Role of the Company Director and the Board Sport & Recreation Alliance
Role of the Company Director and the Board Sport & Recreation Alliance Presented by Paul Munden 2013 1 Role of the company director & the board Course content corporate governance - the company’s legal and regulatory environment - the director’s role - 2 Preliminaries 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! 3 Paul Munden Commercial Law Barrister Chartered Director Company Secretary, Legal Director and Chief Executive Business Link for London Non Executive Director NHS North Essex Board advisor General Teaching Council for England Chairman National Youth Music Theatre Legal Services Board Justice of the Peace Other previous appointments Non Executive Director Customer First UK Ltd Non Executive Chairman Soda Creative Ltd 4 Introductions – delegates your name your role any previous board experience? 5 Role of the company director and the board Quiz 6 Corporate governance – evolution UK business life until mid 19th century introduction of limited liability – 1844 business scandals – late 1980s 1990s - emergence of corporate governance - Cadbury, Greenbury, Hampel (1992-1997) 1st Combined Code on Corporate Governance (1998) Turnbull (1999, 2005) Higgs, Smith, Combined Codes (2003 - 2008) UK Corporate Governance Code 2010 - 7 The Enron approach! Normal capitalism: “You have two cows. You buy a bull. Your herd multiplies, the economy grows - you sell the bull & retire” Enron capitalism: “You have two cows. You sell three of them to your publicly listed corporation using letters of credit opened by your brother-in-law at the bank where he works. You then execute a debt/equity swap with an associated general offer to the public so that you get all four cows back with tax exemption for five cows. The milk rights for six cows are transferred via an intermediary to a Cayman Islands company secretly owned by your chief financial officer who then sells the rights for seven cows back to your listed company. Your annual report states that your corporation owns eight cows, with an option on six more” 8 UK Corporate Governance Code Application - UK listed companies on main markets (also exemplar for other organisations) - “comply or explain” Content - leadership - effectiveness - accountability - remuneration - relations with shareholders 9 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. 10 Sarbanes Oxley Act 2002 Application - publicly traded companies, their employees, officers & owners - auditors, lawyers, bankers, brokers & analysts of public companies, - mandatory – sanctions include fines and up to 20 yrs imprisonment - CEO & CFO personally responsible for accuracy of financial reports - Management must maintain effective internal controls 11 Corporate governance – principal tenets Accountability Probity Transparency 12 Shareholder rights shareholders own shares not companies shares bring rights: to a dividend, if paid to transfer ownership of shares to vote at a general meetings 13 Directors’ relationship with shareholders fiduciary duties accountability powers of appointment & removal of directors delegated powers – not mandated delegates “The business of the company shall be managed by the directors who may exercise all the powers of the company.” 14 Direction vs ownership Direction who is a director? directors’ authority Ownership general meetings/voting/shareholder agreements 15 Company constitution the organs of the constitution are: - members (via general meetings) - board of directors legal distinction is clear, can become confused in practice 16 Direction, management & ownership POWER & AUTHORITY RESPONSIBILITY SHAREHOLDERS Can be BOARD delegated Can’t be delegated EXECUTIVE MANAGEMENT 17 Powers reserved to board – typical content board appointments/ removal terms of reference - board committees remuneration/change of auditors press releases communications with shareholders dividend payments changes to internal control or risk management arrangements accounting policies disposal or acquisition of major assets major contracts and investments treasury management and capital policies strategies and budgets pension arrangements policies – e.g. people, health & safety, conduct, compliance. 18 Shareholders’ meetings all meetings are general meetings annual general meeting extraordinary general meeting business conducted at general meetings is: ordinary business, or special business 19 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 20 Role of the company director & the board Course content corporate governance - the company’s legal and regulatory environment - the director’s role - 21 The company’s legal and regulatory environment features of a company different legal corporate forms disclosure of information and reporting corporate insolvency 22 Limited Liability Who benefits from the concept of limited liability? 23 Examples of board dilemmas 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 24 Constitutional documents Memorandum of association Articles of association Tables A - F (CA 1985) New Models (CA 2006) 25 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) 26 Articles of association share capital / rights transfer/ transmission of shares proceedings at directors’ meetings disqualification alteration of capital secretary general meetings dividends & reserves procedures/voting accounts and audit borrowing powers capitalisation of profits appointment, powers winding up indemnity & duties of MD 27 Corporate forms in the UK private limited companies with shares – most common limited by guarantee – trade assns/charities /clubs public limited companies community interest companies (CIC) – public good corporations formed by statute or by charter charitable incorporated organisation (CIO) societas europeae (SE) unlimited companies – rare, exempt from filing a/cs, tax adv limited liability partnerships (LLP) 28 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 29 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 30 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 31 Fraudulent trading “knowingly carrying on the business of a company with intent to defraud creditors or potential creditors” intent fraudulent - actual dishonesty/real moral blame penalties directors may be personally liable to contribute criminal offence - Unlimited fine/7 years in prison 32 Fraudulent trading – examples actions/transactions by officers when they know there are insufficient funds taking orders and deposits for transaction that cannot be fulfilled playing one bank off against another large variations between balance sheet and actual figures Paying off debts with directors’ guarantees 33 Role of the company director & the board Course content corporate governance - the company’s legal and regulatory environment - the director’s role - 34 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 35 Who is a director? Director in law “any person occupying the position of director by whatever name called” executive non-executive directors nominee director alternate director shadow director – “someone in accordance with whose instructions the board is accustomed to act” Director by name associate dtr, branch dtr, regional dtr, project dtr 36 Breach of duties Who can take action against directors? the company regulators the Crown shareholders (derivative claims) stakeholders 37 Grounds for disqualification Which of the following are grounds for disqualifying a director? general misconduct unfitness fraudulent trading wrongful trading 38 Disqualification What is the maximum period for which a director can be disqualified by the courts? 10 years life life for a managing director 15 years 39 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) 40 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? 41 Directors’ duties historically – mainly common law codified in Companies Act 2006 42 Directors’ General Duties Companies Act 2006 - to act within powers to promote the success of the company…. to exercise independent judgement to exercise reasonable care, skill and diligence to avoid conflicts of interest not to accept benefits from third parties to declare interest in proposed transaction or arrangement 43 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: long term employees suppliers, customers and others community / environment company’s reputation need to act fairly as between all members 44 Act within the powers Does a director have unlimited authority? No, he must act in accordance with the company’s constitution only exercise his powers for the purpose for which they were conferred 45 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: 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) 46 Duty of care, skill & diligence directors need not give continuous attention to company’s affairs directors can trust company officials to perform duties properly delegated, but should monitor directors should attend board meetings 47 Exercise independent judgement Directors must exercise independent judgement but: may take advice may act in accordance with the company’s constitution incl. shareholders’ resolutions directors’ discretion may be fettered by the terms of an agreement to which the company is a party 48 Avoid conflicts of interest Examples of conflicts: family companies nominee directors a director on the board of two competing companies a director leaving the board of one company to set up a competing business 49 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” 50 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) 51 Declaration of personal interests CA 06 distinguishes three types transactions/arrangements to which the company is not a party proposed transactions./arrangements to which the company will be a party existing transactions/arrangements to which the company is a party 52 Directors’ duties – to purchasers of shares directors and the company are liable for untrue/misleading statements or omissions which induces persons to acquire shares e.g. in a prospectus directors, as well as the Company, are personally liable for the particulars in a prospectus. 53 Directors’ duties – to customers, suppliers and others directors are not normally liable on contract unless: director has signed cheques, purchase orders & promissory notes where the company’s name does not appear legibly not clear director is contracting as an agent director exceeds his authority before the company is incorporated performance personally guaranteed by director fraudulent or negligent misstatements 54 Role of the chairman Articles of Association elected by the board chairman of the board also acts as chairman of general meetings may have a casting vote 55 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 56 Role of the managing director - - Formulating strategy Liaising with the chairman Developing a business portfolio in line with strategy Delivering the business plan Establishing planning and control systems Ensuring objectives and standards are understood Monitoring results against plans Taking remedial action Leading management and employees Managing the company today to day 57 Role of executive director two accountabilities: company director - joint & several liability functional responsibility - reporting to & supporting MD 58 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 59 Role of NEDs – 11 ‘C’s contributor challenger of executives’ proposals contact provider confidante conciliator checker of Board processes crisis manager coach/mentor to executive directors consultant compensation conscience of the company 60 NED independence UK Corporate Governance Code They must not: have been an employee of the company in previous 5 yrs. have had a material business interest with the company in previous 3 years receive income, other than director’s fees participate in company’s share option or performance related remuneration/pension schemes have close family ties with Company’s advisers, directors or senior employees have conflicting cross directorships represent significant shareholders serve as a director for more than 9 years 61 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) 62 Role of company secretary 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 63 Appointment of directors executive directors contract of employment/service agreement recognises dual status of director and employee non-executive directors contract required – usually a letter from the chairman (Higgs Review contains specimen) no 64 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 65 Removal of directors ‘vacation’ by statute failure to take up a share qualification bankruptcy disqualified by court order under 16 years old (CA2006) other methods typically included in Articles resignation absence (typically six months) receiving orders made against mental disorder removal by written notice (Listed co/subsid.) 66 Removal of directors Section 168 Companies Act 2006 members wishing to remove give special notice of ordinary resolution company sends copy of resolution to the director board meeting convenes general meeting director may speak at meeting board may make representations to the members proposer may only make representations to the general meeting 67 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 68 Applying the knowledge All IoD course leaders and consultants can provide: On-site support Coaching or mentoring Board consultancy or any other in-house training services to help you to apply the knowledge within your organisation. Please ask your course leader for further details 69 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 70
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