TO BE, OR NOT TO BE, A DIRECTOR
This is not an article about the merits of becoming a director. Instead, it is an exploration of who may or may not be one.
People who think they may be are not - a statutory directors that is - even if they have the title director. Whilst others that do not have the title director may be deemed to be directors in law if they perform the duties associated with a director. Confused?
Like a Shakespearean play, the plot is thick and may confuse. And my introduction was just the ‘synopsis’. And, as in a Shakespeare play, misunderstanding can lead to tragedy or, at the very least, directorships may not all end well.
Do you know what the difference is between a statutory director, an executive director, a non-executive director and a managing director? And do you know how these titles are viewed in law?
If you do not have one of these titles, you may not care. But many people with these titles are unable to answer the questions. The consequence for them may be a tragedy if they are uninsured against the unlimited liabilities that they could be exposed to.
For example, many are unaware that in the law of the UK, there is no distinction between the legal responsibilities of a non-executive director and a statutory or executive director. But, whereas many statutory directors will be insured against liabilities, non-executive directors often find themselves uninsured and very exposed.
As Prof. Bob Garratt points out, in UK law the terms executive director and non-executive director do not exist. “Either you are a statutory director or you are not, and the proof is in having signed form 288A or its equivalent”.
Garratt also warns, “Confusion arises when executives are promoted to a board position as a statutory director, but then use the title executive director. They usually continue to operate as though they were still executives for 100% of their time. They are not”.
When serving as a director their primary loyalty must be to the company and they must demonstrate independence of thought on each agenda item in board meetings. They must not think their role is to make the case for the CEO or executive team or to defend them.
A similar problem exists in the case of the representative or nominee director, elected because of pressure from investors for example. Once on the board, their primary loyalty must be to the company, not the interest that got them elected.
Of the case of the nominee director nominated by a large shareholder to represent his interests, Lord Denning said there is nothing wrong with their election, “so long as the director is left free to exercise his best judgement in the interests of the company which he serves. But if he is put on terms that he is bound to act in the affairs of the company in accordance with the direction of his patron, it is beyond doubt unlawful”.
As Garratt points out, “All directors have a fiduciary duty to ensure the continuing health or their organisation. It is almost impossible to deliver this if they are acting purely as representative directors”.
Although it has been addressed to some extent, the combined role of chief executive and chairman in one person leads to an obvious accountability issue and encourages bad behaviour or potential conflicts of interest at the very least. It is a problem that is more prevalent in the U.S. than other countries and, although it is being addressed, it is a problem that persists in some companies.
What I hope I have done in touching on these issues is highlight the unnecessary confusion that exists, despite there being great clarity in the law. I do so to highlight one of the issues that I think the Future of the Board initiative we are about to launch must address. The status quo has significant ramifications detrimental to the good governance of businesses and organisations. They impact negatively upon board effectiveness. They are also detrimental to the interests of investors and other stakeholders.
It is hard to see how the status quo is in anyone’s best interests, and that includes directors themselves, especially those unaware of the risks they are exposed to.
The Future of the Board initiative will be launched on March 13th in London. For details visit the website. Here you can get launch conference tickets. We also have a dedicated Linkedin Group to support the initiative. And details as a pdf flyer