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Directors’ Responsibilities
Leslie SpiersBoardroom Dynamics
Corporate problems?
What’s this got to do with companies outside
the FTSE 350?
Does it mean yet more regulation?
Corporate Governance as business improvement
Internal improvements
Systems
Roles
Processes
External improvements
Compliance
Reputation
The role of the Board in SME’s2007 Research into SME’s
Boards were often a legal formality
Boards appear to contribute little of significance to business development
Boards dealt with operational matters as opposed to strategic issues
Boards dealt with short term goals (survival)
Strategic versus operational planning
Board structures and processes
Lack of formal committees
Few non-executive directors
Lack of risk management systems
Less advice from auditors as threshold for independent audit increases
Governance and business improvement
Risk reduction through identification and management
Wider experience in decision-making
Stakeholder engagement through identification and management
Overseas Overseas GovernmentsGovernments
The BusinessThe Business
LocalLocalGovernmentGovernment
GovernmentGovernment
SuppliersSuppliers
CompetitorsCompetitors
EmployeesEmployees
BankersBankers
ShareholdersShareholders
PressPressRegulators
HMRC
Stakeholder groups
Further considerations
Reputation management
Greening of business (the business case for social responsibility and integrity)
Corporate governance is about changing organisational cultures rather than regulations
How then to determine board room competencies to develop excellence
in direction?
The business literature is unanimous
Boards are no longer a cosy affair
Proactive and transparent
Growth in status of NEDs = more scrutiny
Ultimately need honest, diverse opinions, courage, and knowledge to improve the board decisions
BOARD FIT and mix of exec and non execs
Board fit... depends on the business
NED recruitment
Historically poor
Less than 4% have formal interview
< 1/3 Chairs help NED prepare for the role
Smoke filled rooms
NED attributes 1Breadth of experience
Team player
Well prepared
Communicator
Sharp mind
Creative and visionary
Focused on board improvement
NED attributes 2Committed
Confident
Independent
Experience
Challenge
Supportive
Focus on company performance
Legal responsibility
Conscience of shareholders
Appointing executive directors
Competent in 4 key areas
– Results orientation
– Strategic orientation
– Collaboration
– Independence
But
– Diversity vs. group think
– Snakes in suits – psychopathy in the board room
Who to appoint?
Every instinct points you to appoint someone you like, and someone like you
Diversity however gives you
– Long term creativity
– Allows you to match your markets
Needs continual “management”
See iod.com for model service agreement
What is a Company?
It is a separate legal entity
It is recognised as a legal “person”
It has personality & can act as a person
It has a constitution
It has long life potential
It can claim under Human Rights Act
What is the purpose of a Company?
Designed to make profits to distribute
To limit liability of investors
Companies Ltd by guarantee can use surplus to the benefit of the company
What are the features of a Company?It is separate from individuals in it
It creates a separate person
It has its own life and responsibilities
It has members who subscribe capital
It is set up by shareholders to protect themselves
It is registered with Companies House
It has regulations and officers to run its affairs
The Company and its Directors
Co Act 2006 says the primary duty of a director is to the Company, but also to recognise a duty to…
– towards shareholders – towards trading partners
– towards employees – towards the state
Co has a decapitated head – the Board
Board is the “thinking and controlling mind”
Rail Track, Herald of Free Enterprise, Lyme Regis
Overseas Overseas GovernmentsGovernments
The BusinessThe Business
LocalLocalGovernmentGovernment
GovernmentGovernment
SuppliersSuppliers
CompetitorsCompetitors
EmployeesEmployees
BankersBankers
ShareholdersShareholders
PressPressRegulators
HMRC
Stakeholder groups
Directors’ legal requirementsNow codified in Companies Act 2006
“Enlightened shareholder Interest” – future and potential
Act within your powers
Promote the success of the company
Have regard to other stakeholders
Exercise independent judgment
Exercise reasonable care, skill and diligence
A general duty to avoid conflict of interest
Insolvency
6 Factors not to be ignored
1. Likely long term consequences of a decision
2. Interests of employees
3. Need to foster relationships with suppliers & customers
4. Impact of the business in the community & environment
5. Maintaining high standards of business conduct
6. Need to act fairly between members
Get or keep out of gaol
No requirement for extensive paper trail
Well prepared board papers that
– Deal with relevant factors
– Demonstrate these have been considered
– Minute reflects the decision
Who is a Director?
Types of Director
– Executive and Non Executive
– Shadow
– De Facto
Must be at least 1 “natural person” on the board
Prohibitions on acting as a director
Undischarged bankrupts
Under the Directors Disqualification Act 1985
Person under 16 years old (from Oct 2008)
From April 2007 no upper age limit
Articles may impose further disqualifications
"The job of the Board is all to do with creating momentum, movement, improvement and direction.
If the Board is not taking the company purposefully into the future, who is?"
Sir John Harvey-Jones
What is the Board for?
The Board's key purpose
Seek to ensure the company's success by collectively directing its affairs and meeting the
legitimate interests of its shareholders and relevant stakeholders
The Board's main functions
Policy formulation
Accountability and compliance
Strategy and leadership
Supervision of management
Providing clarity – no mixed messages
The Board
AccountabilityTo the companyTo OwnersTo regulators and legislatorsTo StakeholdersEnsuring Directorial Audit
Policy FormulationStating PurposeCreating Vision and ValuesDeveloping corporate climateMonitoring the external environment
Strategic ThinkingMarket PositioningSetting corporate directionReviewing resourcesSetting implementation processes
Supervising ManagementPerformance ManagementBudgetary ControlReview of key business resultsOrganisational capability
SHORT TERM LONG TERMOperations Review Cycle
INTERNAL
EXTERNAL
Governance Review Cycle Strategy Review Cycle
Responsibilities of the Board
Accountability
To ensure that the Company complies with laws & regulations and that management & employees
comply with carrying out the Board's decisions
Very onerous duties and different from management
GovernanceThe Board is the 'Mind & Will' of the Company
In law – all directors are jointly responsible
All directors are equal (technically)
Executive powers are vested in the Board
Board is always responsible for the Company's affairs
Directors’ primary duties are owed to the Company
Board must have regard for the shareholders and other interested parties
StrategyBoard needs to set tone, standards, values
Board needs to agree common vision
A Board Charter clarifies ToR
Directors accept & utilise their differences
Reward contributions towards achieving the overall vision
Selecting the MD/CEO - personifies the Board's leadership
DirectionFormulation of strategy
Acquisition & allocation of overall resourcesSetting policies
Establishing directionEmphasising the mission & the shared vision
Direction and management
Management Running the business
Shorter term operational mattersFinancial, production, market management
Direction and management
Power & responsibility
SHAREHOLDERS
MANAGEMENT
BOARD
POWER
RESPONSIBILITY
Board composition & organisation
"A Board may be composed of brilliant
individuals and yet be ineffective.
It can only fulfill its true potential as a Board if it is properly selected, organised and led."
Good practice for directors – standards for the Board
Board meetings
Directors powers are collective
Need a quorum to convene a board meeting
No director must be excluded
Right to inspect accounts and minutes
Board minutes must be kept
Board structures and styles
GOVERNANCE
MANAGEMENT
BOARD
MANAGEMENTORGANISATION
All – Executive Directors Board
Majority Executive Directors Board
Majority Non-Exec Directors Board
All non-Executive Board
Roles of chairman and Managing Director
Difficult to be objective about the performance of management
Roles ideally need different temperaments and motivations
More difficult for Executive Directors to act in their director roles
Confusion as to which hat is being worn in the boardroom
Too much power in one person & two heads are better than one
Under pressure, management take precedence over governance
Above a certain size, there is too much for one person to do
Exterior profile is narrower than with two persons
One person is more vulnerable than two
In Summary… DirectorsEstablish clarity of mission, vision and valuesto lead the broad direction of the company
Decide upon the strategies and structureto ensure the company's survival & prosperity
Delegate to management and involve staffto effect implementation of strategy, policies & plans
Exercise responsibility to shareholders and other interested partiesto promote & meet their legitimate interests