Information sheet on the role and responsibilities of company board members

1.THE ROLE OF DIRECTORS

1.1Cornwall Council (the "Council") has made a decision to set up a new arms length company from April 2012 to manage its housing stock and related services and assets (the ALMO).

1.2As recommended in government guidance the company will be set up as a company limited by guarantee with one member (the Council) and withlimited liability. Its activities will be governed by a Memorandum of Association (its written constitution) which will state that the business of the company will be managed by a Board of directors (the Board). It is the Board that will be responsible for running the affairs of the ALMO and which will report back to the Council as sole member.

1.3To ensure no one group is in the majority the Board will include an equal number of people called the directors representing Council nominees,tenants and independent members, in the case of the ALMO there will be six directors in each group. The ALMO will not own the housing stock as legal ownership of properties will remain vested in the Council, however, it will be responsible for housing management and for its own finances.

1.4It is essential to ensure that the Board collectively possesses the relevant qualities and experience to take the necessary decisions on behalf of the ALMOand to run the ALMOefficiently as well as to monitorperformance and it is therefore important to ensure (where possible) that the Board includes those with the relevant skills including amongst others the following:

The housing needs to be met by the ALMO.

General business skills, including experience of the management of staff and property.

Corporate business, management and finance skills.

The ability to appreciate tenants issues and concerns.

A knowledge of community relations and needs, includingamongst other, equal opportunities.

Experience of working with local authorities.

  • Relevant communication/analytical skills.

Experience in making public presentations.

Knowledge of legal responsibilities of directors and legal employee responsibilities.

Appreciation of company and staff legal matters.

  • Experience of working as an effective team member.
  • General business, financial and management skills.
  • The Board should carry out an ongoing review of its own strengths and weaknesses in order to ensure its continuing effectiveness and to satisfy the requirements of the paragraph above.
  • The primary duties owed by member of the Board to a company are the general fiduciary duties (duty to act in good faith) which lie at the heart of a director’s relationship with the company. In addition, there is a specific area of legislation which relates to Board members’ duties, namely: company law which is now primarily set out in the Companies Act 2006. Registered social landlord law does not apply to ALMOs as these companies are not landlords registered with the Homes and Communities Agency. It is however considered good practice for an ALMO to comply with the spirit of registered social landlord law and this note will refer to this area of law where it is relevant.

2.CORE FUNCTIONS OF THE BOARD AND OBLIGATIONS OF BOARD MEMBERS

2.1The role of the Board includes the following core functions:

  • To comply with all corporate legal requirements.

To define and ensure compliance with the values and objectives of the organisation.

To establish and agree a business plan to achieve those objectives with the Council.

  • To establish the ALMO’s ‘Delivery Plan’ (a key part of the contractual arrangements between the ALMO and the Council) which will set out in respect of its functions the key outputs of the ALMO and the key performance requirements and performance standards of services to be delivered by, as well as, the ALMO’s financial and staffing resource needs.

To approve each year’s budget and accounts prior to publication.

To establish and oversee an appropriate framework of internal and external delegation and systems of control.

To take key decisions on matters that will, or might, create a significant risk for the ALMO.

To monitor performance in relation to any plans, budgets and decisions.

To satisfy itself that the ALMO’s affairs are generally conducted lawfully and fully in accordance with generally accepted standards of corporate performance and propriety.

  • To manage the strategic role and visions of the ALMO.
  • To ensure compliance with the management agreement negotiated between the ALMO and the Council.
  • To ensure arrangements are in place for urgent decisions to be made between Board meetings and to ensure directors have a proper flow of information to enable them to comply with their statutory duties.
  • The general obligations of a Company Board Member include:
  • Duty of good faith to the company and compliance with all legal principles and statutory restrictions relating to company law.

Commitment to the values, polices and objectives of the company.

Commitment to the company’s core policies.

Contributing to, and sharing responsibility for, Board and Committee decisions.

Preparing for Board and other meetings and reading all papers in advance.

Preparing for and attending induction programmes and organised training sessions and other events. (Meetings will normally take place in the evenings.)

Declaring any relevant interest in any matter under discussion by the Board.

Maintaining the confidentiality of any information relating to the Board’s decisions or the business of the company generally.

  • Maintaining a duty of good faith to the company.
  • Maintaining knowledge of and compliance with all legal principles and statutory regulations relating to the company.
  • Not do anything which compromises or is likely to compromise the company.

3.FIDUCIARY DUTIES

3.1The most important and confusing part of the general fiduciary duties of a director is an obligation to carry out,with respect to the company,his or her duties with such skill and care as can reasonably be expected of a person with his or her knowledge and experience and at all times to take such care in decision making on behalf of the company as a prudent man or woman would take on his or her own behalf.

3.2A requirement of the Companies Act 2006 is that directors must take particular care to ensure that every proposed activity decided upon by the Board falls within the permitted objects and powers of the company as set out in the Memorandum of Association and within any company policies. If in doubt, independent legal advice should be obtained.

3.3When acting as a member of the Board an individual director must use his or her powers solely for the purposes for which they are conferred and for the benefit of the company as a whole. A director must not put himself or herself in a position where his or her own interests conflict with those of the company. He or she must not make a secret profit out of his or her position as a director and will be under a duty to account to the company for any profits made from his or her position as a director.

3.4Where a director has a personal interest in a contract or other transaction being undertaken with the company the general rule is that the director must declare such an interest and disclose it unless the directorsof the company specifically authorise it or it is ratified as being permitted by thecompany. If a director is in breach of these general law principles the company can bring an action against him or her and can take action to remove him or her as a director. The Companies Act 2006 has placed added emphasis on this requiring that the Board must put in place procedures to deal with conflicts of interest and to ensure that directors are aware of their obligations to disclose relevant interests.

3.5Directors must also at all times comply with the other duties imposed by the Companies Act 2006 including:

  • the duty to exercise independent judgement.
  • the duty to promote the success of the Company.
  • the duty to exercise reasonable skill, care and diligence.
  • the duty to comply with any other directors duties set out in the Companies Act as in force from time to time.

4.REGISTERED SOCIAL LANDLORD LAW

4.1The 2004 Government guidance on ALMO’s stated that members of an ALMO Board should not be paid but may receive expenses. However, in line with the arrangements that apply to the Registered Social Landlords (RSI) it has been agreed that ALMOs should have the freedom, like RSI’s to decide whether or nor not to pay members of the Board. No decision has yet been made on this in respect of the ALMO.

4.2In addition the Housing Act 1996 prevents payments or benefits to close relatives of Board Members or businesses trading for profit in which a director has a direct management responsibility or in which they are a principal proprietor. Payments and benefits received beyond those permitted in the 1996 Act may be recovered by the Company.

5.COMPANY LAW

5.1The Companies Actimposes a number of statutory duties, prohibitions and restrictions on directors. Provisions include an obligation to regularly prepare and file company accounts, the regulation of loans by companies to directors, the control of disposal of company assets and the requirements for directors to disclose interests in contracts. Breaches of these requirements may sometimes lead to personal liability or prosecution and disqualification of an individual as a company director.

5.2A director of a company which is facing financial difficulties should be aware of the scope of potential personal liability if he or she disregards the situation and is found guilty of wrongful or fraudulent trading. Fraudulent trading involves an action intentionally to defraud creditors of a company or creditors of any other person or a similar fraudulent purpose. Wrongful trading can arise where a company has gone in to insolvent liquidation and the director knew or ought to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation and that, once the director knew or ought to have known this, he or she failed to take every step possible to minimise the potential loss to a company’s creditors. This may include a situation where a company is unable to pay its debts as they became due, but still continues to trade. A director cannot escape liability by arguing that he or she did not take an active role in the affairs of the company or that he or she did not have access to adequate information concerning the company’s trading position. It is one of the requirements of the fiduciary duties ofdirectors that they should ensure that they do take an active role in all company matters and that they ensure they obtain adequate information from the officers of the company.

6.LOCAL AUTHORITY LAW

6.1The ALMO, will have only one member – the Council – and as a consequence it is classed as a controlled company under the Local Government and Housing Act 1989.

6.2Controlled companies are subject to the same range of propriety and other controls as local authorities and for prudential borrowing purposes are treated as part of the Local Authority. The Board will find that a number of key financial powers open to a private company are limited by the ALMO having a Controlled Company status.

7.PRACTICAL CONSIDERATIONS

7.1In practical terms, the duties of directors as members of the Board require them to attend meetings regularly and to become actively involved in the management of the company and to share responsibilities for its decision-making processes.

7.2Directors may delegate the day to day administrative duties of running the company to their staff and agents. The Board will employ professional officers to run the ALMO on a day to day basis. However, directors cannot delegate their powers or discretions and consequently it is for them to set the policies which the officers implement and the parameters of delegation must be clear. In the future the Board of the ALMO will consider and adopt a large number of relevant policies and procedures, including amongst others Financial Regulations.

7.3In addition, it will be for the Board to monitor and review compliance with the policies it sets and the ALMO’s performance generally. Putting in place adequate reporting procedures from officers of the ALMOto the Board are a vital component in protecting the directors and enabling them to fully fulfil their role.

7.4The Board will also authorise the appointment of external advisors: legal, financial, accounting, tax etc. Generally, directors will not be liable for any loss arising from any default by any external agents of this nature provided that the agent was employed only to undertake acts within the scope of his or her normal business, the appointment was made on a reasonable basis and the activities of the external agent were supervised with common prudence. In practice, the Board should ensure through its officers that any agent has the relevant experience, qualifications and insurance in place.

7.5The ALMO will also arrange or pay for insurance (Directors Liability Insurance) to be put in place to protect the Board from any personal liability arising from them acting in their roles as directors. This will protect directors against any actual or alleged “wrongful act” that they may have committed in the course of carrying out their duties (but will not cover acts which are dishonest, fraudulent or illegal).

7.6The Board may and should create committees of directors to which the main Board can delegate work for detailed consideration. The terms of reference and the details of any such delegations must be carefully considered and drafted.

CML (Updated)

August 2011