Managing and understanding the extent of authority and control within a company is a key element of ensuring good corporate governance. A lack of clarity over the extent of an individual’s power or authority exposes a firm and its directors to risk. For instance, what happens if someone without authority enters a contract with a third party, seemingly on behalf of a company?
In some cases, the actions of an unauthorised person would be considered null and void but if a third party had a reasonable expectation that they were transacting with a person with authority to commit, the decision may be binding upon the company. This can be costly.
A situation like this could arise from someone fraudulently holding themselves out as having authority but it can quite simply be down to individuals, such as a director or a senior manager, not knowing or fully understanding the extent of their power.
An innocent mistake it may be, but if this decision or action causes detriment to the interests of the shareholders, the directors risk being sued by shareholders under a derivative claim.
So, where does authority lie and how can directors take reasonable steps to ensure that individuals do not act beyond their powers (known as acting ‘ultra vires’)?
The main decision-making authority within a company is its governing body – i.e. the Board of Directors. The powers of the Board are set out in company law and in the company’s Memorandum and Articles of Association. These documents, and the rules within them, are approved by the owners (shareholders or ‘members’) and can be amended through an appropriate majority. Shareholders typically have the power to appoint and remove directors and therefore have the ultimate authority over the Board.
Directors are obliged to use reasonable skill, care and diligence to manage the company in the interests of the stakeholders (e.g. the shareholders) and to act within the law and the powers afforded to them by the Articles of Association. The Board operates under the principle of ‘collective responsibility’ meaning that the decisions taken by the Board are not just by one person, but the Board acting as a whole. Unless they choose to resign, individual directors are bound to follow the decision of the majority, even if they voted against a particular resolution.
There is a legal duty on directors to ensure that the decisions taken in Board Meetings are formally documented and retained in the minutes. As such the minutes provide evidence of authority for a decision or action. They can provide proof of authority to external bodies e.g. extracts from the minutes, authenticated by the Chair, can be used to authorise the setting up of a bank account.
The Board may also give delegated authority to an individual to carry out certain activities on its behalf. For instance, if the Board collectively agrees to enter a contract with a third party, it may also resolve to authorise one of the directors to sign the contract on behalf of the Board. This has a practical benefit as it removes the need of every individual director having to sign.
Indeed, there are many circumstances within a business in which having to directly seek Board approval for everything would prove vexatious and impractical. Therefore, a Board needs to carefully delegate certain authorities.
For certain ‘business as usual’ activities, it is wise for the Board to explicitly set out the authority of each director or officer within the company and to keep this under regular review. This can take the form of a delegated authority chart. Such a chart may set out the authority of staff at various levels within the organisational structure – from Directors and Heads of Department through to Junior Managers and Team Leaders.
Details of those with delegated authority may also be passed on to key suppliers so that they know who is authorised to make decisions on behalf of the company (e.g. a third-party ICT supplier would need to know who in the organisation can order user account changes).
Without this clarity, misconceptions may arise. For instance, a third party, dealing with a person with a grand job title such ‘Director of…’ may reasonably assume that that person has the relevant authority, whereas in reality that ‘director’ may not actually be a statutory director of the company at all and have no authority to bind the company.
A delegated authority chart may cover financial and non-financial matters. For instance, it may contain limits on capital expenditure approvals by managers e.g. a project manager, working on an approved project, may have the delegated authority to commit the company to a spend of £1,000, whereas a Head of Department may have the authority to spend up to £5,000 but require Board approval for expenditure in excess of this.
The chart may set out the extent to which managers can approve pay rises without needing Board approval, or simply give certain members of staff the authority to authorise the payment of utility bills or spending of petty cash etc. It can go beyond financial matters too. For instance, the chart might state the authority of managers to recruit, discipline or even dismiss staff.
Having a delegated authority chart is a useful way of ensuring that business is transacted in an efficient manner, without requiring board approval for every piece of expenditure or every single decision. It is also an effective way of communicating authority within the organisation (and externally in some circumstances) and therefore mitigates risk. It is also a useful control, which helps demonstrate compliance with relevant laws, such as the Bribery Act 2010.
Nevertheless, delegated authority charts should be reviewed by the Board regularly to check that the delegation is appropriate and that there remains sufficient Board oversight. It should also be updated where members of staff leave. This is particularly important when details of authorised individuals are communicated to third-party suppliers.