On 18 January, the Institute of Chartered Secretaries and Administrators (ICSA) published a guidance note on the liability of non-executive directors (NEDs).
Borne from its own and other industry guidance and from experience of company secretaries of UK listed companies, it is a useful reminder of the proper function of NEDs and the importance of minimising personal liability.
The NED role
Executive and non-executive directors have the same legal duties, despite a distinction in their respective levels of time commitment and depth of knowledge about the business concerned.
However, one of the many legacies of the recent financial crises has been an increased focus on corporate governance in the UK and the spotlight has fallen on, amongst many other things, the role of NEDs.
There is an undoubted shift in expectations of the role and ICSA's guidance identifies steps which NEDs can take to reduce their exposure to liability. The recommendations outline approaches to work which may enable NEDs to demonstrate to a regulator or court that they have acted with care, skill and diligence in the execution of their roles and responsibilities.
Among its key recommendations, ICSA advises that NEDs should, before joining the board:
- undertake their own due diligence to satisfy themselves that it is an organisation in which they can have confidence and can make a strong and valued contribution. Guidance on the enquiries which should be made are set out in a separate ICSA note
- ensure that they have, or can acquire, and can develop necessary skills and understand what is expected from a director with specific skills or experience
- question the culture, values and behaviours associated with the board and recognise that the role involves upholding high standards of integrity
- review their letters of appointment and raise any concerns before signing. ICSA highlights expected time commitment here, and warns that NEDs must ensure they can devote the time necessary to discharge their responsibilities, including additional commitment during times of challenge or crisis
- understand their duties in relation to conflicts of interest, and gifts and hospitality under the Companies Act 2006
On appointment to the board, NEDs should
- take an active role in ensuring they receive comprehensive and tailored induction and training programmes, and that they keep up to date with developments affecting their company
- understand their role is to provide independence, oversight and constructive challenge to the board
- ensure they receive sufficient notice of meetings and insist on receipt of all relevant information sufficiently in advance of meetings and at other times as it comes to light
- report their concerns and get independent professional advice as appropriate
- ensure they make all decisions objectively in the interests of the company
- familiarise themselves with the company's procedures for conflicts of interest and receipt of gifts and corporate hospitality
- appreciate that circumstances may arise in which they may need to resign from the board
ICSA's note is based on the assumption that NEDs may find themselves having to justify themselves to a regulator or court.
However, if both companies and NEDs pay heed to the sound advice in ICSA's guidance, particularly around time commitments and the supervisory role of NEDs, it will go a long way towards ensuring problems do not arise in the first place.