Comply or Explain - Student Spotlight

Posted By: Admin, 18 Feb, 2014 - 01:13 pm


In the last student note we saw that governance has evolved through the development of a whole series of codes using the idea of “comply or explain”. We’ve also seen that governance is more than compliance and that since it’s a relationship with the organisations stakeholders it’s really about decisions that the board takes about how it wants to run its organisation.

However, compliance is important. Directors and trustees don’t just have “comply or explain why they don’t comply” with the corporate governance code for their sector. They must comply with the law.

For companies, the 2006 Companies Act sets out seven duties of directors:

  • promote success of company for shareholders as a whole, having regard to impact on other stakeholders – probably the most important directors duty
  • act within powers – as set out in the company’s memorandum and articles of association
  • exercise independent judgement – and not be subject to outside influence
  • exercise reasonable care, skill and diligence – directors can make mistakes but need to be diligent in their decision making
  • avoid conflicts and possible conflicts – of interest
  • not to accept benefits from 3rd parties – that might influence their judgement
  • declare interest in proposed transactions – conducted by the company

In addition there are many other kinds of law that directors must ensure are followed. This includes employment law, health and safety law, employment law and much other specific law including the Bribery Act, whistle-blowing legislation and strict rules about insolvency.

Every sector has its own variant of this kind of legislation. The 2011 Charities Act sets out the duties of trustees:

Trustees have and must accept ultimate responsibility for directing the affairs of a charity, and ensuring that it is solvent, well-run, and delivering the charitable outcomes for the benefit of the public for which it has been set up.


Compliance - Trustees must:

 

  • Ensure that the charity complies with charity law, and with the requirements of the Charity Commission as regulator; in particular ensure that the charity prepares reports on what it has achieved and Annual Returns and accounts as required by law.
  • Ensure that the charity does not breach any of the requirements or rules set out in its governing document and that it remains true to the charitable purpose and objects set out there.
  • Comply with the requirements of other legislation and other regulators (if any) which govern the activities of the charity.
  • Act with integrity, and avoid any personal conflicts of interest or misuse of charity funds or assets.

 

Duty of prudence - Trustees must:

 

  • Ensure that the charity is and will remain solvent.
  • Use charitable funds and assets reasonably, and only in furtherance of the charity's objects.
  • Avoid undertaking activities that might place the charity's endowment, funds, assets or reputation at undue risk.
  • Take special care when investing the funds of the charity, or borrowing funds for the charity to use.

Duty of care - Trustees must:

  • Use reasonable care and skill in their work as trustees, using their personal skills and experience as needed to ensure that the charity is well-run and efficient.
  • Consider getting external professional advice on all matters where there may be material risk to the charity, or where the trustees may be in breach of their duties.

So directors and trustees have extensive and serious duties and liabilities that go hand-in-hand with their corporate governance role.
 

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