Company Law UK: Non-Executive Directors and the Combined Code 2008 - Term Paper Example

UK Company law - Non-Executive Directors and the Combined 2008 Introduction: It is seen that the UKM Companies Act has laid lot of emphasis on the matter of duties and responsibilities of directors, especially non-executive directors (NED) in the matters of superintendence, control and management of companies, especially from the outside. Before entering into the deliberations of what NEDs owe the management of the companies in which they function, it is necessary to get an idea of what the Companies Act views NED. According to the Companies Act 1985 and also the new Companies Act 2006, there has been no definition of NED as such, and a lot about duties and responsibilities of NED would vest with the roles they perform. It also needs to be seen that one of the main aspects would be in terms of detached, unbiased and independent view which a NED may take in corporate affairs of the company in which he is serving as NED. It should also been seen that the main roles of NED would be in terms of acting as a ethical check on the executive directors, especially with regard to power consolidation and influence exercised over the organisation. Risk of autocratic rule by executive directors In their roles as executive whole time directors, wielding major powers and exerting high influence over the destiny of the Companies they administer, it may be quite likely that WTD may misuse their powers or exercise it in an autocratic and domineering way, which may, in certain cases, prove prejudicial to the larger interests of the Company and its shareholders. “Non-executive directors usually stand back from the day-to-day running of the business, drawing alongside the executive team as required to facilitate the strategic decision-making process. Exactly what this entails will vary from company to company, depending on what is required at each stage of a company’s development.” http://www.cipd.co.uk/nedresource/information/roleofneds.htm Thus, it could be inferred that under UK laws, the role and functions of non-executive directors are determined by their performance in the organisation and the undertaking of specific tasks as laid down by the shareholders of the companies during General Meetings. The one aspect that emerges very clearly is that NED, in their outside capacity could serve as robust watchtowers for the protection of inside interests. They could serve to monitor the activities of executive board and even be empowered to discipline or remove errant executive directors. Combined Code of Governance 2008 Under the Combined Code of Governance 2008, it is seen that NED scrutinise the performance of management in overseeing that it meets agreed goals and objectives of the Company. This is with specific reference to the need to enforce financial control systems that could possibly address fiscal discipline and internal mechanism that could guard against possibilities of occurrences of frauds, etc. Under the CCG 2008, it is seen that the Chairman of the Board of Directors also needs to interact with NEDs so as to be well informed and have constructive rapport with both executive and non executive directors. According to the CCG 2008, in large companies, nearly 50% of constituted Board of Directors should be non-executive, or part time directors, and the balance 50% executive whole-time directors. This would ensure balance and parity between power sharing and decision making and could ensure that hegemony by directors, or director cliques do not occur, which may sometimes be prejudicial to the interests of the shareholders and even the larger good governance aspects of company. In the cases of smaller companies, two directors may hold office as non –executive directors. http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code%20Web%20Optimized%20June%202008(2).pdf Role of Nomination Committee: Further, it has been stated that it would be in best interests of good governance that a Nomination Committee be appointed that would oversee the aspects of appointment of directors, mainly whole time executive directors. The NED would constitute a larger portion of this selection committee, and by virtue of their detached mentality, outside experience, independent outlook and professionalism, they would be in a better position to select the right kind of executive directors for the job of directing the company. The element of independence and objectivity are important for managerial selection, since bias, discrimination, and parochial sentiments may often cloud judicious decisions which need to be avoided under all circumstances. This could be best achieved by Third Parties like outside NED, who would consider aspects of good governance, above everything else and would strive to uphold righteous business conduct. Since the role and responsibilities of NEDs are not constrictively defined and deliberated upon in the Companies Act 2006, it is believed that they are capable of taking up all kinds of work that are entrusted upon them by the Board of Directors and also the work entrusted to them by shareholders. Senior non –executive directors may even offer specialised advice and guidance to Chairman on workings of Company, and also recommend the appointment or removal of whole time executive director. According to the CCCG 2006 and 2008, it is said that As part of their role as members of a unitary board, non-executive directors should constructively challenge and help develop proposals on strategy. Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.” http://books.google.co.in/books?id=4ZwHBANzAqAC&pg=PA132&lpg=PA132&dq=As+part+of+their+role+as+members+of+a+unitary+board,+non-executive+directors+should+constructively+challenge+and+help+develop+proposals+on+strategy.&source=bl&ots=KhxVmX1VHc&sig=ESSPBmmzXShqDAouBOH3cDc4GzY&hl=en&ei=dlr6Sce0HJiVkAX5qYXeBA&sa=X&oi=book_result&ct=result&resnum=1#PPA132,M1 Thus it is seen that the main aspects that needs to be dealt with by NED would be in terms of acting as a counterbalance for executive directors and more importantly, performing and contributing to the overall good governance and enhanced development of the business enterprise in which they serve. However, the rights and privileges of Non-Executive directors also need to be seen from the fact that these would naturally stem from the covenant with the shareholders and the Board, but Neds may question the emoluments and benefits claimed by Executive directors should they think it necessary to do so, in terms of good governance and measure of fiscal discipline. Independent functioning and decision making capacity: Given their independent status in the scheme of things, they could even question justification for appointment, tenure and removal of whole time executive directors reigning on the board. However, much would also depend upon the attitude the senior management adopts towards part-time, or non executive directors, who may not be really required to devote all their time and energies towards administration and directing of such corporate enterprises. The Equitable Life Assurance Society abandoned its claim against its former non-executive directors, accepting that it would not be able to prove that they had been negligent. http://www.oup.com/uk/orc/bin/9780199547050/resources/updates/ch16/ Norms qualifying independent nature of NEDs According to this report, the main aspect would be with respect to autonomy and independences of working of part time director, or non-executive director, and despite the following issues being present, the Board may, at its discretion, view the NED as an independent and unbiased functionary: 1. Such a person has been an employee of the said company within five years 2. He has been having business interests in the said company within last three years, directly, or indirectly as a higher employee, director, shareholder or partner in any company which has business dealings with the said company. 3. Apart from, or outside purview of Director’s Fees, the incumbent non executive director is also in receipt of either share option, been a participant in share dealings, performance related schemes or pension plans of the company. 4. Is closely related to any of the directors, higher employees or company advisers. 5. Has nexus with this company under cross directorships, or any associate interests which form substantive relations with this company. 6. Represents a senior shareholder of this company 7. Has been in the board for period of not less than 9 years http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code%20Web%20Optimized%20June%202008(2).pdf Thus, it is seen that given the kind of independence that a non-executive could function, it is seen that there could not be much of continual differences between executive and non executive directors, except perhaps the fact that an executive director holds a full time duty while, non executive may need to devote only part of his time for directing the company. However, it is in this context that non-executive directors’ time and commitment needed to effectuated for the company, including the details of other programmes that may be taken up by the non-executive e director, needs to be chalked out well in advance. Interaction with Company secretaries It is seen that Company Secretaries are important constituent officers of Company, and therefore need to co-ordinate with non-executive directors, in discharge of their functions. Thus, non-executive directors need to co-ordinate with the company secretary in matters affecting their roles and responsibility, more so, with regard to matters that affect the administration and working of corporate under changing legal settings and environments. Coming to the next aspect is that the change of a conflict or even a friction of role between the executive functionaries and the non –executive functionaries cannot be ruled out, more so, on the basis of the fact that while on the one hand, the Ned’s have to oversee and supervise executive counterparts, they also need to function closely and co-operatively with them on the Board of Directors of the company, especially during general and extraordinary meetings of the company , and even, perhaps need to interact during specially constituted committees, that govern corporate business dealings. Finely turned and delicately manoeuvred relations between constituents: Thus it is seen that the role of NED’s in good governance and furthering the interests of the stakeholders who have nurtured and sustained their tenure on the board needs to be maintained and strengthened over the period of time it is in constructive service. It could also be seen in terms of the fact that good governance needs to ensure whole hearted co- operation, goodwill and open, transparent and cordial relations among all the constituents, irrespective of hierarchical standing. More so, the delicate and finely balanced relationship between executive whole time directors, the non-executive part time directors, on the one hand, and the management and shareholders on the other, has been underpinned and bulwarked by guidelines and tenets enunciated by the law committees and lawmakers and reviewed annually to make it more effective. . There are many aspects that need to be considered in the light of Code 2008, and this could be seen in terms of: The Appointment order of the director needs to consider the time commitment for the currency of the director ship held, whether full time or part time basis. It is essential that the directors be provided with full information about the workings of the company and other official matters that affect the carrying out of their duties and responsibility. Information needs to be timely, appropriate and in sync with the needs of directors in discharging their corporate functions. http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code%20Web%20Optimized%20June%202008(2).pdf Appropriate training needs to be given to new directors and needs to be upgraded and updated on a regular basis, in order to allow them to function to the best of their abilities. It is also necessary that constant interactions between chairman, full time directors and part time or non-executive directors be carried out in order to pinpoint areas of conflicts and resolve them on consensus. Except for the lesser time that non executive may be able to devote to their official directorships, in all other matters, executive and non –executive directors may be treated at par. http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code%20Web%20Optimized%20June%202008(2).pdf Powers not to be centralised with one person or group: The Chairman of Board of Directors needs to differentiate between decision-making powers and capacity in such a way such that it is not exclusively monopolised by any one group or clique, and all directors – executive and non-executive have equal voting power in major decisions affecting the future course of the company. Another important aspect is the number of Board Meetings and other Committees that take place, preferably in a fiscal year, and the number of directors, executive and non- executive who attend such meetings. It is also necessary to note the names and particulars of Non-Executive directors, and the steps taken by the Board of Directors in apprising them of the recent developments and issues that affect the functioning of such directors. Again, the good governance aspect of non-executive directorships is seen from the fact that re-appointment of directors can be made only after the Chairman has confirmed that performance of individual non executive directors continues to be effective and to demonstrate commitment to role. http://www.frc.org.uk/documents/pagemanager/frc/Combined%20code%202006%20OCTOBER.pdf Conclusions: The adoption of the Combined Code 2006 and its amended version in 2008 augurs well for the UK listed Companies which need to mandatory follow the aspects relating to Company law on matters of appointment, retirement and re-electing of company directors during general meetings. The link between good governance and enforcement of Combined Code 2008 could be seen in terms of the fact that if the Chairman and his board of Directors need to offer full support and co-operation to Non executive directors in the performance of their onerous tasks in coordination and cooperation with the other senior management. They also need ensure that control systems are in place, identifying areas of laxity and lapses, and correcting them immediately, institutionalising and enforcing a strong leadership style, not only in terms of standards but also in terms of practices. It could be said that such policy guidelines are only as good as how well they are enforced on a regular and effective manner, not only in the Boardrooms but beyond. It needs to be enforced throughout the organisation and its accrued benefits in terms of good governance, leadership in action, excellent managerial systems and on the right track to growth and prosperity would also fall into place for the organisation. However, it needs to have the whole-hearted support, co-operation; guidance and control of all the concerned people and it is only with a united and consolidated effort that sustained benefits could be derived from enforcing of such guidelines in future. Frequent changes in management structures and styling, leadership changes, organisational upheavals all these cause delay in the progress to growth and needs to be well monitored as far as possible. It is also necessary that both Non-Executive Directors and Executive directors understand the critical roles played by each other and strive to underpin the respective strengths and performances contributed by each other. Only by fostering a genuine and cordial relationships among the directors with the Board and Chairman, the director’s per se and with the work force could sustained benefits from these guidelines be derived. Read More