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Independent professional advice - Coggle Diagram
Independent professional advice
The UK CG Code used to require boards to ensure that directors, especially NEDs, have access to independent professional advice at the company's expense where they judge it necessary to discharge their responsibilities as directors
Compliance with this requirement was at such a high level that the FRC felt able to remove it from the 2018 Code and transfer it to the 2018 FRC Guidance on Board Effectiveness
FRC Guidance states that it is the responsibility of the CS to ensure that directors, especially NEDs, have access to independent professional advice at the company's expense where they judge it necessary to discharge their responsibilities as directors of the company
The CS will not have any power to ensure that this happened unless the board has adopted policies and procedures in this area
Directors of the company are given a right to consult the company's professional advisers and if necessary seek independent professional advice at the company's expense (eg where they are not satisfied with the advice received from the company's professional advisers
This right only applies if it is exercised in the furtherance of their duties as directors of the company
Directors must give prior notice to the chair, the CS or the SID of their intention to seek independent professional advice under this procedure and must provide the names of any professional advisers they propose to instruct together with a brief summary of the subject matter
The CS provides a written acknowledgement of receipt of the notification which states whether the fees for the professional advice sought are payable by the company under these procedures
A director must obtain the prior approval of the chair, deputy chair or SID where the adviser's fees are likely to exceed a stated amount
Any advice obtained under this procedure must be made available to the board, if it so requests
An alternative solution could be to authorise a member of the board to commit the company to pay and contribute up to a fixed amount to the costs of the independent advice and to require the director to notify the chair or CS whenever such expenditure has been authorised
Pre-notification seems a reasonable requirement but the choice of recipient is more difficult. The obvious choice is the chair but this could cause embarrassment where the actions of the chair are the matter causing concern. An alternative would be to require notification to SID.
If the CS is the chosen recipient, the resolution should make it clear whether the secretary should then communicate the information to the chair or another director
It appears to be prudent to place financial limits on the cost of the advice however this could be viewed as a fetter on the right to take independent advice
Rather than laying down arbitrary cost limits of general application, it may be better to require the cost limits to be agreed as part of the pre-notification procedure. The involvement of the CS in this aspect would be desirable as the secretary will usually be more experienced than most directors about the costs of obtaining professional advice and the methods of limiting and controlling costs
In addition to passing a board resolution on this matter, it would be desirable for the right to take independent professional advice to be covered in directors' service agreements as a board resolution does not necessarily have the contractual effect between the directors and the company
Independent advice for board committees
FRC guidance states that board committees should be provided with sufficient resources to undertake their dutieis
Access to independent professional advice may be one of the resources the board committees may require.
The terms of reference of each committee should include any delegated authority the committee needs for these purposes
For example the remuneration committee will need to appoint remuneration consultants and the nomination committee will need to appoint recruitment consultants