board skills for sport iod training – role of the company director and the board

1

Role of the Company Director and the Board

Sport & Recreation Alliance

Presented by Paul Munden

2013

2

Course content - corporate governance - the company’s legal and regulatory

environment- the director’s role

Role of the company director & the board

3

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!

4

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

5

Introductions – delegates

your name

your role

any previous board experience?

6

Role of the company director and the board

Quiz

7

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-

8

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”

9

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

10

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.

11

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

12

Corporate governance – principal tenets

Accountability

Probity

Transparency

13

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

14

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.”

15

Direction vs ownership

Direction who is a director?

directors’ authority

Ownership general meetings/voting/shareholder agreements

16

Company constitution

the organs of the constitution are:- members (via general meetings)

- board of directors

legal distinction is clear, can become confused in practice

17

Direction, management & ownership

SHAREHOLDERS

BOARD

EXECUTIVE

MANAGEMENT

POWER & AUTHORITY RESPONSIBILITY

Can be

delegated Can’t be

delegated

18

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.

19

Shareholders’ meetings

all meetings are general meetings annual general meeting extraordinary general meeting

business conducted at general meetings is: ordinary business, or special business

20

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

21




22

The company’s legal and regulatory environment

features of a company

different legal corporate forms

disclosure of information and reporting

corporate insolvency

23

Limited Liability

Who benefits from the concept of limited liability?

24

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

25

Constitutional documents

Memorandum of association

Articles of associationTables A - F (CA 1985)

New Models (CA 2006)

26

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)

27

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

28

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)

29

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

30

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

31

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

32

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

33

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

34




35

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

36

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

37

Breach of duties

Who can take action against directors?

the company regulators the Crown shareholders (derivative claims) stakeholders

38

Grounds for disqualification

Which of the following are grounds for disqualifying a director?

general misconduct unfitness fraudulent trading wrongful trading

39

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

40

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)

41

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?

42

Directors’ duties

historically – mainly common law

codified in Companies Act 2006

43

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

44

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:

45

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

46

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:

47

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

48

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

49

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

50

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”

51

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)

52

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

53

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.

54

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

55

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

56

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

57

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

58

Role of executive director

two accountabilities:

company director - joint & several liability

functional responsibility - reporting to & supporting

MD

59

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

60

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

61

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

62

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

63

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

64

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)

65

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

66

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.)

67

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

68

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

69

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

70

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