Coghill: Is directorship an asset or a liability in financial services?

Tracy Coghill 450 Index

At a time when the news wires are reporting an increase in the packages paid to senior directors of more than 25 per cent in the last year*, the role of a director may look increasingly attractive to many of those in the financial services industry. Behind the numbers, it’s apparent that share schemes are largely responsible for the near quarter rise. Nonetheless, the rise in pay certainly exceeds that expected by many of us today. What is expected of directors to justify these enhanced returns? Put simply, what liabilities does a director take on board in order to earn these assets?

The key piece of legislation impacting directors in the UK is the Companies Act 2006. This set out, for the first time in a single document, the seven duties owed by directors to their company:

  1. Duty to act within powers;

  2. Duty to promote the success of the company;

  3. Duty to exercise independent judgment;

  4. Duty to exercise reasonable skill, care and judgement;

  5. Duties relating to conflicts of interest;

  6. Declaration of interest in proposed transaction or agreement;

  7. Duty not to accept benefits from third parties.

The standards expected of directors in fulfilling these duties will depend on their knowledge and experience. Put simply, a former audit partner at one of the Big Four accountants will be expected to add more to the oversight of the management accounts of a fund manager than a director with a background in advertising. Whilst many of the seven duties points are fairly self explanatory, the “duty to promote the success of the company” is perhaps more opaque. In essence, this requires directors to have regard to six factors including the likely long term consequences of any decision, the interests of employees and the desirability of maintaining a reputation for high standards of business conduct. Careful judgement will clearly need to be exercised by an individual to ensure that he can demonstrate compliance with this duty, this is no “part time” job.

In addition to the legal requirements set out above, the FSA also imposes obligation upon directors of firms in the financial services industry. Each director must be registered within the “controlled function” regime operated by the FSA as a CF1, with duties and responsibilities which exceed those of other senior members of a firm. Recent investigations demonstrate that the regulator emphasises prioritising management of risk versus generation of revenue.

To put the extent of the legal and regulatory obligations of directors in context, today’s headlines focusing on increased pay to Board members are appearing alongside announcements that Allied Irish Bank will be targeting former directors of the Bank and asking them voluntarily to forgo a portion of their pensions. This is in the light of outrage in Dublin that those in charge of the Bank at the time of the Irish financial crisis are perceived to have been impacted marginally by the downturn in the fortunes of the Bank and the Irish economy as a whole. This news follows the announcement in September of a record fine by the FSA on a director of HBOS judged to have significantly contributed to senior management failings, together with a ban on that individual holding certain positions within the industry in the future.

Whilst there certainly are financial advantages in becoming a director in our industry, the standards of conduct expected are extremely onerous and the consequences of failure are high.

*data sourced from the Directors’ Pay Report from Income Data Services

Tracy Coghill is compliance officer at City Asset Management