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1
Role of the Company Director and the Board
Sport & Recreation Alliance
Presented by Paul Munden
2013
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Course content - corporate governance - the company’s legal and regulatory
environment- the director’s role
Role of the company director & the board
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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!
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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
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Introductions – delegates
your name
your role
any previous board experience?
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Role of the company director and the board
Quiz
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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-
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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”
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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
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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.
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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
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Corporate governance – principal tenets
Accountability
Probity
Transparency
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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
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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.”
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Direction vs ownership
Direction who is a director?
directors’ authority
Ownership general meetings/voting/shareholder agreements
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Company constitution
the organs of the constitution are:- members (via general meetings)
- board of directors
legal distinction is clear, can become confused in practice
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Direction, management & ownership
SHAREHOLDERS
BOARD
EXECUTIVE
MANAGEMENT
POWER & AUTHORITY RESPONSIBILITY
Can be
delegated Can’t be
delegated
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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.
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Shareholders’ meetings
all meetings are general meetings annual general meeting extraordinary general meeting
business conducted at general meetings is: ordinary business, or special business
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Voting at member meetings
Meetings – AGM and EGM ordinary resolutions >
50%* special/extraordinary resolutions ≥ 75%*
* of those present and voting (i.e. excl. abstentions)
Voting by show of hands by poll
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Course content - corporate governance - the company’s legal and regulatory
environment- the director’s role
Role of the company director & the board
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The company’s legal and regulatory environment
features of a company
different legal corporate forms
disclosure of information and reporting
corporate insolvency
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Limited Liability
Who benefits from the concept of limited liability?
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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
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Constitutional documents
Memorandum of association
Articles of associationTables A - F (CA 1985)
New Models (CA 2006)
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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)
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Articles of association
share capital / rights transfer/ transmission of
shares alteration of capital general meetings
procedures/voting borrowing powers appointment, powers
& duties of MD
proceedings at directors’ meetings
disqualification
secretary
dividends & reserves
accounts and audit
capitalisation of profits
winding up
indemnity
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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)
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Corporate insolvency
When is a company deemed to be insolvent?
a. When a company’s liabilities exceed its assetsb. When a company’s current liabilities exceed its fixed
assetsc. When a company is unable to pay its debts as and
when they fall dued. When company goes into liquidation at a time when
its assets are insufficient to pay its debts and the cost of winding up
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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
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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
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Fraudulent trading
“knowingly carrying on the business of a company with intent to defraud creditors or
potential creditors”
intent fraudulent - actual dishonesty/real moral blamepenalties
directors may be personally liable to contribute criminal offence - Unlimited fine/7 years in prison
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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
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Course content - corporate governance - the company’s legal and regulatory
environment- the director’s role
Role of the company director & the board
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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
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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
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Breach of duties
Who can take action against directors?
the company regulators the Crown shareholders (derivative claims) stakeholders
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Grounds for disqualification
Which of the following are grounds for disqualifying a director?
general misconduct unfitness fraudulent trading wrongful trading
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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
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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)
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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?
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Directors’ duties
historically – mainly common law
codified in Companies Act 2006
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Directors’ General DutiesCompanies 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
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The success of the company Companies Act 2006
long term employees suppliers, customers and others community / environment company’s reputation need to act fairly as between all members
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:
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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
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Duty of care, skill & diligence(derived from Section 214, Insolvency Act 1986)
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)
Directors must exercise the same standard of care, skill & diligence that would be exercised by a reasonably diligently person with:
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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
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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
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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
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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”
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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)
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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
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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.
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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
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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
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Chairman’s role – dual focus
Internalboard leadership
board membership
board direction
board monitoring
responsibility for people
provision of information
Externalreporting financial results
wider representational role
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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
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Role of executive director
two accountabilities:
company director - joint & several liability
functional responsibility - reporting to & supporting
MD
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Myths about NEDs
NEDs should be done away with altogether
it is dangerous nonsense to assume that part-
time NEDs know enough to spot problems
NEDs are about as much use as Christmas
tree decorations
NEDs are like a bidet: no-one knows what
they do, but they add a touch of class
Lord Young
Tiny Rowland
Michael Grade
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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
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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
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Senior independent non-executive director
Which of the following does the UK Corporate Governance Code state are appropriate roles for a senior independent NED?
a) sounding board for the chairmanb) intermediary for the other directors c) deputising for the chairman when not availabled) 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
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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
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Appointment of directors
executive directors contract of employment/service agreement
recognises dual status of director and employee
non-executive directors no contract required – usually a letter from
the chairman (Higgs Review contains specimen)
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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 CompaniesAt 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
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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.)
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Removal of directorsSection 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
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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
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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
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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