Role of the Company Director and the Board Sport & Recreation Alliance

1. Role of the Company Director and the BoardSport & Recreation Alliance Presented by Paul Munden 2013

2. Course content corporate governance the company’s legal and regulatory environment the director’s role Role of the company director & the board

3. Preliminaries name cards/business cards introductions – course delegates course format mix of presentations, exercises, questions, discussion style – informal & participative timings – start, breaks, finish being a director law & best practice must be tailored to individual circumstances IOD Folders fun!

4. Paul Munden Commercial Law Barrister Chartered Director Company Secretary, Legal Director and Chief Executive Business Link for London Non Executive Director NHS North Essex Board advisor General Teaching Council for England Chairman National Youth Music Theatre Legal Services Board Justice of the Peace Other previous appointments Non Executive Director Customer First UK Ltd Non Executive Chairman Soda Creative Ltd

5. Introductions – delegates your name your role any previous board experience?

6. Role of the company director and the board Quiz

7. Corporate governance – evolution UK business life until mid 19th century introduction of limited liability – 1844 business scandals – late 1980s 1990s - emergence of corporate governance Cadbury, Greenbury, Hampel (1992-1997) 1st Combined Code on Corporate Governance (1998) Turnbull (1999, 2005) Higgs, Smith, Combined Codes (2003 - 2008) UK Corporate Governance Code 2010

8. The Enron approach! Normal capitalism: “You have two cows. You buy a bull. Your herd multiplies, the economy grows - you sell the bull & retire” Enron capitalism: “You have two cows. You sell three of them to your publicly listed corporation using letters of credit opened by your brother-in-law at the bank where he works. You then execute a debt/equity swap with an associated general offer to the public so that you get all four cows back with tax exemption for five cows. The milk rights for six cows are transferred via an intermediary to a Cayman Islands company secretly owned by your chief financial officer who then sells the rights for seven cows back to your listed company. Your annual report states that your corporation owns eight cows, with an option on six more”

9. UK Corporate Governance Code Application - UK listed companies on main markets (also exemplar for other organisations) - “comply or explain” Content leadership effectiveness accountability remuneration relations with shareholders

10. Corporate governance – internationally OECD corporate governance codes should: promote transparent and efficient markets protect shareholder rights promote the equitable treatment of shareholders recognise the rights of stakeholders ensure timely & accurate financial, performance, ownership and governance reporting set out the board’s role for strategic guidance and monitoring and their accountability to the company.

11. Sarbanes Oxley Act 2002 Application publicly traded companies, their employees, officers & owners auditors, lawyers, bankers, brokers & analysts of public companies, mandatory – sanctions include fines and up to 20 yrs imprisonment CEO & CFO personally responsible for accuracy of financial reports Management must maintain effective internal controls

12. Corporate governance – principal tenets Accountability Probity Transparency

13. Shareholder rights shareholders own shares not companies shares bring rights: to a dividend, if paid to transfer ownership of shares to vote at a general meetings

14. Directors’ relationship with shareholders fiduciary duties accountability powers of appointment & removal of directors delegated powers – not mandated delegates “The business of the company shall be managed by the directors who may exercise all the powers of the company.”

15. Direction vs ownership Direction who is a director? directors’ authority Ownership general meetings/voting/shareholder agreements

16. Company constitution the organs of the constitution are: members (via general meetings) board of directors legal distinction is clear, can become confused in practice

17. Direction, management & ownership POWER & AUTHORITY RESPONSIBILITY SHAREHOLDERS BOARD Can be delegated Can’t be delegated EXECUTIVE MANAGEMENT

18. Powers reserved to board – typical content board appointments/ removal terms of reference - board committees remuneration/change of auditors press releases communications with shareholders dividend payments changes to internal control or risk management arrangements accounting policies disposal or acquisition of major assets major contracts and investments treasury management and capital policies strategies and budgets pension arrangements policies – e.g. people, health & safety, conduct, compliance.

19. Shareholders’ meetings all meetings are general meetings annual general meeting extraordinary general meeting business conducted at general meetings is: ordinary business, or special business

20. Voting at member meetings Meetings – AGM and EGM ordinary resolutions > 50%* special/extraordinary resolutions ≥ 75%* * of those present and voting (i.e. excl. abstentions) Voting by show of hands by poll

21. Course content corporate governance the company’s legal and regulatory environment the director’s role Role of the company director & the board

22. The company’s legal and regulatory environment features of a company different legal corporate forms disclosure of information and reporting corporate insolvency

23. Limited Liability Who benefits from the concept of limited liability?

24. Examples of board dilemmas entrepreneurial vs. prudent control confusion regarding the role of the board short term vs. long term commercial need vs. responsibility to others conflicts of interest directors of subsidiary companies directors of JV companies directors of family companies

25. Constitutional documents Memorandum of association Articles of association Tables A - F (CA 1985) New Models (CA 2006)

26. Memorandum of association Company’s name including ltd / plc / SE Country of registration Members’ liability is limited Share capital Subscribers’ signatures Company’s objects (if required, in articles post Oct 09)

27. Articles of association share capital / rights transfer/ transmission of shares alteration of capital general meetings procedures/voting borrowing powers appointment, powers & duties of MD proceedings at directors’ meetings disqualification secretary dividends & reserves accounts and audit capitalisation of profits winding up indemnity

28. Corporate forms in the UK private limited companies with shares – most common limited by guarantee – trade assns/charities /clubs public limited companies community interest companies (CIC) – public good corporations formed by statute or by charter charitable incorporated organisation (CIO) societas europeae (SE) unlimited companies – rare, exempt from filing a/cs, tax adv limited liability partnerships (LLP)

29. Corporate insolvency When is a company deemed to be insolvent? a. When a company’s liabilities exceed its assets b. When a company’s current liabilities exceed its fixed assets c. When a company is unable to pay its debts as and when they fall due d. When company goes into liquidation at a time when its assets are insufficient to pay its debts and the cost of winding up

30. Wrongful trading trading when the company has no reasonable prospect of avoiding insolvent liquidation penalties directors may be personally liable to contribute disqualification for up to 15 years

31. Wrongful trading – examples directors acting unreasonably or negligently by entering into contracts with knowledge of the company’s affairs and avoiding the facts directors failing to meet their duties

32. Fraudulent trading “knowingly carrying on the business of a company with intent to defraud creditors or potential creditors” intent fraudulent - actual dishonesty/real moral blame penalties directors may be personally liable to contribute criminal offence - Unlimited fine/7 years in prison

33. Fraudulent trading – examples actions/transactions by officers when they know there are insufficient funds taking orders and deposits for transaction that cannot be fulfilled playing one bank off against another large variations between balance sheet and actual figures Paying off debts with directors’ guarantees

34. Course content corporate governance the company’s legal and regulatory environment the director’s role Role of the company director & the board

35. The director’s role directors’ duties consequences of a breach of duty roles and types of director section, appointment, induction and removal of directors leadership

36. Who is a director? Director in law  “any person occupying the position of director by whatever name called” executive non-executive directors nominee director alternate director shadow director – “someone in accordance with whose instructions the board is accustomed to act” Director by name  associate dtr, branch dtr, regional dtr, project dtr

37. Breach of duties Who can take action against directors? the company regulators the Crown shareholders (derivative claims) stakeholders

38. Grounds for disqualification Which of the following are grounds for disqualifying a director? general misconduct unfitness fraudulent trading wrongful trading

39. Disqualification What is the maximum period for which a director can be disqualified by the courts? 10 years life life for a managing director 15 years

40. Effect of disqualification acting whilst disqualified criminal offence individual is personally liable for debts incurred by company (any person acting on the instructions of a disqualified person may also be personally liable)

41. Case Studies Disqualification of directors questions what duties did the directors breach? were they unfit and would you have disqualified them? if so, for how long? why?

42. Directors’ duties historically – mainly common law codified in Companies Act 2006

43. Directors’ General DutiesCompanies Act 2006 to act within powers to promote the success of the company…. to exercise independent judgement to exercise reasonable care, skill and diligence to avoid conflicts of interest not to accept benefits from third parties to declare interest in proposed transaction or arrangement

44. The success of the company Companies Act 2006 long term employees suppliers, customers and others community / environment company’s reputation need to act fairly as between all members A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

45. Act within the powers Does a director have unlimited authority? No, he must act in accordance with the company’s constitution only exercise his powers for the purpose for which they were conferred

46. Duty of care, skill & diligence(derived from Section 214, Insolvency Act 1986) the general knowledge and skill expected of a person having the same functions (objective test) the general knowledge, skill and experience that the director actually has (subjective test) Directors must exercise the same standard of care, skill & diligence that would be exercised by a reasonably diligently person with:

47. Duty of care, skill & diligence directors need not give continuous attention to company’s affairs directors can trust company officials to perform duties properly delegated, but should monitor directors should attend board meetings

48. Exercise independent judgement Directors must exercise independent judgement but: may take advice may act in accordance with the company’s constitution incl. shareholders’ resolutions directors’ discretion may be fettered by the terms of an agreement to which the company is a party

49. Avoid conflicts of interest Examples of conflicts: family companies nominee directors a director on the board of two competing companies a director leaving the board of one company to set up a competing business

50. Benefits from third parties Directors may accept benefits from 3rd parties if: it “cannot be regarded as likely to give rise to a conflict of interest”