What is the purpose of the board of directors?
The board of each company has specific aims and responsibilities that should ultimately work towards the long term success of the company. The responsibilities of the board and each individual board member are very rarely set out in the company’s constitutional documents; rather they are often set out within the terms of reference of the board meetings and/or within the documents that detail the remit and responsibilities of each individual board member.
Whilst the responsibilities of the board of each company may differ in specific circumstances there are certain common themes, such as:
- Overarching responsibility for the strategic direction of the company and setting the strategic objectives and goals of the business;
- Deciding on and appointing senior management for the company and dealing with any senior promotions as well as succession planning;
- Monitoring the progress of the company on its way to achieving its strategic goals and proposing changes in the strategy depending on the changing external and internal factors;
- Giving account of the company’s activities and its financial performance to the shareholders or other stakeholders;
- Preparing financial statements of the company and approving the same;
- Setting the tone and parameters for the overarching risk management framework of the company; and
- Setting the culture of the company to include its corporate social responsibilities.
Whilst each board member needs to understand his or her key responsibilities to ensure the company is moving in the right direction, on the day to day operational level, the directors should be able to govern their activities in a way that is transparent, understandable and as practical as possible. In other words, the board acts in accordance with the articles of association of the company which serve as an operational manual that governs all procedural aspects of the operation of the board of each company.
How does the board operate in practice?
The articles of association of each company are usually drafted to provide the directors with flexibility in relation to the management of the company. Prior to the appointment to the board, each director should make him/herself familiar with the content of the articles as some may be standard whilst others may be more bespoke.
To assist the directors in focusing on their key objectives and responsibilities, a company secretary is usually appointed to run the day to day administration of the board meetings and other secretarial activities of the company. The key responsibilities of the company secretary can be described as follows:
- Ensuring that the company complies with any statutory requirements imposed upon it by relevant laws;
- Ensuring that the company files relevant statutory returns in line with statutory deadlines;
- Being responsible for ensuring that the board meetings are duly convened, held and minuted;
- Assisting the directors in other relevant areas such as checking the relevant quorum, ensuring formalities are satisfied for convening board meetings at short notice etc.
Whilst the role of the company secretary is invaluable and directors may rely to a large extent on the company secretary it is important to note that directors remain ultimately responsible and liable for ensuring that the company satisfies all requirements and duties imposed on it by relevant laws.
How does the board operate effectively?
First and foremost, the board should have the appropriate balance of skills, experience, independence and knowledge of the company business to enable them to discharge their respective duties and responsibilities effectively.
Effectiveness of the board is one of the key principles of the Corporate Governance Code that was produced in 2012 by the Financial Reporting Council and has been amended on the basis of the recommendations from the various UK corporate governance reports (Cadbury, Greenbury, Hampel and Walker Reports).
The other important aspects of the board’s effectiveness include:
- Formal, rigorous and transparent procedure for the appointment of new directors to the board;
- All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively;
- All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge;
- The board should be supplied in a timely manner with information in a form and of a quality appropriate to enable it to discharge its duties;
- The board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors; and
- All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.
Although the Corporate Governance Code is primarily designed for companies listed on various markets of the London Stock Exchange most of the above principles of effectiveness of the board should be applied to Jersey companies if the board wants to ensure its own effectiveness.
Operation of the board in compliance with the regulatory Codes of Practice
The Codes of Practice (Codes) have been issued under the remit of the Financial Services (Jersey) Law 1998 and, in addition to their statutory duties, directors of regulated businesses must also comply with these Codes.
The Codes contain seven fundamental principles which are described and explained in each section. These are not strict rules but rather best practices and each business and its board of directors must make sure that they understand these principles and any additional guidance provided. The actual way each regulated business ensures compliance with those principles is left to the board of directors however if scrutinised they must be able to explain how they have achieved compliance with the Codes.
In addition to the Codes, directors of Jersey regulated entities have various duties under the Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism (Handbook). By way of example, the additional responsibilities contained in the Handbook include:
- Requirement for the board to conduct and record a business risk assessment and to keep it up-to-date;
- Requirement for the board to establish a formal strategy to counter money laundering and financing of terrorism;
- Responsibility of the board to document its systems and controls;
- Requirement for the board to assess the effectiveness of and compliance with systems and controls and take prompt action to address any deficiencies etc.
Failure by the regulated business and its board of directors to comply with the principles set out in the Codes and the Handbook requirements represents grounds for the regulator (Jersey Financial Services Commission) to take enforcement action. The worst case scenario the regulated businesses could face, depending on the seriousness of non-compliance, is the revocation of their regulatory license. There are also other tools in the regulator’s armoury to ensure compliance with the Codes such as civil penalties or written direction that may impose on the board of the regulated business requirements such as to do or not do things, remove persons or even cease operations.
How we can help
Effective corporate governance and effective board are crucial to successful operation of each company. It is not only the strategic direction and the leadership the board is expected to set but also the ability to circumnavigate the waters of the regulatory regime in Jersey as well as other jurisdictions where the company operates or has business interests.
Our directors have the requisite skills and years of experience serving on the boards of Jersey companies as well as other investment and sovereign wealth funds. We have particular expertise in ensuring proper corporate governance and processes for conducting effective board meetings. Our directors continuously keep up to speed with the latest developments in corporate governance as well as risk management and compliance regulation.
By Mirek Gruna, Managing Director.
If you are interested in our directorship services or have any questions please contact Mirek Gruna.