Directors – The Importance of Induction

Becoming a director is a major responsibility and it is important for anyone taking on such a position to be prepared for the demands and accountabilities of the role. It is good practice for companies to put in place a structured induction process for new directors. This brings plenty of advantages as it will allow a new director the opportunity to familiarise themselves with the company, and the work of the Board, relatively quickly. There is a lot to learn, so it is productive for all concerned for directors to be able to become a fully engaged board member at an early stage.

In a firm with a healthy culture, a director should be joining a Board which provides clear management and direction to the company, in an ethical manner. It should encourage high performance and standards at all levels, and should make well-informed and considered decisions, in an environment where all directors are able to adhere to their statutory obligations set out under the Companies Act 2006, s.171-177.

So, how can firms prepare an effective induction process?

It is wise for the Board to put an experienced director, or even the chair, in charge of the induction process. Where possible or necessary, the Board should also allocate a budget for the process.

The new director should be provided with relevant information concerning the company, its ownership and its management. This can include details of strategy documents, policies and procedures, copies of recent minutes of Board Meetings, a list of shareholders, details of the company’s professional advisors (e.g. accountants or lawyers), details of shareholders agreements and a copy of the company’s Articles of Association.

A new director should take the time to read these documents thoroughly and also make sure they are familiar of what is required of them by law and use their own initiative to ask questions to their fellow directors on anything they are uncertain of.

The inductee should also be informed of the current financial state of the company and receive copies of the latest accounts and budgets, as well as information relating to the company’s banking arrangements, loans, covenants or charges. Details should be provided of all the locations or premises the business operates from, including information concerning ownership or rental arrangements.

A new director should also be aware of the staffing structure and receive a copy of the organogram, showing the areas of responsibility in an organisation. If the director is not already known to the staff, then it is worth arranging introductory meetings with the employees.

By the end of the induction process, a director should understand their fiduciary duties and legal obligations. They should possess the necessary knowledge of relevant laws or regulations that apply to the company, including company law, employment law and legislation or regulation specific to the field in which the company operates.

The director should also be able to read and understand the company’s management accounts and financial reports and be able to make an informed decision concerning the future solvency of the company.

In respect of the Board, the director should be aware of their obligation to attend meetings, to read the relevant papers, assert themselves and make informed contributions to the discussions and decision-making process. Importantly, they should recognise that they must exercise independent judgement and not be unduly influenced by ‘dominant’ figures around the Board table. It may prove unpopular but, if their independent judgement leads them so, a director must be prepared to be in a minority of one on certain votes. A director must also recognise that their role is to lead and not simply react to events and circumstances, they need to make things happen to move the company forward.

As a leader, a director must also understand they must set an example to others. Therefore, a director should endeavour to behave in an ethical manner and must understand, adhere to, and have copies of, the company’s policies and procedures on gifts and hospitality, bribery and corruption, corporate governance and any ethical codes of conduct.

Fundamentally, a director must also understand that they have accountability. They are answerable to the shareholders, the law and the regulator (where relevant) for the activities, acts or omissions of the company. Whilst a director is expected to take risks, these should be reasonable and properly assessed and monitored. They should also make sure they play a part in disaster planning and understanding what their role is in the event of various contingencies or crises that may face the company.

Being a director is not just about having a grand title and status, it is about assuming the custodianship of a company and looking after its interests and those of its stakeholders, including the shareholders, its employees and its customers. Directors, at whatever stage in their career need to consider whether they are fully equipped to meet the demands of the role and, if any gaps are identified, work to resolve them at the earliest opportunity. A good induction system for directors can help foster good corporate governance and reasonably ensure that a new director is ‘kept on the right track’ from day one.