Board of directors
Historically, directors' duties have been owed almost exclusively to the company and its members, and the board was expected to exercise its powers for the financial benefit of the company. However, more recently there have been attempts to "soften" the position, and provide for more scope for directors to act as good corporate citizens. For example, in the United Kingdom, the Companies Act 2006, not yet in force, will require a director of a UK company "to promote the success of the company for the benefit of its members as a whole", but sets out six factors to which a director must have regards in fulfilling the duty to promote success. These are:
- the likely consequences of any decision in the long term
- the interests of the company’s employees
- the need to foster the company’s business relationships with suppliers, customers and others
- the impact of the company’s operations on the community and the environment
- the desirability of the company maintaining a reputation for high standards of business conduct, and
- the need to act fairly as between members of a company
This represents a considerable departure from the traditional notion that directors' duties are owed only to the company. Previously in the United Kingdom, under the Companies Act 1985, protections for non-member stakeholders were considerably more limited (see e.g. s.309 which permitted directors to take into account the interests of employees but which could only be enforced by the shareholders and not by the employees themselves. The changes have therefore been the subject of some criticism. [1]
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Failures
While the primary responsibility of boards is to ensure that the corporation's management is performing its job correctly, actually achieving this in practice can be difficult. In a number of "corporate scandals" of the 1990s, one notable feature revealed in subsequent investigations is that boards were not aware of the activities of the managers that they hired, and the true financial state of the corporation. A number of factors may be involved in this tendency:
- Most boards largely rely on management to report information to them, thus allowing management to place the desired 'spin' on information, or even conceal or lie about the true state of a company.
- Boards of directors are part-time bodies, whose members meet only occasionally and may not know each other particularly well. This unfamiliarity can make it difficult for board members to question management.
- CEOs tend to be rather forceful personalities. In some cases, CEOs are accused of exercising too much influence over the company's board.
- Directors may not have the time or the skills required to understand the details of corporate business, allowing management to obscure problems.
- The same directors who appointed the present CEO oversee his or her performance. This makes it difficult for some directors to dispassionately evaluate the CEO's performance.
- Directors often feel that a judgement of a manager, particularly one who has performed well in the past, should be respected. This can be quite legitimate, but poses problems if the manager's judgement is indeed flawed.
- All of the above may contribute to a culture of "not rocking the boat" at board meetings.
Because of this, the role of boards in corporate governance, and how to improve their oversight capability, has been examined carefully in recent years, and new legislation in a number of jurisdictions, and an increased focus on the topic by boards themselves, has seen changes implemented to try and improve their performance.
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Sarbanes-Oxley Act
In the United States, the Sarbanes-Oxley Act (SOX) has introduced new standards of accountability on the board of directors for U.S. companies or companies listed on U.S. stock exchanges. Under the Act members of the board risk large fines and prison sentences in the case of accounting crimes. Internal control is now the direct responsibility of directors. This means that the vast majority of public companies now have hired internal auditors to ensure that the company adheres to the highest standards of internal controls. Additionally, these internal auditors are required by law to report directly to the audit board. This group consists of board of directors members where more than half of the members are outside the company and one of those members outside the company is an accounting expert.
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See also
- Alternate director
- Chair (official)
- Company (law)
- Corporation
- Corporate governance
- Corporate titles
- Executive director
- Finance director
- Managing director
- Non-executive director
- Vorstand
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Footnotes
- ^ Shareholder democracy | Battling for corporate America | Economist.com
- ^ Financial exchanges | Shareholder power | Economist.com
- ^ Formally entitled the Report of the Committee on the Financial Aspects of Corporate Governance (1992). The Code of Best Practice which accompanied the Report recommended (at paragraph 1.3) that "The board should include non-executive directors of sufficient calibre and number for their views to carry significant weight in the board's decisions."
- ^ Under English law, a "shadow" director is defined as a person "in accordance with whose directions or instructions the directors of the company are accustomed to act" otherwise than only because "the directors act on advice given ... in a professional capacity." See section 741(2) of the Companies Act 1985 and section 251 of the Insolvency Act 1986
- ^ Gower, Principles of Company Law (6th ed.), citing Isle of Wight Railway v Tahourdin (1883) 25 Ch D 320.
- ^ Per Cozens-Hardy LJ at 44
- ^ See Gower, Principles of Company Law (6th ed.) at 185.
- ^ For example, in the United Kingdom, see section 303 of the Companies Act 1985
- ^ In the United Kingdom it is 28 days' notice, see sections 303(2) and 379 of the Companies Act 1985
- ^ In the United Kingdom, see section 304(1) of the Companies Act 1985. A private company cannot use a written resolution under section 381A - a meeting must be held.
- ^ In the United Kingdom, see sections 303(2) and (3) of the Companies Act 1985
- ^ See for example Barber's Case (1877) 5 Ch D 963 and Re Portuguese Consolidated Copper Mines (1889) 42 Ch D 160
- ^ Breckland Group Holdings Ltd v London and Suffolk Properties [1989] BCLC 100
- ^ Percival v Wright [1902] Ch 421
- ^ For example, if the board is authorised by the shareholders to negotiate with a takeover bidder. It has been held in New Zealand that "depending upon all the surround circumstances and the nature of the responsibility which in a real and practical sense the director has assumed towards the shareholder," Coleman v Myers [1977] 2 NZLR 225
- ^ Re Smith & Fawcett Ltd [1942] Ch 304
- ^ Re W & M Roith Ltd [1967] 1 WLR 432
- ^ That is a company which has the same 100% shareholder
- ^ Following Hogg v. Cramphorn Ltd. [1967] Ch 254
- ^ Teck Corporation v Millar (1972) 33 DLR (3d) 288
- ^ This division was rejected in British Columbia in Teck Corporation v Millar (1972) 33 DLR (3d) 288
- ^ Although as Gower points out, as well understood as the rule is, there is a paucity of authority on the point. But see Clark v Workman [1920] 1 Ir R 107 and Dawson International plc v Coats Paton plc 1989 SLT 655
- ^ In the United Kingdom, see section 317 of the Companies Act 1985
- ^ In summary, the facts were as follows: Company A owned a cinema, and the directors decided to acquire two other cinemas with a view to selling the entire undertaking as a going concern. They formed a new company ("Company B") to take the leases of the two new cinemas. But the lessor insisted on various stipulations, one of which was that Company B had to have a paid up share capital of not less than £5,000 (a substantial sum a the time). Company A was unable to subscribe for more than £2,000 in shares, so the directors arranged for the remaining 3,000 shares to be taken by themselves and their friends. Later, instead of selling the undertaking, they sold all of the shares in both companies and made a substantial profit. The shareholders of Company A sued asking that directors and their friends to disgorge the profits that they had made in connection with their 3,000 shares in Company B - the very same shares which the shareholders in Company A had been asked to subscribe (through Company A) but refused to do so.
- ^ Industrial Development Consultants v Cooley [1972] 1 WLR 443 (corporate information), Canadian Aero Service v. O'Malley (1973) 40 DLR (3d) 371 (corporate opportunity) and Boardman v Phipps [1967] 2 AC 46 (corporate opportunity, which again, the company itself had declined to take up)
- ^ a b Norman v Theodore Goddard [1991] BCLC 1027
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External links
- Institute of directors website
- Guidance on director's duties (Lemon & Co)
- CEO Evaluation Form (Boardroom Metrics)
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