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Difficult decisions – the need for information

By | 13/04/2022 in Blog posts
difficult decisions

P & O Ferries’ recent decision to make large scale redundancies has been controversial, attracting wide media cover and criticism from the government. The focus of the criticism has been on the senior executives at the company, in particular the CEO. Whatever we may think of the approach taken it seems likely that the decision was not an easy one. Those speaking for the company have indicated the issue was existential, it was not a nice to have but essential if the company was to survive.

This note does not consider the rights and wrongs of the company’s action, but rather touches on some aspects of how directors should act when faced with policy decisions of this type?

At the time of writing, it is not clear as to the process the company went through before reaching its decision, but the Financial Times quotes the company as saying it acted as it did only after “full consideration of all the other options”.

Non-executive directors

It is well established that one of the main roles of a non-executive director is to provide constructive challenge to the executive, but how should non-executive directors approach difficult policy decisions? Should they be acting as watchdogs or bloodhounds? In other words, how far do they need to dig? Should their default stance be supportive or sceptical? Unfortunately, there is no easy answer to these questions, it will nearly always be a question of fact and judgement.

All directors, including non-executive directors, are required to exercise independent judgement. In performing their role, non-executives, in Sir David Walker’s words: ‘need to find the right point on the spectrum which ranges from unquestioning support of the executive at one end to persistent and ultimately unconstructive challenge at the other’.

The Companies Act 2006 requires all directors to exercise reasonable care, skill and diligence. Before reaching a decision, directors will need to satisfy themselves that they have sufficient knowledge to enable them to reach a reasoned conclusion. The courts have concluded that directors have a continuing duty to acquire and maintain sufficient knowledge and understanding of their company’s business to enable them to discharge their duties as directors. This may mean educating themselves on a topic and it will nearly always mean obtaining and processing information from multiple sources but particularly from the company itself.

The UK Corporate Governance Code recognises the importance of information for boards. Principle F provides:

The chair leads the board and is responsible for its overall effectiveness in directing the company. They should demonstrate objective judgement throughout their tenure and promote a culture of openness and debate. In addition, the chair facilitates constructive board relations and the effective contribution of all non-executive directors, and ensures that directors receive accurate, timely and clear information.

Businesses operating in the regulated sectors need to pay particular attention to management information. For example, firms in the financial sector are expected to meet exacting standards in relation to the production of information for the Board. Both the FCA and the PRA have taken action against firms which fail, in the regulator’s view, to provide adequate information to boards.

Directors may sometimes be worried that the information provided to them by the executive is incomplete, not sufficiently objective or otherwise lacking. Making this judgement can be difficult for non-executive directors particularly in specialist areas. Serious failings by the executive can put a non-executive at risk. This issue has been considered by the courts in the past and the general rule is that a non-executive can assume that executives in responsible positions can be trusted until there is a reason to distrust them. However, non-executives need to be alive to this issue and where they have reasonable doubt it is important to act on those doubts.

In some circumstances non-executives can consider asking for access to independent legal advice paid for by the company where they reasonably judge it to be necessary for them to discharge their responsibilities properly. Requests of this type would normally be made in writing to the chair copying the company secretary.

Directors need to remember that Board information is a “dynamic” concept. Boards, and those supporting them, should constantly assess whether the information being provided is sufficient to enable the board to carry out its function properly. Non-executive directors should be pro-active where they consider that they are not receiving the information they need, or where the information received is insufficient or not up to the standard that enables them to perform their roles properly.

Information for the board needs to be well presented and clear as to what it covers and what is its purpose. If the executive is looking for a decision from the board, this needs to be clear from the face of the document. Boards and those responsible for the framework of board papers need to consider how best to ensure the quality of board papers and ensure management information is of a high standard. Too much control can stifle innovation and fetter the ability of the board to engage in high quality debate. Too little control can result in variable quality materials and waste precious board time.

Peter Snowdon is a legal and corporate governance expert, with a particular interest in issues affecting financial services firms, banks and investment firms. A former partner at Norton Rose, he also worked for the Financial Services Authority (FSA) prior to joining Bvalco.

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