Being a Company Director is an onerous role that requires a director to be aware of a wide range of activities affecting the company, including:
Understanding Financial Accounts
This relates to:
- Monthly Trading Profit & Loss Accounts for each business activity within the business
- Balance Sheet that has been verified as to the assets and liabilities
- Ratio analysis for the various businesses and the Balance Sheet
- Key Performance Indicators (KPIs) on the individual businesses, with management submitting a report as to the reasons for variations in KPIs from previous months and budget expectations
- Budgets
- Benchmarking – comparing the individual business activities to your peers by conducting benchmarking reviews
Source and Application of Funds
It’s a good idea for directors to insist that they receive detailed source and application of funds statements, on a regular basis, throughout the year, as this can be a very informative way of understanding what has happened to the cashflow within a company.
Understanding Budgets and Cashflow Forecasts
Directors should have a working knowledge of the components of budgets and cashflow forecasts.
Market research is normally the first activity relative to budgets. Directors should inquire as to how the market research was undertaken and ask questions to satisfy themselves that reasonable assumptions have been made on the projected market for the company’s products. This information then flows through to the preparation of labour and product development budgets and the stock budget.
Have the sales budget been prepared on a reasonable basis? How does the average selling price compare to selling prices achieved in previous periods? Does the gross profit percentage compare favourably with the gross profit percentage achieved in earlier periods? If not, directors should be asking questions to satisfy themselves that the budgets have been prepared on a reasonable basis.
Good Corporate Governance requires directors to subject budgets to reasonable questions, including discussions on the assumptions that have been made by the persons preparing the budgets. Directors need to be aware that, when the budgets are adopted by the company, it’s the directors who are adopting the budgets, not the employee or consultants who prepared the budgets for submission to the Board of Directors.
- Within the cashflow forecasts, have reasonable estimates been made for debtors’ days outstanding and creditors’ days outstanding?
- How do these ratios compare to previous periods? Are the adopted figures “defendable”?
- If the company is undertaking significant capital expenditure programs, has the funding for those programs been incorporated within the cashflow forecasts?
- If reliance has been made on leasing finance, has the company secured an undertaking from a bank or lease company to finance the capital expenditure?
- If the cashflow forecasts are indicating that the company is going to be exceeding its financial arrangements with its bank, are the directors monitoring management’s discussions with the bank, to ensure that financial packages are in place to meet the company’s projected requirements?
Portfolio Allocations
Directors need to satisfy themselves that the key management portfolio allocations have been made to appropriate people which, in some instances, could include directors, to ensure that the workload is effectively spread and that an executive is responsible for each of the individual portfolios, not on the basis that the portfolios are allocated to only one or two people. Normally it would be the CEO who allocates the portfolios, however it’s reasonable for the Board of Directors in performing their duties to inquire as to the allocation of the portfolio responsibilities and then to periodically review the performance of that executive relative to the portfolio(s) that they have been allocated.
Example of portfolios that directors should be ensuring have been adequately allocated include:
- Research and Development – planning and documentation of R&D projects
- Product development and manufacture
- Relationship with suppliers
- Human Resources responsibility within the company
- Manufacturing and preparation of product
- Commercialisation strategies – distributors, sales outlets
- Information Technology – relative to accounting system, production, CRM system
- Marketing – including social media, marketing activities, website
- Customers
- Sales – management of the sales team
- Accounting Department
- Premises
- Government grants
- Taxation
- Shareholders
Board of Directors’ Meeting
A sound Corporate Governance system ensures that adequate notification is given to each director as to when a Board of Directors’ meeting is going to be held. Notification should include an agenda and reports that have been prepared by the CEO, CFO and other executives who have a direct reporting responsibility to the Board of Directors.
It’s a good practice for the company to have appointed a Chair who approves the agenda and ensures that Board reports have been submitted to directors so that they can read them prior to the meeting. The Chair should also review the minutes of the previous Board of Directors’ meeting prepared by the Company Secretary and authorise the release of minutes, together with the action plans for each individual director or executive originating out of the minutes of the previous meeting.
Company Secretary
Many companies will not have a full-time Company Secretary. It’s a good Corporate Governance strategy to appoint someone to perform the role of a Company Secretary. This would normally include:
- preparation of the agenda in conjunction with the Chair
- notification of the date, time and place of the Board of Directors’ meeting
- distribution of the agenda and the executive reports to the directors at least 72 hours prior to a meeting
- attending to other duties that have been allocated by the Board of Directors to the Company Secretary – this could be matters such as shareholder relations, insurance reviews, risk management reviews pertaining to the PPSR
The Company Secretary should also ensure that the minutes of the Board of Directors’ meetings are prepared accurately, names of the mover and seconder of each motion are recorded in the minutes and, if a decision is not unanimous at the Board of Directors’ meeting, the minutes should record directors voting in favour of a motion, those voting against and those abstaining.
It’s also a good practice to record the names of directors in attendance, the commencement time of the meeting and to record details of any director who left the meeting during the meeting’s proceedings (and the time) and also if the director returned later, record the time that the director returned to the meeting. If a director has declared an interest in a matter being discussed at the Board of Directors’ meeting, it’s important that the director’s interest is noted in the minutes of the meeting.
Directors should carefully read the minutes of the Board of Directors’ meetings and, if they disagree with the minutes as distributed, it’s a good practice for the director to immediately contact the Chair and advise him/her that they disagree with the minutes as recorded and to then implement discussions as to what the minutes should state on the particular issue.
There have been a number of court cases that have resulted in company minutes being examined , therefore it’s very desirable that the minutes are prepared accurately in the first place and, if any director disagrees with the wording in the minutes, that he/she raise an objection as soon as possible and argue for the minutes to be changed at the next Board of Directors’ meeting if the changes haven’t already been made. If a director is not satisfied with the decision relative to the recording of minutes, the director should consider his/her ongoing position on the Board of Directors and seek independent legal advice.
Directors should be aware of any shareholder’s agreements that have been accepted by the company (even if by a former Board of Directors) so that the directors can ensure that the terms and conditions of the shareholder’s agreement, which is a legally binding agreement between the company and the shareholder, are being implemented.
An important convention of Board of Directors’ meetings is that the directors maintain confidentiality on matters discussed at the meeting and that businesses relative to the matters discussed at the meeting are only discussed with other directors.
Disclaimer
This information is provided as a guide only and is not intended to constitute advice whether legal or professional. You should obtain appropriate advice concerning your particular circumstances.
