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These notes have been prepared as the basis of a 2 hour presentation on the role of a non-executive Director in an SME. These will provide the basis of a number of PowerPoint slides using the content and the approach in this word document. In the time available it is not possible to cover all aspects of this topic, but it should provide a taster to this subject and should introduce: Roles and responsibilities of the Board and Non-Executive Directors Skills, attributes and requirements of a Non-Executive Directors Handling issues by Non-Executive Directors Liabilities and penalties for Non-Executive Directors Best practice for Boards and Non-Executive Directors Becoming a NED
Topics
1. Who / What is a director 2. Directors' powers, duties and liabilities 3. Role of the Board 4. What is a Non-Executive Director 5. Contribution of Non-Executive Director 6. Attributes of a Non Executive Director 7. How a Non Executive Director should act 8. Why companies want Non-Executive Directors 9. Reasons for becoming a Non-Executive Director 10. Time commitment for a Non-Executive Director 11. Payment for a Non-Executive Director 12. Legislation & Code of Conduct 13. Features of an effective Board 14. Role of the Chairman 15. Types of Board 16. Board Committees 17. Non Executives with shareholdings 18. Penalties 19. Directors' & Officers (D & O) insurance 20. Pre-appointment due diligence 21. NED appointments Reading List
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Companies Acts 1985 & 2006 The role and responsibilities of company directors were defined by case law. The Companies Act 2006 confirms existing case law and requires company directors to act in a way which is most likely to promote the success of the business.
Executive and Non-executive directors A director may be involved in day-to-day management, but doesn't have to be Non-executive directors have the same legal responsibilities as other directors Shareholders appoint directors Appointment of directors must comply with the company's Articles of Association which set out rules for how the company is to be run including: How many directors there should be How long they can serve What happens at the end of their term Shareholders may appoint whom they want as director. But candidates must not (without the court's permission): Be disqualified by a court from being a director Be an undischarged bankrupt Be under the age of 16 (if based in Scotland) Retirement of directors In many companies directors are required to retire after a set term. They can offer themselves for re-election at the shareholders' annual general meeting. Who is a director? Director in law Executive directors Non-executive directors Nominee director Alternate director Director by conduct Shadow director Deemed director Director by name Associate director
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Obey the law: Company law - produce proper accounts & send documents to Companies House Other laws including health and safety, employment law and tax May be responsible for the actions of company employees In addition, from a date to be announced: Avoid actual and potential conflicts of interest Not to accept benefits from third parties Declare any interest in proposed transactions And A general duty of continuance
4. Liabilities Acting improperly can lead to fines, disqualification from being a director, personal liability for the company's debts or a criminal conviction. If in doubt, take professional advice.
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The duties of a director include the following: 1. Act in a way most likely to promote the success of the company to benefit the shareholders. This should consider the long term, the firm's reputation and the interests of other stakeholders, such as creditors, employees and the community. The best interests of the company are not always the same as the best interests of the shareholders. 2. Give equal consideration to all shareholders - even if a Director holds most of the shares, or acts as the nominee of the major shareholder, that Director must consider the interests of shareholders as a whole. 3. Not use position to make private profits at the company's expense - If a Director is found to have secretly profited from a contract, that director might be forced to hand it over to the company. 4. Any potential conflict of interest must be declared - for example, if a Director has interests in another company with which the company is planning to do business. The Director concerned should not vote on such a deal. 5. Substantial personal deals with the company must be approved - Any plan for a director to enter into a substantial personal deal with the company, must be approved by the shareholders in a general meeting. 6. Declare any shareholdings in the company, and any dealings in the shares, within five days. This obligation extends to shares held by the spouse and any children under 18. 7. Directors contracts of employment capable of exceeding five years must be approved by the shareholders in a general meeting. 8. Pursue the objectives listed in the Memorandum of Association and act within the powers granted in the Memorandum and Articles of Association. The Memorandum normally sets out a list of powers which the directors may exercise in pursuing the main objective(s) of the company and the Articles of Association define the rules governing the directors. If the directors act outside the company's powers, the company may have an action against them. Note: the company's main objectives may only be changed by getting shareholder agreement to a new Memorandum. 9. Exhibit a degree of skill - Directors are required to exhibit a degree of skill as may reasonably be expected from a person with that knowledge and experience. For example, a chartered accountant might be expected to know if the company was trading while insolvent. 10. Exercise a degree of care - Directors are required to exercise an acceptable level of care being what a reasonable person would do in looking after their own affairs.
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2. Governance & Management Governance is: Establishing & maintaining the vision Formulating and owning corporate strategy Acquiring and allocating overall resources Settling & maintaining policies Focusing on the longer term Strategy The Board is concerned with Governance. Management is: Achieving strategic objectives Running the business day in, day out Operational problem solving Profit generation Focusing on the here and now tactics Executive Directors and managers are concerned with management. Shareholders require the Board to run the company on their behalf and delegate power and responsibility to the Directors. The Board must delegate power to management to achieve corporate objectives, but responsibility always resides with the Board.
Shareholders
Responsibility
Power
Board
Management
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3. Roles The board Collectively directs the companys affairs The chairman Leads the board and manages its business Managing Director / Chief Executive Executes strategies, plans and policies agreed by the Board Leads the management and employees Manages the business activities day to day Board 1. 2. 3. 4. 5. 6. fundamentals The Board is the companys mind and will Directors have joint & several responsibility Directors as a Board act as a council of equals The Chairman is the first amongst equals The MD has no boardroom seniority Non-Executive Directors serve only their director role but executive directors also have their management role
Thrive
Survive
Low
High
Strategy (Board)
5. Key tasks of the board Foresight Establish vision, mission and values Far sight Set strategies and structure Oversight Delegate to management & review Hindsight Exercise accountability to shareholders and be responsible to relevant stakeholders
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Executive Directors Full time Day-to-day, hands-on Employed Contract of employment Not Independent Line responsibility Portfolio responsibility Executive responsibility Executing company strategy Micro or internal knowledge
Non-Executive Directors Part time Hands-off Self Employed Letter of appointment Independent No line responsibility Without portfolio No executive responsibility Consider & review company strategy Macro or external knowledge
A Non-Executive Director is distinctly different from a retained professional advisor, an Interim Manager or Consultant. Advisors are paid to advise and Directors are paid to decide. A Non-Executive Director has responsibilities as a "corporate policeman or watchdog" with adherence to good practise, adherence to Boardroom disciplines, corporate governance and corporate responsibilities. Government led reviews over the last few years, like the Higgs Review produced by Sir Derek Higgs in 2003, were the precursor of the Combined Code on Corporate Governance which has as one of its main stipulations (para A.3.2.) that "a smaller company should have at least two independent Non-Executive Directors".
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Specifically, the role of the Non-Executive Director has the following key elements: 1. Strategy - Constructively challenge and contribute to the development of the company's strategy. 2. Performance - Scrutinise the performance of the company's management in meeting agreed goals and objectives and monitor the reporting of performance. 3. Risk - Satisfy themselves that the company's financial information is accurate and that financial controls and systems of risk management are robust and defensible. 4. People - Determining appropriate levels of remuneration of Executive Directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning. A Non-Executive Director should bring the following to the company: Strengthen the Management Team Be involved in the creation of the Business Plan, policies and strategy Review plans and budgets which will implement policy and strategy Provide an independent assessment of management and management structure and ensure the competency of the executive team Monitor and supervise the management of the business Objectively assess the company's overall performance Ensuring company compliance with laws and regulations Mentor and "Wise Owl" to Chairman, MD/CEO and other Board members while remaining independent Confidential sounding board for the Chairman, MD/CEO and other Board members and keep their focus Add credibility providing comfort to company's suppliers, Bankers & investors Keep the Board focused on Board issues (as distinct from management concerns) and act as an effective referee on the Board Inspiring best board practice Determine appropriate remuneration levels for the Directors Provide beneficial sector contacts, acquired in previous businesses Provide outside experience of the workings of other companies and industries Provide contacts with third parties such as financial sources, grant availability, potential clients etc Provide specialist and invaluable knowledge at critical stages of a Company's growth through similar experience in other businesses www.innovation-nations.com
The presence of a Non-Executive Director on an inexperienced Board should help to retain the company's and the MD's focus and help to prevent them from making basic mistakes that many such companies tend to make.
A Non-Executive Director on a Company's Board must have sufficient credibility experience and stature to provide comfort to a company's investors, Customers, suppliers and Bankers. A Non-Executive Director must have all the business, commercial and technical knowledge, skills and experience expected of someone with the particular background of that individual. In addition, the Non-Executive Director will possess the necessary soft skills which are essential to operate as a Non-Executive Director in the Board environment including communication, influencing, mentoring etc.
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Continually refresh knowledge and skills on corporate governance, financial reporting, the industry and the market Communicate well internally and externally and listen constructively to colleagues Be a Team Player who lets the Executive team get on with their jobs Be an Independent advisor who can challenge as well as support
5. More often than not early stage companies struggle to gain funding due to the lack of credibility in their management team and we can address this shortcoming. 6. It is considered that successful companies are 85% good management and 15% good idea; and that the appointment of one or two Non Execs adds considerably to good management. Often smaller businesses don't realise how much a Non Exec can add to the capability of the team, the quality and robustness of the decision taking and the strength of the right Non Exec's connections. Often businesses will only focus on the cost of an NED and do not appreciate what great value a Non Exec can be.
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Additional time can be spent on introducing contacts or potential clients, with funding providers, discussing strategy and key decisions and on PR activity.
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All companies incorporated in the UK and listed on the Main Market of the London Stock Exchange are required under the Listing Rules to report on how they have applied the Combined Code in their annual report and accounts. Overseas companies listed on the Main Market are required to disclose the significant ways in which their corporate governance practices differ from those set out in the Code. The Combined Code contains broad principles and more specific provisions. Listed companies are required to report on how they have applied the principles of the Code, and either to confirm that they have complied with the Code's provisions or - where they have not - to provide an explanation. The Combined Code provides good practices for all companies. Higgs was only asked to address corporate governance in the big, listed and quoted companies, but the Combined Code on Corporate Governance has as one of its main stipulations (para A.3.2.) that "a smaller company should have at least two independent Non-Executive Directors".
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Executive Directors unable to differentiate between Board and management roles Directors unable to differentiate between director role and shareholder position Board not acting as a council of equals Focused on day to day management rather than Board issues - Unable to establish vision and formulating strategy Inadequate Chairman Form over substance of the Board Lack of communication, conflict or interpersonal issues - members of Board Management with-holding information from the Board / Non-Executive Directors Focused largely on short-term issues rather than longer term strategic Board unable / unwilling to provide governance Board does not have confidence of shareholders Non-Executive Director(s) not seen as providing any benefit
two requirements go hand in hand. This investment is an indication of commitment and helps to protect the IPR. The holding of shares by NEDs may be opposed on the basis that it compromises independence, but a shareholding can be helpful in aligning the interests of the NED with the long-term interests of shareholders. However, it is undesirable for this shareholding to represent a large proportion of the individual NED's financial wealth.
18. Penalties
Company Directors are responsible for the management of their companies and must act in a way most likely to promote the success of the business and benefit its shareholders. They also have responsibilities to the company's employees, its trading partners, and the state. Directors need wide powers to help them promote the company but face serious penalties if they abuse those powers, or use them irresponsibly. Directors must exercise responsibilities carefully - penalties for failing to do so can be formidable. Directors have many legal duties including: Employment law - may be found personally liable for unfair dismissal, racial or sexual discrimination or unfair work practices. Directors should ensure that the company complies with all employment law changes Health and safety - must ensure that a risk assessment is carried out, a health and safety policy is in place. If you employ more than five people your health and safety policy must be in writing Tax - ensure that the correct amount of tax, VAT and National Insurance are paid and on time Company law - responsible for sending statutory returns to Companies House Personal liability For losses resulting from acts or omissions - including acts which are illegal, beyond the directors powers or undertaken with insufficient skill and care For company debts incurred through wrongful or fraudulent trading Directors jointly and severally liable. Liability could be unlimited - directors could be made bankrupt as a result of decisions of the other directors, even in a limited liability company
Disqualification Individuals may be disqualified from acting as a director for: Continuing to trade when the company is insolvent Failure to keep proper accounting records Failure to prepare and file accounts and not sending returns to Companies House Failure to submit tax returns and pay tax Failure to co-operate with the official receiver Disqualification may last from two to 15 years While disqualified, a person must not: Be a director of any company Act like a director - even without being formally appointed Influence the running of a company through the directors Be involved in the formation of a new company or promotion of a company In addition, there may be criminal charges, fines or personal liability for the company's debts.
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Criminal convictions Criminal convictions may arise from: Failure to keep proper accounting records Fraudulent trading Health and safety shortcomings Misappropriation of company funds
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Reading List The Non-Executive Director role The Independent Director Ernst & Young Tolleys Non-Executive Directors Morris & Dunne Handbook Non-Executive Director Handbook Chiltern / NEDA Non-executive director's Morris GD handbook Elesvier / CIMA Directors responsibilities Being a director a practical guide to what you need to know The responsibilities of Company Directors The Directors Handbook Governance Corporate Governance Business Ethics Essential Director The fish rots from the head The effective director PWC Sparrow / Institute of Management Martin Webster Sheridan & Kendall Moon & Bonny Bob Tricker Bob Garratt Neville Bain
1998 1998
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The Good Practice Notes The role of a Non-Executive Director in a SME has been reproduced for Innovation-Nations with the kind permission of David Lever FCIMA David Lever Business & Financial Solutions E: david@david-lever.co.uk
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