The strident voices in the media complaining about the financial packages offered to the former directors of the Banks share one thing in common – an extraordinary lack of insight into the legal position which is very clear to anyone undertaking even the most cursory research.

This is an appropriate time for all directors to refresh their knowledge of their duties and responsibilities and the key provisions are as follows:-

The Statutory Code
The new Statutory Code is to be found in Chapter 2, Sections 170 to 181 of the Companies Act, 2006 (http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_13#pt10-ch2).

The section which is most interesting in the context of the banking crisis is section 172 which provides that directors have a duty “to promote the long term success of the Company” and that in doing so they must have regard to the following:-

(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.

The City Code and Corporate Governance
The City Code does not have the force of law but operates on a “comply or explain” principle. The directors of all listed companies must comply with the provisions of the City Code and the annual report must contain a statement to the effect that it is in compliance or, if it is not, explaining why not. This statement has a clear bearing both on the share price and the tenure of the directors.

The City Code had its origins in the Cadbury Report, revised and updated by the Greenbury and Hempel Reports, the Higgs Review, the Smith Guidance on Audit Committees and the Turnbull Guidance on Internal Control. The City Code should be “required reading” for the directors of any company with a significant shareholder base. It is primarily concerned with “best practice” and has much to offer the directors of private companies as well as those of listed companies.

Within the context of the banking crisis, the Turnbull Guidance on Risk Management is of particular significance. It is the responsibility of the Board to identify and analyse all of the “mission critical” risks affecting their business and the steps which are to be taken to address each of the identified risks. It is now clear that the “mission critical” risks of the major banks which have collapsed were simply not identified or understood and that the culture in these institutions was fatally flawed.

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