If you suspect a business partner of drawing excess remuneration, diverting business away or otherwise working against the company they work for what should you do? This point comes across our desks at IFAC from time to time.
Obviously, it is vital you find out what is happening as soon as possible. Industrial spy-ware is increasingly common, but puts you off-side if you ever plan to use it, and of course like any eavesdropping it can mislead as easily as inform.
One strange effect of appointing a director to that role is that they are legally obliged to work in the best interests of the company they represent. This obligation doesnt legally extend to mere employees nor to senior managers.
IFACs experience is that director s access to information (or lack of access) is often the trigger to a full blown company dispute. If a company director feels information is being hidden from them, then they Will have every right to Kick off. The imbalance of information gives unfair advantage between one stakeholder and another.
A director is entitled to almost all the information related to the company they work for. Directors run businesses, and are all equally liable for the activities of their business. Obviously, the liability is limited hence the name of the organisation structure, but how should you gain access to information that is being withheld from you?
Well, you can go to the courts of course. A director is entitled to be informed about a companys affairs and to inspect all the companys books and records. But there is a key limitation. Such a right must not be exercised for an improper purpose. Broadly this means any purpose other than to allow the director to exercise their duties as a director!
A court will not allow or enforce inspection where it is clear the information is sought for the purpose of the directors own private litigation against the company, or to pursue an unfair claim. It is therefore important for any mal-content director to seek access to information at an early stage, before the request can be categorised as being part of a dispute.
The most common disputes are between non executive directors and executive. Years ago I owned a network that appointed a disruptive non executive chairman. A former Nationwide director, he was not known for his modesty - typical of employees of that organisation. He insisted bringing along his friend as a co-non executive my first mistake, and secondly that a voting structure should be passed such that majority votes be binding on the minority directors my second mistake. You could smell the coffee, but even I was shocked to find that within days they were using these powers asking for a show of hands in favour of some daft motion. But there is nothing quite so foolish as a clever-dick. Shortly after the meeting finished the minority director losers were asking their auditors Grant Thornton for advice. Luckily, the bully from Nationwide had omitted to change the Articles of Association and so the majority rule was not binding, and he was shown the door taking up a position at the FCA instead.
If you are working at board level it is only a matter of time before you come across an unhappy board. Sir Nigel Rudd, recently wrote a memoir A Chairmans tale with interesting insights into unhappy relations in the boardroom at Barclays Bank shortly before the credit crunch. The implication was that their later and recent troubles with the UK regulator could be sourced to a bunch of directors who for whatever reason didnt trust each other.
Whatever the tensions, it needs sorting out, and the sooner the better, and independent view is likely to be required.
Next week: Part 2 Shareholders.