners and service providers signed up to the Stewardship Code. The numbers exceeded the FRC’s expectations but it stresses that signing up to the Code is only a first step and that it is too early to tell if the objective of better engagement will be met. It notes that reporting on stewardship is variable, especially in relation to managing conflicts, collective engagement and the use of proxy voting agencies.

Next steps – FRC proposals for 2012

UK Corporate Governance Code: the FRC is expected to consult on the following amendments to the Code:

  • to extend the reports that the audit committee gives to the board and to require clearer disclosures of how the external auditor is selected;
  • to reflect any recommendations on going concern following Lord Sharman’s enquiry (expected to be published in February 2012); and
  • to tie in with proposals from BIS on narrative reporting (expected to be finalised in the first few months of 2012).

These would be in addition to the recently reported changes to the Code requiring FTSE 350 companies to report annually on their diversity policy.  Any amendments to the Code will take effect on 1 October 2012 to tie in with proposals from BIS.

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