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