Categories
Opinion

Exactly what should directors do?

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

The 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 thedecisions 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 dutyTo 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.

Categories
Opinion

Is your board dysfunctional?

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?

If 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? Is your board dysfunctional?

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.

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