The UK Companies Act 2006 spells out the essential principles regarding the roles directors must play. But the roles of executive and non-executive directors should be clearly defined to maximise board performance.
Legal role and responsibilities of directors
The Companies Act 2006 imposes certain general duties on a director of a UK company. As a director, you must:
- Act within powers — You must act in accordance with the company’s constitution, and only exercise your powers for the purposes for which they were given.
- Promote the success of the company — You must act in the way you consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
- Exercise independent judgment — You must exercise independent judgment and make your own decisions.
- Exercise reasonable care, skill and diligence — You must exercise the same care, skill and diligence as a person would with the general knowledge, skill and experience that may reasonably be expected.
- Avoid conflicts of interest (a ‘conflict situation’).
Effective roles for directors
However, in choosing more specific roles for directors, much depends on the organisation’s mission and how its management is structured.
The chairperson’s role is clear in most cases: “Good boards are created by good chairpersons”, writes the UK Financial Reporting Council (responsible for the Corporate Governance Code) in a recent study.
“The chairperson creates the conditions for overall board and individual director effectiveness. The chairperson should set clear expectations concerning standards of integrity and probity, and concerning the company’s culture, values and behaviours. He or she should also set the tone of board discussions. With the help of the other directors, the chairperson sets the board agenda”.
Much of the success of the board depends on the chairperson. He or she should be the driving force on a well-performing board.
The role of the senior independent director is also critical, almost as much as that of the chairperson. The senior independent director acts as a kind of sounding board for the chairperson, providing discussion on objectives. When challenges arise, the senior independent director works closely with the chairperson to resolve issues and any disputes. When there is a difference of opinion with other board members and the chairperson, the senior independent director should be expected to intervene.
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Executive directors have the same duties as other members of the board. These duties extend to the whole of the business, and not just that part of it covered by their individual executive duties. Nor should executive directors see themselves only as members of the CEO’s executive team when engaged on board business. Taking the perspective of the business as a whole can provide greater access to knowledge and better decision-making. Executive directors often have a non-executive director role on another board, and this should enable them to get the right perspective on the company and its management. First-time executive directors may need training – the chairperson should make this evaluation when they join the board.
The non-executive director (NED) has a somewhat different role, even if the legal responsibilities of non-executive directors are exactly those of other board members in the UK.
As the UK Institute of Directors points out: “Essentially the non-executive director’s role is to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors. The 1992 Cadbury Report initiated a debate about the main functions and responsibilities of non-executive directors. Today, it is widely accepted that non-executive directors have an important contribution to make to the proper running of companies and, therefore, more widely to the economy at large. As the Cadbury Report said, they “should bring an independent judgement to bear on issues of strategy, performance and resources including key appointments and standards of conduct”.
Because NEDs are today often chosen for their specific skill sets, chairpersons and chief executives should use their NEDs to provide general counsel — and a different perspective — on matters of concern. They should also seek their guidance on particular issues before they are raised at board meetings, so that the technical issues can be addressed by experts. Indeed, some of the main specialist roles of a non-executive director will be carried out in a board sub-committee (particularly the remuneration and audit committees), especially in listed companies.
According to the Institute, the key responsibilities of NEDs can be said to include the following:
- Strategic direction — As ‘an outsider’, the NED may have a clearer or wider view of external factors affecting the company and its business environment than the executive directors. The normal role of the NED in strategy formation is therefore to provide a creative and informed contribution and to act as a constructive critic in looking at the objectives and plans devised by the chief executive and the executive team.
- Monitoring performance — Non-executive directors should take responsibility for monitoring the performance of executive management, especially with regard to the progress made towards achieving the determined company strategy and objectives. They have a prime role in appointing, and where necessary removing, executive directors, and in succession planning.
- Communication — The company and its board can benefit from outside contacts and opinions. An important function for NEDs, therefore, can be to help connect the business and board with networks of potentially useful people and organisations. In some cases, an NED will be called upon to represent the company externally”.
Diligent Boards supports effective governance
To ensure effective boardroom consideration of all issues, including succession (refreshment), Diligent Boards provides the ideal environment.
Diligent Boards moves all of the agendas, documents, annotations and discussions of board meetings online into one intuitive, secure portal. The platform goes beyond digital board books to manage the full scope of a board’s moving parts — committees, contacts, voting, reporting and more.
With Diligent Boards, on-the-go directors will have more than iPad board meeting software at their fingertips. From a single sign-on (even for multiple boards), they’ll be able to work across devices (with real-time syncing) to: stay current, communicate and search an online library of updated materials. Access is possible from anywhere in the world, with local customer service, using any device on a major operating system.
Diligent Boards offers the highest level of security, with all communications encrypted and threat protection updated to the latest level of technology. Board members can message, chat and converse in total safety, and recording is available to simplify record-keeping.
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