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Seven mistakes made by new company directors

03 Apr 2019
Woman leading a classroom of business people

Becoming a company director is arguably the biggest single move you can make up the career ladder. In some cases, it can be likened to the step up from coach to team manager.

Suddenly, you are entrusted with a whole new set of responsibilities and the whole company, rather than just one department, is looking towards you for leadership.

Here we outline seven common mistakes to help new directors to prepare for the role…

1. You don’t know your liabilities

Steve Giles is a course leader at the IoD with over 25 years’ experience of advising directors and managers on business issues. He says, “A lot of people are promoted to the role of director because they are good managers. That is absolutely fine, they’ve got great executive skills, but that does not necessarily mean that they will be excellent directors. One of the things often missing is that they simply don’t know what know their duties are, as set out in the Companies Act.

“This often serves as a real wake-up call and a jolt for many people who may not be aware of the extent of their liabilities.”

There are seven key duties, which are as follows…

  • To act within powers in accordance with the company’s constitution and to use those powers only for the purposes for which they were conferred
  • To promote the success of the company for the benefit of its members
  • To exercise independent judgement
  • To exercise reasonable care, skill and diligence
  • To avoid conflicts of interest
  • Not to accept benefits from third parties
  • To declare an interest in a proposed transaction or arrangement

2. From short and medium-term objectives to long-term goals

Paul Bennett is the chairman energy efficiency company BSSEC. In 2016, he was named Chartered Director of the Year at the IoD’s annual awards.

Bennett says, “One common trap I’ve seen people fall into is to continue to act like managers in the boardroom, not like directors. And there is a big difference in the roles.

For example, he says, “managers tend to focus on implementing a process and measuring its efficiency; they are most concerned with the profitability of their actions in the short and medium term.

“Directors, on the other hand, focus on creating value for organisations, customers and stakeholders in the longer term.

“Creating value requires an in depth understanding of value chains and changing customer needs that goes well beyond the current service level or product performance of today.”

3. Understanding what makes a good director

Paul Fox is the MD at Boardroom Evolution and a Fellow of the IoD. He says, “I had directors who I had reported to before and the biggest thing in their life was having the word ‘director’ on their name badge and some acted like playground bullies. I was determined to make sure there was more to it than that.

“You can have an order book the size of Popeye’s left bicep but, unless you have a genuine understanding of a broad range of skills [from strategic planning, and risk management, to exercising good corporate governance] that a modern director needs, I don’t see how you can fully dispense your duties. That led to my professional development route through the IoD where I gained my Certificate in Company Direction.”

"As a leader, you need the gravitas to inspire confidence in people who are looking to you for that leadership. The IoD provided me with the basis and understanding that if you can display and demonstrate morals, values and ethics then people will listen to you.

“When I was MD at Merryhill Envirotec (specialists in asbestos removal and surveying) we had a charter for our directors for them to understand how to operate ethically and that was something that most small companies didn’t have 10 years ago.”

4. Are you able to ‘do the numbers’?

Deborah Morton-Dare is a course leader at the IoD and runs a course on Finance for Non-Financial Directors. “The course is designed to take the fear of finance away from directors who don’t have a financial background and therefore are often quite intimidated by it.

“We want to enable them to engage with the financial director more effectively, to understand how to use finance to make better decisions and ask the right questions for the business going forward.

“As a director, you have a responsibility for the finances of the business and I almost think it should be a compulsory qualification.”

5. Managers may follow, directors must lead

Making the step up from the ‘shop floor’ to the boardroom can be a daunting experience, given that you are now working alongside the people that you used to report to. Therefore, new directors may, at first, feel inclined to fall in line. But in the long run simply being a ‘yes man’ can be counter-productive and could ultimately cause the business to stagnate.

“A charismatic, powerful director can heavily influence the actions of others on the board,” says Paul Bennett.

“The problem arises when this influence is not in the best interest of the shareholders, organisation, employees or customers.

“So, while managers generally need to follow the instructions and the intent of directors, board members need to challenge each other – play devil’s advocate if necessary – for the common good, not simply concur.”

6. The implications of wrongful trading

It doesn’t matter if you sit on the board of a small business or a large organisation; exactly the same rules apply when that business fails to conduct its affairs in the proper manner.

Lee Rhodes is a director at insurer brokers Quantum and he explains, “Directors are personally liable if they allow a company to continue to trade when, to their knowledge, there is no reasonable prospect of debts being paid, either when they are due or shortly after.

“This is viewed as fraudulent trading because it amounts to an intention to defraud creditors. Anyone knowingly party to the fraud is liable for the debts of the company without any limit. It is also a criminal offence punishable by up to seven years in prison.”

7. The role never stops evolving

“One thing that has changed is that directors are increasingly being held accountable for their actions and I think this is one of the legacies from the global financial crisis,” says Steve Giles.

“Back then we had some of our biggest financial institutions being bailed out by the taxpayer and one of the things that politicians and media commentators have focused on is that actually very few individuals were held to account for the part they played in that crisis. Most clearly within financial services, the focus is to try and hold the people at the top of the business to account for the decisions they take.”

Even decisions made with the best intentions can be scrutinised. Directors Liability Insurance, underwritten by Chubb Insurance, provides protection against the risks personally faced and peace of mind for directors. IoD members save up to 35 per cent.

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