The vast majority of board members with whom we work hold some common governance misconceptions about their role.
These are our top six Governance Misconceptions –
1. I’m a director of a company limited by guarantee. I’m only liable for £1 if things go wrong.
This is one of the most common misconceptions about ‘limited by guarantee’ companies. The model articles of such a company state that “The liability of each member is limited to £1”, not that the liability of each director is limited. This means that if the directors make poor decisions, which then result in debts for the company, they may be liable for those debts, along with costs and fines. The best way to mitigate against this is to have good governance practices.
All directors must be aware of the financial position of the organisation and ensure it does not trade while insolvent. Directors must be vigilant, and avoid any fraudulent activity. Failing to identify any problems can be considered as mismanagement.
2. I wasn’t at the meeting. I can’t be held responsible for that bad decision
All directors are jointly and severally liable for all decisions. Directors have a responsibility to attend meetings, and to contribute to the decision-making process. If you are unable to attend a meeting, you should consider the papers presented in advance of the meeting, and make your views known to the chair.
3. I was acting on professional advice, therefore I’m fully protected.
You should take professional advice when making big decisions. However, at the end of the day, the responsibility for the decision lies with the directors, so be sure you fully understand the advice you are given, the assumptions it is based on, and the consequences for each option presented. Ask questions until you are satisfied the advice is sound. Then use your inependent judgement to decide what’s right for the company.
4. I don’t really have to attend meetings. I’m more of a figurehead.
The days of the old boys’ club are fading fast, but there are still some directors who believe they are there to lend their name to a board. Directors have duties under the law to promote the success of the company. This means that you have to participate, and not just be a name in a company report.
Many directors have spouses or other relatives who are listed as directors. Again, if you are registered as a director, you should protect yourself by taking part in the decision-making process, and not blindly signing documents when asked. There is no such thing as a director ‘in name only’, as many have found out to their cost.
5. I resigned. I’m no longer liable
Just because you’re no longer on the board of an organisation, does not mean you can’t be held liable for decisions made during your tenure. Investigations often go back 3 years or more.
6. Our minutes only need to record what has been agreed
There are currently no rules governing what should be contained in minutes, and they can range from a verbatim record of the meeting to a list of action points. However, if something does go wrong, minutes can help make the thought processes of the board more apparent.
Remember that, under the Companies Act 2006, directors have a duty to promote the success of the company, and consider the impact of any decision on long-term performance, employees, key stakeholders, and the environment while maintaining a good reputation and acting fairly. If you only record the outcome of the discussion it may be difficult to prove that you have considered these factors.
Remember to record enough in the minutes to show the board has thought through options and key risks before reaching a decision. You should also get the Chair to sign the minutes as an accurate record, and keep them for at least 10 years.
Some useful reading –
- How to Lead: Wisdom from the World’s Greatest CEOs, Founders, and Game Changers (Free with Audible free trial)
- The New Directors Handbook: How to become more confident, more effective, more quickly
- The Oxford Handbook of Corporate Governance
- Corporate Governance: Principles, Policies, and Practices
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