10 Points for Directors’ Attention: Directors and Corporate Governance
24 Jun 2015 7:08 am by Mark Dunn
There has been much comment on corporate governance over the last few months following the publication of the Financial Reporting Council's UK Corporate Governance Code ('the Code'). It is important to remember that the directors of both public and private companies are subject to the same duties contained in the Companies Act 2006 ('the Act'). There is no distinction between different types or size of company.
This situation can be contrasted with the application of the Code. Whereas all companies with a premium listing in the UK must apply the Code – those with a standard listing and those listed on AIM are not subject to the Code. It is a benchmark of best practice and many companies voluntarily adopt some or all of its terms.
10 Points for Directors' Attention
- Remember your duties to the company. Think of them as the 'Magnificent Seven'. Directors may be able to remember 4 or 5 of them but can they name all seven of the general duties codified into statute? Sections 170 -177 of the Act .
- Be aware of your specific statutory duties. The Act imposes a number of specific duties on directors such as the preparation of annual accounts.
- What about your right to be paid? Company law does not confer on a director any right to be paid. Any such right must derive from the company's Articles and/or the director's service contract. The Code (September 2014) (Section D: Remuneration) states that executive directors' remuneration should be designed to promote the long –term success of the company. Performance - related elements should be transparent, stretching and rigorously applied.
- Do directors have the right to be insured? A company is permitted to purchase and maintain for directors of a company or an 'associated company', insurance against any such liability. (The Act, section 233). The existence of Directors and Officers (D & O) insurance does not exonerate members from their obligations.
- Concerns about wrongful trading? In order for directors to protect themselves against the possibility of an action for wrongful trading (Insolvency Act 1986 section 214) – directors need to be constantly aware of the company's financial position. Accounting records should be sufficient to enable directors to draw conclusions on the financial state of the company. Directors need to ensure that proper systems are in place to provide them with regular and current financial information.
- Does the company have adequate risk management and internal controls? The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving its strategic objectives. The board should maintain sound risk management and internal control systems. The board should monitor the company's risk management and internal control systems and at least annually, carry out a review of their effectiveness, and report on that review in the annual report. The monitoring and review should cover all material controls, including financial, operational and compliance controls.
- Be aware of retention of documents and what is a prudent period of time to keep documents. Beware that there are different limitation periods depending on the circumstances and the basis upon which a claim may be brought.
- Pay close attention to whistleblowing. The Public Interest Disclosure Act 1998 protects employees who report malpractice by their employees or third parties. The Code requires the audit committee to keep arrangements under review whereby staff may raise in confidence concerns regarding irregularities in reporting and other areas.
- What about corporate social responsibility? Directors must have regard to community and environmental issues and the interests of employees when considering their duty to promote the success of the company. Under the Code, a board should set the company's values and standards and ensure that its obligations to its shareholders and others are understood and met.
- Can a director's liability be restricted or limited? A UK company cannot exempt a director for liability to the company for breach of duty, negligence or other default. Hence the need for D & O insurance.
So the learnings are clear, Directors should ensure that they take appropriate legal advice and act on it and remember that non – executive directors are equally culpable. Ignorance is no defence. Directors need to think carefully before accepting an appointment and be aware of their responsibilities and duties to effectively manage risk within their organisations.
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