It can be challenging to navigate your responsibilities as a company director and comply with best practice both inside and outside of the boardroom. Read on for our top ten 10 practical tips for directors who want to succeed on the board.
- Know your legal duties
- Documentation is key
- Be cautious of expressing dissenting opinions outside the boardroom…
- …but do speak up when members of the board are acting improperly
- Company information
- Conduct meetings with proper quorum and notice
- Know how to deal with deadlock
- Role of the chair
- Beware of insolvency
- Only abandon ship as a last resort!
1. Know your legal duties
Under legislation, all directors are under a duty to:
- act within the company’s constitution and only exercise powers for a proper purpose;
- act in good faith to promote the success of the company;
- exercise independent judgement;
- exercise reasonable care, skill and diligence;
- avoid conflicts of interest;
- not accept benefits from third parties; and
- declare interests in proposed transactions or arrangements with the company.
Avoid falling into traps which are easily avoidable by ensuring that you are fully aware of your legal responsibilities.
2. Documentation is key
As a director, it will be in your best interests to ensure that accurate records are kept and all important decisions and deliberations of the board are documented, especially where there is the potential for liability to arise.
If a director faces allegations of insolvent trading (see below), they may only escape liability if they can show that they have had adequate regard to the company’s finances and acted accordingly. This may be evidenced through the production of accurate and up-to-date management accounts, cashflow statements and board minutes documenting the rationale for decisions. Evidence of obtaining valuations for asset disposals; review of reserves being made before drawing dividends or paying out bonuses and obtaining professional advice would also be very helpful.
3. Be cautious of expressing dissenting opinions outside the boardroom…
Think of the board as a collective decision making body. The most appropriate forum for a director to voice their disagreement with the board’s management strategy or decisions will always be within the confines of the boardroom. The best course of action for a dissenting director is to engage in debate and attempt to persuade other board members of their point of view within this forum. If this is unsuccessful, and a director is unhappy with the course which the board is taking, they should ensure that their concerns are properly documented.
It will not generally be considered to be acting in accordance with your fiduciary duties and duties of good faith if you publicly denounce or criticise board decisions whilst still remaining a director. If an individual feels so strongly against a decision that their integrity would be compromised if they were to continue in office, they can consider resigning (however see tip 10 below).
4. …but do speak up when members of the board are acting improperly
It is vital to take action if you feel that another member of the board is acting improperly or illegally. If the issue is relatively minor, the most appropriate action may be to simply give the board and/or individual an opportunity to correct the indiscretion.
However, if the situation is more serious or involves deliberate wrongdoing, you must ensure that there is written evidence of your objections on record, and you may need to take legal advice to ensure that you are adequately protected. Although you are not generally liable for the actions of other board members if you are unaware of what they are doing, turning a blind eye may not be enough to benefit from this protection.
5. Company information
Be aware of what information you and other board members are entitled to. Sometimes this will be a statutory right. For example, all directors are entitled to inspect or review the company accounts at any time, so that they are able to make informed decisions about solvency and comply with their legal duties.
The situation may become more complex if a matter arises in which a director has a conflict, or a director faces disqualification (in which case company information may be withheld). The company’s articles or shareholders agreement may provide assistance or guidance as to best practice in this type of scenario.
Lastly, always bear in mind your obligations to keep company information confidential.
6. Conduct meetings with proper quorum and notice
All directors should be provided with notice of board meetings, even if they have previously indicated that they are unable to attend. It is best practice for notice to be in writing. Unless the company’s articles prescribe a set period of notice which may be given, the length of notice must be “fair and reasonable”. What is reasonable in the circumstances may depend on a range of factors including what is being decided; the urgency of matters to be discussed and past practice of that particular board.
The quorum required for board meetings is usually set out in the company’s articles and/or shareholders agreement. A quorum must be present for the duration of the meeting, and a director cannot be counted as part of the quorum for any resolution which they are disqualified from voting on. A decision made at an inquorate board meeting may be ratified by a resolution duly passed at a quorate board meeting, unless a company’s constitution provides otherwise.
Issues as to quorum can arise if there are too many directors with a personal interest in a particular matter, or there is a small company with relatively few directors and/or absentee directors. In such cases, it may be necessary to consider appointing additional directors.
7. Know how to deal with deadlock
An issue common for a joint venture company, can arise if the directors and shareholders both cannot agree key decisions. In this scenario, the company can become deadlocked and unable to operate properly.
The main options for a deadlocked board are as follows:
- Giving the chairman of the board a casting vote. However, this gives an advantage to the party who has appointed the chairman.
- Appointing a neutral non-executive director (for example an expert in the field of the company’s business) and agree that their decision is binding on all parties.
- If the company is within a group, the deadlock can sometimes be escalated to higher levels of management.
- Considering reference to mediation, arbitration or expert determination.
- If none of the above are effective, options are typically limited to a transfer of shares or voluntary liquidation of the company. Two party agreements can include variations on put and call options such as “Russian roulette” or a “Texas shoot-out”.
8. Role of the chair
A company’s articles usually provide for the appointment of a chairperson. In essence, the role of the chair is to exercise procedural control over board meetings.
This may include ensuring there is a quorum present; keeping order; following the agenda; ensuring that all necessary business is dealt with; being responsible for determining whether a director has a right to vote and, in some circumstances, exercising a casting vote.
For a listed company, the chairperson is subject to additional requirements under the Corporate Governance Code. However, as a matter of good practice, the chairperson of any company should provide leadership to the board; facilitate a culture of honest debate and be responsible for good corporate governance.
9. Beware of insolvency
If a company is at risk of insolvency, it is of paramount importance that you understand your obligations to act in the best interests of the company’s creditors generally, and that you do not open yourself up to allegations of wrongful trading by continuing to run the business when the company is in material danger of failing.
To determine whether a company is solvent, you should take into consideration both the net asset position and the ability of the company to settle its reasonably foreseeable liabilities out of its expected cash flow.
As a director, you can become personally liable to contribute to a company’s ongoing debts. Wrongful trading occurs if there is no reasonable prospect of avoiding insolvency and you continue to trade without taking every step to minimise potential losses to creditors. Keep in mind that this obligation is not limited to taking every reasonable step, and it is an objective as well as subjective test. In other words, if you have not exercised due caution, it is possible to incur liability even if you are unaware of the likelihood of an impending insolvent liquidation.
Directors of an insolvent company can also face the threat of disqualification, for between two to fifteen years, if it is determined that their conduct makes them unfit to be involved in the management of the company.
10. Only abandon ship as a last resort!
Resignation may be appropriate where a board refuses to acknowledge a problem and, through the director’s resignation, the company is forced into the spotlight and into taking remedial action.
However, this should always be a last resort. In an insolvency situation, resignation may be considered an abrogation of responsibility and a liquidator will not look favorably on a director who resigns at a time when a company is struggling to stay afloat. The official can also look at the actions of ex-directors in the two years up to formal insolvency.
Consider the analogies of the Titanic and the Costa Concordia. The captain should always be the last not first to abandon a sinking ship. Also, even if a director does manage to escape by resigning, they can still be held accountable for any liability arising from their actions (or inactions) whilst on board the ship.
For further information, please contact Paul Taylor (partner) or Charlotte Kong (trainee) in the corporate team.