Importance of good corporate governance

Director’s duties are paramount to good corporate governance, as outlined by the go-to definition produced by the Cadbury Committee in 1992:

“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship.”

The Companies Act 2006 (CA 2006) made ‘serious corporate governance headway’ in codifying many of the duties owed by a director to their organisation. Theses duties, often fiduciary in nature, were traditionally earmarked for equitable interpretation. However, since codification they have been given more weight, thus increasing their prominence in legal proceedings. S.173 CA 2006, imposing the directorial duty to exercise independent judgement, was the key source of discussion in the recent Stobart Group Limited v William Andrew Tinkler case.

By way of background, between the summers of 2017 and 2018 the Claimant, an infrastructure company, was embroiled in a board room confrontation between a dissenting director, the Respondent, and the remaining members of the board. In July 2017, the Respondent stepped down as CEO but continued in a non-exec role. He become deeply dissatisfied with the management of the company and, according to Judge Russen QC, sought to de-stable the board. The Board resolved to remove the Respondent twice, first as an employee and then as a director having been re-appointed, between June 2018 and July 2018; the substance of the case becoming whether his removal had been lawful.

The High Court came to the conclusion that the removal had been lawful as the Respondent had acted in breach of his fiduciary duties in a number of respects. In particular, the judge reiterated that the duty found at s.173 CA 2006 exists to support the board’s management of the company and not to act independently from the board. The breaches were as follows:

1. The Respondent had private discussions with the Claimant’s major shareholders in which he openly criticised the chairman and pushed for his removal. Judge Russen QC did not believe this was an exercise in independent judgement instead proposing that the proper and correct means of complying with this duty is to:

a) Raise any matters in issue at board level;

b) If sufficiently serious, raise these matters at a general meeting;

c) But, any communications with shareholders should be in the presence of the board or at least with their permission; and

d) These opinions should be, were possible raised with all shareholders.

2. The Respondent had shared commercially sensitive information with third parties. Whilst he tried to argue that this was actually within the remit of his employment, as he was exploring the potential sale of an investment, the judge disagreed as at no point did Respondent discuss or disclose this as a practical business plan to his fellow directors. More likely this was part of the Respondent’s plan to secure a hierarchical change within the management.

3. Whilst still a director, Respondent formally wrote to the company’s shareholders and employees about his dissatisfaction with the company’s direction and his disagreements with other members of the board. The High Court, having reviewed the contents of the letter, instead found that is was misleading. In the letter, Respondent falsely suggested that company tried to remove him at the start of 2018, that there was board instability (largely caused by himself) and this was justification for removal of the chairman. Again, the court reminded Respondent of his duties and criticised him for going straight to the shareholders and not the board.

4. Finally, Judge Russen QC felt that, because of his letter to the shareholders as detailed above, the Respondent was, although not solely to blame, sufficiently involved in the “petition” to oust the chairman.

“Companies do not exist in isolation” stresses the recent Financial Reporting Council in the most recent UK Corporate Governance Code, and this appears to be at the heart of Judge Russen QC’s decision making process here. Furthermore, we can expect other forms of corporate governance reform in the near future, still under consultation is the UK Stewardship Code and guidance for those approaching insolvency.