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Reliance on management and advisers - Coggle Diagram
Reliance on management and advisers
Following further high profile business failures blamed on poor management, government attention has once again been focused on corporate governance and behaviour of directors
In 2018, BEIS published its response to the Insolvency and Corporate Governance consultation, the aim of which was to identify changes that would assist in reducing corporate failure by strengthening coproate governance, stewardship and to improve the insolvency regime
The reforms announced by the government are intended to ensure that the responsibilities of directors of firms when they are in or approaching insolvency are met and more generally to imrpvoe the performance of directors and the effectiveness of the boards of public companies
The government is looking at measures to enhance stewardship of the largest companies through stronger mandates and greater transparency over group structures and dividend policies
The government also announced that it intends to introduce new legislation to ensure that directors of dissolved companies can be held to account if they have failed to discharge their duties properly
It is hoped that the reforms will see more failing companies rescued or restructured, that stewardship and transparency of the larges companies is further strengthened and that returns to creditors in insolvency will be higher
The following proposals for change were announced
Insolvency proposals
Taking forward measures to ensure greater accountability of directors in group companies when selling subsidiaries in distress
Legilating to enhance existing recover powers of insolvency practitioners in relation to value extraction schemes
Legislating to give the Insolvency Service the necessary powers to investigate directors of dissolved companies
When they are suspected of having acted in breach of their legal obligations
Corporate governance proposals
Strengthen transparency requirements around complex group structures
Enhance the role of shareholder stewardship
Strengthen the UK"s framework in relation to dividend payments
Bring forward proposals to imrpvoe boardroom effectiveness
In general where a director acting in good faith seeks comprehsevie advice from either the company's own management or from suitably qualified advisers and in good faith acts in accordance with that advice they will have discharged their duties to promote the success of the company and their duty to exercise reasonable care, skill and diligence
Where a director is professionally qualified and that qualification is relevant to the matter at hand the courts will apply more exacting standards of behaviour
Where directors are not experts in the matter under consideration, it is sufficient that they should seek advice from suitably qualified professionals and that they act on the advice, however directors should not blindly accept advice without reviewing it or challenging it if if appears to be at odds with the facts and should attempt to understand the advice and its consequences as far as they are able
Professional advisers are often invited to attend meetings of the directors, sometimes on a regular basis. Such advisers must take to restrict their advice to their area of expertise such as accountancy or property transactions and they should only attend board meetings for their relevant area of expertise. If they provide wide ranging advice which the directors regularly take or act upon they are likely to become shadow directors. It is helpful that professional advisors should have a written letter of engagement setting out their terms of reference and area of advice so there is a formal agreement and documented evidence of their role
Of particular concern for regulators will be whether professional advice was truly impartial or whether it was tailored to what the client wanted to hear
All directors and especially NEDs should challenge advice in circumstances where a number of professional firms have been approached for the advice or opinion that the executive directors are seeking