Author: Perditax

What is corporate governance and why is it relevant?

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of a company’s many stakeholders, such as members, employees, service users, suppliers and the community. The primary objective of corporate governance is to enhance corporate transparency, accountability, and to ensure the company’s purpose is fulfilled.

So far, so not obviously feminist. However, as more and more feminists in the UK begin to organise using corporate structures, it is important they understand the UK corporate framework. With that in mind, this is intended as the first of several articles about different aspects of UK company law.

It is essential that those assuming the role of director or trustee for the first time understand how governance contributes to a company’s success or failure. As a corporate lawyer and non-executive director, I have seen poor corporate governance lead to, sometimes irreparable, financial and reputational damage. On the other hand, strong corporate governance flows through an organisation, promoting good decision-making and adherence to the company’s purpose; this is why lenders and investors thoroughly review a company’s corporate governance systems before backing it.

A slightly depressing practical point is that companies organised by feminists have a more than usual number of activists seeking to distract, obstruct or suppress them. Good corporate governance and thoughtful, properly-recorded decision-making will provide the best defences against allegations of wrongdoing.

This topic therefore merits the attention of those of us privileged to serve as directors and trustees, whether of listed leviathans or of grassroots growth groups.

Types of company

Firstly, a word on types of companies. Companies come in various forms; the most common is the company limited by shares but in the context of the charitable, not-for-profit or voluntary sectors, companies limited by guarantee are also frequently used, as are charitable incorporated organisations (CIOs) and community interest companies (CICs). For the purposes of this article, the law on directors’ duties is the same, regardless of the type of the company. To confuse matters further, in some charitable organisations, the terms trustee and director may be used interchangeably; in any event, in broad terms, trustees of an organisation, whether or not it is strictly a company, will be subject to duties very similar to those covered in this article.

Directors’ duties

Directors and trustees have legal responsibilities that are regarded as “fiduciary” in nature. This means that a director or trustee must put the interests of the organisation she serves above her own interests and must think about the organisation’s stakeholders in all the decisions that she makes. In addition, she must act honestly and responsibly, with the skill and care that would reasonably be expected of a person in her position.

The Companies Act 2006 sets out seven specific duties that directors must adhere to, including:

To promote the success of the company.
To exercise independent judgement.
To exercise reasonable care, skill, and diligence.
To avoid conflicts of interest.
Not to accept benefits from third parties.
To declare interests in proposed transactions or arrangements.
To exercise powers for proper purposes.

The duty to exercise independent judgement

The duty to exercise independent judgement means that directors must not uncritically adopt the views of others, and must make decisions based on their own informed judgement. In making their decisions, they must consider all relevant factors and think critically; this may involve seeking out and considering alternative viewpoints.

Why focus on this particular duty? Where an organisation has been established to pursue a particular campaign or to promote a particular cause, the board is likely to comprise directors who all feel the same way about that cause. This type of cause-driven organisation therefore seems particularly exposed to the risk of “groupthink” interfering with the board’s independent judgement.

Groupthink occurs when members of a group conform to the opinions of the majority, rather than considering alternative viewpoints. This can lead to directors overlooking important information or ignoring potential risks. This may be from fear of disagreeing with a majority view or from a lack of diversity on the board meaning that the directors all agree with each other.

The former is unforgivable in a director. Accepting the responsibilities of a director means you have to be prepared to put forward an unpopular view or to ask difficult questions. Indeed, on some boards, where a thorny issue is being discussed, one director is sometimes designated to present the opposing view to help the board to ensure they have considered all viewpoints.

Diversity of perspective

Lack of diversity is the particular feature of campaigning and charitable organisations that increases the risk of groupthink. The directors of a company may be drawn from a pool of leading founders or their associates; the work and responsibility involved in being a director (usually on a voluntary basis at this level) is such that it will only be undertaken by strong supporters of the cause; and those who disagree, or are neutral, are unlikely to want to take on the commitment.

The executive team – those carrying out the company’s mission day-to-day – may well be motivated by great passion. The directors (or other directors if the executives are also on the board) must remain alive to the possibility that this could blind the executive team to potential risks or challenges. The role of directors, particularly non-executive directors, is to adopt a more dispassionate approach and not let their respect for, and often friendship with, the executives prevent them from discharging their duty to constructively, but robustly, challenge the executives’ proposals. A good executive team will welcome this challenge and appreciate the value added by strong corporate governance.

Practice points

Disagreement in the boardroom is healthy. A cosy boardroom is a risky boardroom. That said, disagreement should always be expressed politely and discussions should be constructive.
Try not to recruit new directors in your own image. If the company is large enough, the directors should prioritise achieving diversity of views and backgrounds. This does not mean that you have to recruit people whom you know to be actively opposed to the company’s purpose!
If you know the directors all feel the same way about a particular issue, make a point of honestly considering opposing perspectives.
Keep minutes! Minutes of a meeting signed by the Chair of that meeting are a definitive record of the proceedings of that meeting. Minutes should summarise the discussion, rather than trying to create a verbatim record but should encapsulate the range of views considered.
Keep the best interests of the company at the top of your mind. Consider whether a particular course of action or campaign is promoting the purpose of the company or could in fact harm it.
Avoid the trap of thinking that, because your cause is noble, anything you do in pursuit of that cause must be justifiable.
Consider complaints honestly. The board may receive complaints that it thinks have been made in bad faith, but it should take the time to reflect on whether any may have merit. The directors may decide (and record their decision!) to apply a filter, focussing on complaints that demonstrate knowledge and genuine concern on the part of the complainant, while ignoring those at the more, shall we say, ranty end of the spectrum or those that are all in identical terms, suggesting a spamming campaign.

Questions to ask, especially when the directors are in vehement agreement, include:

What are the arguments against this course of action?
What factors might we have failed to consider?
To whom might we have failed to listen?
Is it possible we are mistaken?

Closing

The issues outlined in this article are relevant to all campaigning groups, not just feminists; moreover, I should clarify that no individual feminist group has inspired this article. However, we can probably all identify campaigning or charitable organisations that appear to have closed their ears to opposing views and their minds to the possibility that they have lost their way. Some of their actions are so transparently self-harming that it is hard to believe that the board can have considered a full range of viewpoints and asked robust questions about the potential risks. These organisations are often large and well-established, with the contacts and resources to recruit (and pay) experienced directors and trustees with diverse backgrounds. If, even with these advantages, they can exhibit such poor corporate governance, how much more must our fledgling organisations guard against falling into the same traps.