Corporate governance issues arising from boardroom structure includes how much each member should be paid for what they are expected to do, as Rob Wirszycz discusses in this TV show.

Corporate governance issues - Defining roles

Remuneration is a really sticky area in a sense.  Actually, if I’m a Non-Executive Director I don’t expect to own any shares.  My belief is that a Non-Executive Director is there to be completely objective.  And I’ve been in many Board meetings where effectively the Board meeting is a meeting of the shareholders.  Self-interest always wins in those meetings.  So if I’m a Non-Executive Director in a meeting and I’m there, my job, I’ll accept a retain, a relatively small retainer, depending on what they want me to do.  If they do anything away, outside of the brief, my belief is that that should be paid for separately.  But so just to be a Non-Executive Director, I would like to be paid for the very clear, clearly-defined, but I don’t want, expect any shares. As a Chairman it’s different.  Now the Chairman, I’m acting on behalf of the shareholders, so I actually have to have alignment with them, so what I always ask for when I’m Chairman is again a retainer, which is a small amount of money, relatively small amount of money, but I want to be able to earn shares based on the achievement of the plan.  So if we achieve the plan, which I’m owning, then I believe that I should be aligned with the shareholders’ interests and I should be able to earn in shares into the business.

If you are interested corporate governance issues take a look at our briefings on director's remuneration and board effectiveness.

 

Corporate governance issues include the relationship between management and staff. In this TV show Rob Wirszycz discusses managing expectations between directors & employees.

Corporate governance issues - Directors vs employees

I think there’s something to be said  for the European Works Council idea, even the Mittelstand in Germany has a Works Council, you know, which is almost like this sort of body that sits below, or even above some, in some cases a Board of Directors.  I think there’s a real case for that.  The UK’s doing okay.  It’s quite public, you know, the data you have to disclose on Companies House and all that kind of stuff and, as I say, with public social media and other stuff, there’s much more disclosure now than there ever was.  So I it’s not a bad place to do business but I think I think there’s still a an us and them between Directors and, if you like, staff, and I think, you know, we should, Directors should explain their role in the business a lot better. I try and for example, tomorrow one of my businesses has got to kick off and what I’m going to be doing is explaining what I do as Chairman.  You know, it will be about two minutes, but I’m just going to explain what I do and how they can use me, or abuse me, I suppose, but I mean  it’s quite important that I make sure that it’s very clear, the role that I’ve got and my expectations of everybody else as well.

Inside Finance TV will continue to follow ideas around corporate governance issues. Follow @InsideFinanceTV for more discussion. Watch the full briefing From the top – Ensuring board effectiveness as a director

 

Business strategy development is the job of the board. In this TV show Rob Wirszycz discusses how they can get these decisions right.

Deciding on strategy development

Boards, I believe, are where decisions are made.  And, you know, while you want the Chief Executive and their team to make other decisions, you know, ask forgiveness rather than permission sometimes, but the decisions are in my view, what I call an irrevocable allocation of resources. So, if we make a decision at a Board, we don’t go back and relitigate, unless the facts materially change.  I mean I think there’s a quote from John Maynard-Kings, who sort of said, you know, “when the facts change I change my opinion” and that’s the truth, you know, you shouldn’t hold on to something when the facts are materially different.  But the Board makes those irrevocable decisions, they write them down, everybody has to agree, so you can’t come out of a Board meeting saying “Well, I know they said that then but I’m doing this”.  Decisions are really important in Boards, and that’s the role of the Non-Executives, be they Directors or Chairmen, is to ensure that the decision is taken in a proper context and it’s not because “We would think that way because we’re all in our 40s and 50s and male”.

Keep browsing Inside Finance TV for more expert insight into strategy development processes. Why not watch the full briefing From the top - Being an effective board director

Business disruption from absence is bigger than may leaders realise. In this TV show Matthew Haswell answers the question - Do business owners understand the cost of absence?

Awareness of business disruption

I don’t think they do, I mean that’s a broad brush answer, I don’t think they do because sickness absence costs, although in a couple of years, in the last year they have actually gone down slightly but as an overall cost it’s still pretty huge for UK industry particularly, well the private sector most research is done on. Now health and wellbeing and employee engagement and connection and holistic approaches to health and wellbeing is a subject that a lot of people, particularly HR consider, whether HR directors consider it from a cost perspective only or they actually think about holistic products is another question. I think what we’d like to do is encourage finance and HR to look at the question of sickness absence together and come up with a strategy to actually minimise the impact. It’s very difficult to get a finance director to sign off on a request from HR when the finance director can’t actually see why putting these procedures in place or even purchasing insurance or the health related products can actually help matters.

Inside Finance will continue bring you expert insight in to business disruption and related topics.

Business disruption can come from government legislative changes. In this TV show Pamela Sayers explains the impact of the Finance Bill 2014.

Finance Bill causes business distruption

The reaction I’m seeing at the moment is that partnerships, LLPs, are now waking up to the fact that this is going to affect them. Interestingly, we undertook a survey in the summer and of the respondents, of which there was just over 100, only half the respondents thought that the Partnership Consultation Document would affect them. I suspect if we asked the same question now it would be 100%. they have left firms with so little time to put their affairs and consider the quite stringent conditions to put things in place by 6th April. In fact one of the representations that we will be making is that actually all of this legislation should be deferred by 12 months. What we have is some draft proposals for the 2014 Finance Bill with some guidance notes attached. The guidance notes lack so much clarity that what we’re expecting, perhaps at the end of February, beginning of March, is much more detailed guidance, but I suspect that is still going to leave a lot of unanswered questions. Browse all TV shows on Inside Finance for more expert discussion on business disruption factors.  

Most good Board meetings, the preparation is done for a couple of days beforehand.  You make calls and you find out, you know, what’s on the agenda, so you should receive the agenda at least two days beforehand, you should be able to have read the pack as soon as you get it and you should get on the phone to ask questions if you don’t understand stuff.  I’ve seen too many people actually read Board packs actually in the meeting and then the meeting becomes a boring sort of thing of people literally reading and catching up.  So that to me is inexcusable. But in terms of new sort o, so the thing is about preparation, you’ve got to be prepped, so you’ve got to know your stuff, you should know your numbers, you should have your questions ready.

Government legislation is dealing with tax leakage between corporate partners according to Pamela Sayers, who explains further in this TV show.

Government legislation: Limited liability partnerships

It’s particularly important for professional partnerships and limited liability partnerships because probably for the first time really since the introduction of LLPs in 2000 we’ve seen more changes in partnership taxation in the last 16 years and the Revenue are concerned on two main areas: one being whether there is any disguising of remuneration and avoidance of employers’ national insurance on partners’ salary, so to speak; and also the allocation of profits to corporate partners, because some LLPs and indeed partnerships have a mix of both individual partners and corporate partners. And really on the latter, where there is a corporate partner which is perhaps, in owned, that corporate partner is owned by one of the individual partners, there is a risk that some profits will be diverted through to the corporate partner for corporate partners will be taxed at lower rates than individuals, say 20% as opposed to 47% and the Revenue have been very concerned that there is a tax leakage there.

If you are interested in finding out more about the effects of changing government legislation, browse more TV show on Inside Finance.

 

Analysing data to show profit and loss is more complicated than it may first seem, and will be done best by a forensic accountant. Doug Hall of Smith and Williamson says it’s about presenting the right information in court.

Analysing data forensically

Probably the best way of illustrating that is a lot of cases that we get involved in, we get involved at a later stage, so the case has been running for some time. Because parties to litigation tend to focus because they’re guided by the lawyers, firstly on liability and quantum is left as a second stage. And we’re often involved in cases where the quantum has been estimated by the in house accountant, it’s the first time they’ve done it and may seem simple to actually work out that you’ve lost this much in sales and this is the profit on it, but there’s all kinds of nuances and techniques that are used and really what a good forensic accountant should be doing is to anticipate how, if you’re acting for a claimant, to anticipate how it would be defended.  For example you may say that my sales have been growing at 5% a year, year on year out, and if you hadn’t caused by business to fail then I would have got another 5% in growth, but that doesn’t necessarily follow, you need to look behind the headline evidence and to look at it from every angle. There is no single right answer and the key thing in my practice is whatever opinion I come up with I need to be thinking ‘There is a counter argument to this’, because ultimately the decision by the court or the tribunal is based on the balance of probability. There’s been some sort of breach, so therefore the claimant wants to be put back in the position they would have been, but for that breach and of course that position didn’t happen, so it’s what might have been. So the short answer is there’s lots of different ways of analysing the data and there’s lots of different ways of presenting it, there’s no single right answer but an experienced forensic accountant knows what works with a court and what doesn’t. And of course there is various conceptual issues, that you can be technically wrong in how you calculate damages and we’ve seen that many times.

If you enjoyed this video about analysing data, then why not watch more TV shows on Inside Finance?

Merger and acquisition can happen across industries and across borders. In this TV show Giles Murphy goes through the typical merger process.

Merger and acquisition in reality

In theory it should be a simple project management exercise. Unfortunately, in our experience, most people prepare very poorly for such an event and in practice spend a lot of time focusing on the merger transaction itself and forget to put effort into the integration process that should happen afterwards. Much would depend upon whether it is a simple domestic merger or whether there’s international firms coming together, but if we take a simple domestic merger, our view is, in terms of the negotiations, really a period of six to eight weeks should be enough for the negotiations to identify whether there are any key deal breakers that one might have to consider. As I say, what often happens is that people focus on that element of negotiation. They then breathe a sigh of relief when the deal actually gets done, and yet what we would say is that’s when the difficult work happens where firms need to prepare much better for the post-deal integration because that ultimately determines how successful the merger will be.

Browse Inside Finance TV for many more videos on merger and acquisition processes.

Good governance is essential for a well run business. Pamela Sayers explains how ignoring tax changes will bury firms.

Good governance of firms

I think if firms ignore this they’re certainly at risk of managing their own affairs in an effective way, and it does come down to good governance within the firm and well run firm. Those firms that try to sort of generalise and everything may well not survive. We’ve already heard rumours that there are a few firms within the top 100 that are struggling. And everyone was very shocked when we heard about the collapse of Halliwells, and then there was. I think there will be other firms as well perhaps before the end of this year. _____________________________________________________________________ If you found this video about good governance interesting, please browse the rest of the TV shows on Inside Finance TV.

A cross border mergers does not only involve 2 firms but 2 countries. In this TV show Giles Murphy explains why English law is often preferred for the contract.

Cross border merger contracts

I think English law is still considered to be a key factor in business transactions, and we do see scenarios where you have businesses from two countries engaging with each other, but the contact will be written under English law because the businesses trust the English courts to resolve any differences.

So there’s a great opportunity to export English law, but to do so it does require firms to have a presence in these other territories, and of course a merger is one way of achieving that.

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Inside Finance will continue to look at issues around cross border mergers. Look out for more from Giles Murphy.

Tax Law has changed and this affects professional practices. Pamela Sayers from Smith & Williamson discusses some of these changes in this TV show:

Tax law in the UK

I think this year we’ve seen some huge changes in the taxation of professional practices, and perhaps the first greatest change for perhaps sixteen years, primarily as a result of the issue of a partnership consultation document in May this year, and we expect to receive a final version of that around about the time of the autumn statement, which is on 4th December (2013).

There is an attack on service companies where many of our professional practices clients have a service company running alongside, and also the government have asked the office of tax to review ways of simplifying taxation of partnerships, so a lot of changes.

They’re looking to really tackle avoidance of tax, so it comes under the whole ambit of the new guard, the general anti-abuse rule that was effective from July 2013. So in the context of partnerships where there has perhaps been some perceived abuse following the Limited Liability Partnership Act in 2000, so they are looking at ways of preventing sort of the avoidance of tax within those firms.

And one of the main ones being that if you are a member of an LLP it can no longer just be assumed that you are self-employed for tax purposes. And depending on the outcome of the partnership consultation document, this could lead to significantly more revenue for HMRC by the collection of employers’ NI at 13.8%.

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If you found this video about tax law interesting why not watch more TV shows on Inside Finance?

The governance model in an organisation affects how it operates. In this TV show, Smith & Williamson's Philip Quigley explains how going public necessitates greater accountability.

Governance model of a public company

The main thing I suppose is that they have to appoint non exec directors which means that you give up some measure of control on a day-to-day basis of your business. So you’re sort of answerable to non-execs and to the nomad.  And you have to put out announcements to the market on a regular basis.  You have to publish your accounts more widely than you do as a private company. You’re just generally under more scrutiny.  And that the more institutional your client or your shareholder base, the more scrutiny you are likely to come under. You might end up having to do roadshows, and results announcements and you know, generally being accountable to your shareholders. _______________________________________________________________________________________ Check back for more TV shows looking at governance model issues.

Under the Companies Act itself probably not, because we’ve already had the, you know, the big overhaul of company legislation for this generation I hope.

There is as always more law and regulation emanating out of Europe.

At the end of last year the European Commission put out their company law and corporate governance action plan listing areas they wish to review so to the extent which Europe has more to say on all of this, things like the Listing Prospectus Disclosure and Transparency Rules, you know, may have to be changed to comply with the various European directives.

 

There is a lot negative press and public anger perhaps, directed at directors of large listed companies, in particular when you look at bold numbers out of context, they can look like large sums of money. And at the moment, other than potentially voting a director off a board, shareholders have not got any other way necessarily to directly influence the pay in terms and conditions which their directors receive. Transparency is important for shareholders to have information about who is running their company and investing their money and for the public at large, it breeds trust. I think one of the most fundamental changes from the Companies Act 1985 to the Companies Act 2006 was to codify directors’ duties so they’re all written down in one place in a reasonably accessible form now. So directors can and should all be aware of their duties under the Act.

Well it can be a criminal offence for both the company and the director and any other officer, so including company secretaries if certain information is not made available to the Registrar of Companies, acting through Companies House. Similarly a company or an individual director of a listed company could be publicly or privately censured or fined if they do not disclose the relevant information required by the Listing Prospectus, Disclosure and Transparency Rules or the relevant AIM rules. Well as I said there are criminal offences associated with not providing the relevant disclosures either under the Companies Act itself, so fines could be payable by the director, other officers such as the company secretary or the company itself. There’s also just the bad PR in the press with some of these bigger issues when things then come out of the wash eventually as a lot of big companies have found over the last years for example with their tax disclosures. The PR can be as detrimental to a company as the actual regulatory fines themselves.

They’re certainly getting better because governance is so much more prominent.

And I think governance goes hand in hand with risk management and compliance generally.  And both of those topics are fairly high up the agenda now.  And obviously in times of economic crisis where more companies might be underperforming, that tends to focus directors minds on risk management compliance and governance issues and obviously investors and shareholders are looking at those topics more carefully as well.

But I think generally there is compliance and I think it’s getting better because I think there are more resources out there certainly to help directors understand what they need to do.

 

I agree certainly with some of the reforms that are currently being proposed by the UK government. I think that’s a move in the right direction. And the move is to increase transparency around directors pay, so make it easier for investors and shareholders to understand what directors are actually paid and how that does link to performance metrics. I think at the moment there is already a lot of reporting out there, but a lot of it is quite opaque, it’s become increasingly complex and detailed over time. And sometimes it’s quite difficult to actually ascertain what a director’s pay package is. So a move to make reporting more transparent is certainly a good thing. Also shareholders need to have a greater say over directors’ remuneration packages. And I think it’s fair to say that to date they have been allowed to voice an opinion retrospectively but that hasn’t necessarily brought about any changes.

The current hot topic is corporate governance, so moving on from the Companies Act, the black letter law which everybody is now, you know, we’re all familiar with what’s in the 2006 Act now.

 But there is an increasing focus on corporate governance so the Corporate Governance Code itself but also various bodies such as ICSA, such as the FRC, the ABI, NAPF issuing more and more guidance papers, there’s a lot more out there for directors and it’s just, it’s fascinating trying to piece it all together.

 

I think first of all they need to work through the standard and identify all those areas that are going to impact their accounts, the profit and loss account or the balance sheet.  They need to analyse each section of the FRS to pick out which are going to be relevant to them. Then I think they need to do a test run on their balance sheet or P&L asset stands at the moment and really present and say, “Well what would this look like?”  And then identify where they’re going to have to start communicating with shareholders. There's going to need to be training within the finance team to be able to actually apply this. And there needs to be communication with all stakeholders, whether that’s bankers where you’ve got loan covenants that are relevant or shareholders looking to maximise the value of their investment.

Cyber space is about the virtual world, it’s about the world of the internet, it’s about the world of soft intelligence and all the other intangibles which are not part of the fixed assets of an organisation. Cyber risk is the risk that those assets in cyber space are going to be manipulated or misused. Cyber crime is the use of those assets in cyber space by criminal activity. Cyber terrorism is the use of those assets in cyber space by terrorists. What we’re looking at is a very significant issue that increasingly our assets are invested in cyber space. How do we protect those assets from criminals, from terrorists and from any other people who want to misuse those assets for a purpose other than that which they were intended?

Cyber risk has become hugely topical now really because governments are starting to understand the importance of it. Someone said to me recently there are only two types of companies, those who know that they’ve had a cyber attack and those that don’t. But everybody’s had them in some form or other. It has become a very important to governments, including the UK government and it really needs to now come onto the agenda of boards. Boards need to be looking at it but it’s not just an IT issue. People have thought about it as an IT issue having a cyber attack. But it’s much more complex now and the old idea of corporate espionage, for want of a better term has moved into this space. Companies are very much at risk now of having their information stolen effectively, and that can be corporate secrets of any kind. So the risks are much higher than they ever were, and it’s not just corporates, we see it in other areas such as the forces, the concerns are growing there. But it’s certainly raising … the profiling of this is growing. It’s becoming more and more important and government is certainly concerned that this is where everybody’s at risk.

Sarah Hawes, Professional Support Lawyer – Corporate, Herbert Smith Freehills LLP on how Directors don't take a short-term view

I’m not sure there’s been a culture change because I’m not convinced that there was necessarily anything that broken.

I think with the codification of directors duties in the Companies Act 2006, all directors stopped and thought again about how to be good directors and to promote the success of their company for their benefit of the members as a whole.

I’m not as convinced as perhaps some of our national press are that short-termism is such a problem.

If you look at the way a lot of directors remuneration packages for example are structured, there are longer term incentives and share schemes that require them to actually invest some time and effort going forward in their businesses.

Julie Bamford, Head of Policy – Corporate, ICSA on ensuring renewed trust in financial industry

There is a definite sense that we need to bring back trust that was lost.  There is … there’s mixed views on it really, certainly the financial services industry and that is my background.  So I understand financial services.  They are looking at being very heavily regulated in the future.

And it’s getting the balance right in terms of regulation.  So there is that that’s happening.  People who work in banking for instance, it’s almost like people are embarrassed to say they work in banking now, which is a shame, because it’s important and it’s, you know, it’s a good industry.  I mean there’s no denying that the UK needs financial services.

We have to have financial services, it’s a huge part of our economy and the city of London is something we should be proud of.  I think it’s really … there is a question mark over rebuilding that trust, how people view the financial services and the banking industry etc, going forward.  But the city of London has always been in the past the centre of that, you know, and we … we wouldn’t want to lose that.

I think it’s important that we move forward and we build that trust and use financial services to build our economy because we need it.

Seamus Gillen FCIS, Policy Director, ICSA on how 24/7 media environment brings more accountability

The role of technology, the role of social media is very important.  We’re living in 24/7 environment, we need to encourage organisations to understand that accountability is now driven by 24/7 agenda and as social media is always on and that organisations are living in a goldfish bowl of public opinion and public scrutiny And that is a big challenge actually, helping organisations to realise that their positioning and their credibility in society, and their success as an organisation or as a business is dependent upon managing stakeholder expectations.  Which is why I go back to governance as one of the principle drivers of that, because if you’re well run and you are managing stakeholder expectations of how you run as a company or as an organisation, you’re going to enjoy levels of support which will always feed through social media, currents and trends and issues and crises or whatever. So organisations need to be clear about what they stand for.  They need to deliver against what people expect of them and then they can begin to manage the whole technological revolution and the social media revolution which is concentrating, public opinion and commentary on how they’re doing.

I’m not an IT expert. But there are certainly small changes that companies can do and there are specialist organisations out there that can help them to do that. There are a number of small changes companies can make that will effectively stop 80% of them. And that is an incredibly cost effective way to go. You can never stop it completely. The world of IT is such as we all know with computer viruses, as soon as you close one loophole or close one avenue then another one opens. So this is an ongoing struggle. People who are working in this area are developing new ways all the time. And like I say, sort of 80% of it can be dealt with in a very cost effective way which leaves you 20% exposed, which is probably always going to be the case. What is being stolen from companies can be as serious as their future strategy, detail, you know, through details of their customer base, all that kind of intelligence that is so important to companies in this competitive environment. If a competitor can get hold of it then obviously that’s very damaging for a company. But we’re not talking about competitors within the UK, this is a worldwide problem and the most cyber attacks are coming from overseas.

Caroline Newsholme, Partner, Nabarro on room for improvement with governance

We have the Corporate Governance Code, we have the Listing Rules and we have a whole raft of best practice guidelines.  So you can say the structure is already there and therefore why do we need anything different?  But I think perhaps in line with the general comply or explain principle perhaps people have been less careful about complying with the codes

And also there’s no real shareholder break on non-compliance which I think is something that has been missing.

 But the new legislation is obviously moving towards greater empowerment of shareholders which I think will enhance and make the existing governance code and regime more effective.

Jonathan Pryor, Partner - Assurance & Business Services, Smith & Williamson on Four steps to prepare for FRS 102

I think there’s a combination of things.  The first thing you’ve got to do unfortunately is invest some time in getting to understand what FRS 102 is all about.

And it may be the easiest route is to talk to us and we’ll give you the overview.

You then need to do a more forensic examination to go into individual accounts account codes and understand precisely what the repercussions will be.

Then you’ve got to map out in quite some detail, exactly how you’re going to move from where you are at the moment to where you need to be in the future and then finally you’ll need a process that gives you assurance that you’ve picked everything up and that what you’ve done works.

James Keeton, Partner - Assurance & Business Services, Smith & Williamson on how FRS 102 changes everything

The implementation of FRS 102 is probably the largest single change to an accounting framework for the majority of companies in a generation.  Not only that, it will also impact on profitability of businesses, the way their accounts looks and because of the impacts on tax, it means that there will be proper real money effects as well.

The way that tax is accounted for in the UK, is that the tax payments often, under many situations follow the accounting rules.  When the accounting rules change, therefore the amount of tax you have to pay also changes.  This means that when you dot the new FRS 102, you will be paying more or possibly less tax, depending on the effect that it has on your profit and loss.

I think people have heard about it.  They heard it’s coming, lots of people haven’t really understood the impact it’s going to have on their accounts.  And lots of people don’t realise that it’s going to have that real money effect that we were talking about.  It is a huge change and the devil is in the detail.

When you throw out all the current accounting standards and replace them with one, that is going to have a huge effect.

Jonathan Pryor, Partner - Assurance & Business Services, Smith & Williamson on why you should focus on FRS 102 today

The transition date for a December year end is effectively 31st of December 2013.

So to the extent that there are these options that you can deal with earlier, you really need to give now a clear picture before that date.

And that will be quite challenging if you’re starting now.

James Keeton, Partner - Assurance & Business Services, Smith & Williamson on how FRS102 will keep finance teams busy

It’s going to be a drain on resources.

It’s going to be a drain on resources for finance directors and finance teams, there’s absolutely no doubt about that.

In terms of the changes, whilst they are mostly taking effect or will have to be adopted by 30th of December … sorry, 31st of December 2015 year end, there will be a transition date and you will have to prepare comparatives.

That brings it forward effectively to the 31st of December 2013, which as we know isn’t that far off.

James Keeton, Partner - Assurance & Business Services, Smith & Williamson on how FRS 102 will change your profits

One of the biggest changes will be in the area of financial instruments. FRS 102 follows much more the IFRS standards that are in place for listed businesses, this means that a number of businesses will find significant changes in their volatility of the level of profits.

Jonathan Pryor, Partner - Assurance & Business Services, Smith & Williamson on how FRS 102 changes the UK’s financial framework

Well, it’s very fundamental because although a lot of the terminology is similar, in practice it’s a bit like learning a language and having completely new grammar.

There’s a whole series of series of changes which are quite fundamental, some of which could mean that the financial statements look completely different, profitable businesses suddenly look loss making and vice versa.  But there’s a whole stream of things that previously you did not even have to recognise in the financial statement which you now will need to recognise, particularly financial instruments.

Well primarily because UK GAAP is on its own.  And the world is moving in an IFRS - International Financial Reporting Standards direction. And the thought process is, that if everybody in the whole world applies broadly a consistent accounting framework then there’ll be spinoff benefits, so that investors in Thailand can invest in England or any other country.

Henry Shinners, Partner - Restructuring & Recovery Services, Smith & Williamson, on personal liabilities of company directors.

Many business people are unaware of the personal liabilities of company directors in the UK. Tough laws create the potential for personal liabilities of company directors where a company carries on trading when insolvent.

There is a risk for directors personally that they could be found liable personally for their company's liabilities.  Many directors aren’t aware of that.  If they carry on trading in business beyond the point that they know or ought to know that it's not going to avoid insolvency, then a subsequently appointed liquidator could apply to court to have them found personally liable.

That is a big risk for directors and one that not many are aware of.  Another thing for directors to watch out for when they have businesses that are in financial difficulty is the question of preferences.

So for example if they have given a personal guarantee to a bank, and they arrange, in the period leading up to the appointment of a liquidator or administrator for that loan to be repaid, so to take away their personal guarantee liability, then that's something that can be overturned by the liquidator of the company subsequently.

So they're not avoiding that liability.  That also applies to director's loans account, if they have taken loans from the company... sorry if they have given loans to the company and either arranged for those to be repaid just before the company goes into liquidation or administration, then that's a transaction that can be overturned by the liquidator or administrator.

So that also applies where directors have given loans to their companies and in the period leading up to the company going into some form of insolvency process, whether that's administration or liquidation, they arrange for those loans to be repaid by the company to themselves.  That's a transaction that a subsequently appointed liquidator would certainly seek to return and would be successful in doing so.

For more information on the personal liabilities of company directors as well as other types of risk, you can watch more videos from Henry Shinners here.

David Alexander: "Company Directors can be held personally liable if bribes have been paid in their company.  And that could happen in a number of ways.  Firstly, obviously if they knew about it or they were involved in the payment of the bribe then they would be caught under the act as a direct person, as someone who is, you know, paid, offered or promised a bribe to another individual.  However, they could also be caught if they have ignored the warning signs.  And if they’ve ignored the risks in the business and not put any procedures in place, and that’s commonly called the consent and connivance clause, and what that’s basically saying is you buried your head in the sand.  You didn’t look at the risks.  You didn’t consider whether there was the potential for the business to be involved in bribery and corruption.  And as a Director, if that is established then you are as guilty as if you paid the bribe."

David Alexander: "If you ignore the Bribery Act and do nothing, you’re undoubtedly taking a risk because you cannot predict and you do not know if bribes are being paid or are going to be paid in your business.  If they are, and if that’s established you can’t go back and reinvent the wheel.  You cannot put procedures in place after the fact and therefore defend yourself against this new element of the legislation which is the criminal offence of failure to prevent.  So we’re advising clients, they don’t have to go overboard on this, but we’re advising them to take a few preliminary steps that can demonstrate that they have thought about this and they have attempted to put some procedures in place to preventing to take bribery."

David Alexander: "The UK Bribery Act is a new piece of legislation, and certainly it only affects acts of bribery after July 2011.  So to a certain extent it’s a sort of a wait and see game.  There have been no prosecutions made by the SFO yet under the Bribery Act .  There has been a single prosecution made but it’s so insignificant that no one can draw any lessons from it.  And really what we’re waiting for is for the SFO to bring some cases to court so that we can understand what the drivers are and what they will be looking at.  But there is some important additional legislation that businesses need to be concerned about, not only the Bribery Act, and that is their responsibilities under the Process of Crime Act and under the Companies Act as well.  And the Process of Crime Act is probably the more significant one because if you suspect that you may have paid a bribe or you suspect that you may be involved in a transaction where a bribe was paid, then there isn’t an automatic requirement for you to report that under the UK Bribery Act.  But there is under the Process of Crime Act.  And the risk there is that if it turns out that it’s proven that you have paid a bribe then all of the value, all of the benefit you have earned as a result of that bribe could be deemed to be the Process of Crime.  So an example of that would be, I pay you £1,000 to win a £100,000 contract. The value of the bribe is clearly £1,000 but under the Process of Crime Act the company found guilty could in theory have to pay over £100,000 being the full value of the contract.  And there would be no excuse for the company saying, “Well that contract … the income for that contract was 100,000, but I only made £20,000 profit for it, therefore my benefit is 20,000.”  It wouldn’t be that, it would be the full value of the contract.  And that’s quite a serious concern for businesses, especially when they have a suspicion because it’s the suspicion that triggers the requirement to report."

David Alexander: "There was some research done a year after the acts came into force, so the summer of 2012.  And that research revealed that only 10% of companies had a real concern about the Bribery Act and thought that there was a danger of prosecution.  So that would lead me to think that companies are unprepared.  And certainly the cases that I come across, that is the case and they need a lot of guidance and they need a lot of help in terms of deciding what action they should take, how much investigation they should do and how they can mitigate the potential regulatory downside."

David Alexander: "There’s always a balance between whether you go down the criminal route or whether you go down the civil route.  The advantage of going down the criminal route is you are seen to be a good citizen.  Also I talked earlier about prevention, and making a criminal complaint and publicising that within your business is clearly a strong deterrent for other individuals, both inside the business and outside the business, to commit fraud in the future, and demonstrates what your attitude is to it.  Unfortunately a lot of businesses will see a downside to make a criminal complaint and that is that the fraud becomes public, and they have to effectively wash their dirty linen in public.  And where businesses, you know, depend on their reputation to encourage new business and to, you know, encourage their existing business then that’s obviously can be a deterrent to reporting.  On the civil side clearly if there’s a substantial amount of money that’s gone missing and there is a realistic opportunity to recover that then businesses are very keen to do that, because not only will they recover the losses but they’ll also recover the cost of the investigation as well."

David Alexander: "Clients typically go down three roads.  They either want to make a criminal complaint and go to the police, or they want to go down the civil route and try and identify what money or assets they’ve lost and recover it or they want to deal with the employment issues.  And if the allegations are proved to be true they want to exit the individual in a legal manner.  Many companies want to do all three of those things, which can be done, although there are often conflicts between them, for example, if you make a criminal complaint and you take it to the police then they will tend to sort of effectively take over the investigation.  And you will have little opportunity to direct the work that they do.  On the civil side which is where you’re trying to get your money back, those are the sort of cases that we work on mostly.  And in that case, because quite frankly the client is paying the bill, the client can decide, you know what direction the investigation should take.  And also the speed of the investigation.  And we normally find that a civil investigation, we can speed the process up.  And if there’s a possibility of recovery then achieving that in a quicker process than going down the criminal route."

David Alexander: "Traditionally if you want to prevent fraud, the focus has always been on accounting controls.  And the idea is that the tighter the accounting controls the less fraud you’ll have.  Unfortunately my experience is that’s not the case, that you can,  if somebody’s sufficiently motivated and they can rationalise the way of their behaviour then despite the controls being tight, you could still suffer from fraud.  So if you’re going to prevent it you need to not only address the controls, but you need to look at some of the softer issues as well.  And I’ll give you an example of that.  Employee manuals or employee handbooks that talk about the conduct and the conduct expected of individuals within a company is a pretty standard document.  The importance of that from a fraud perspective is it’s tackling peoples’ ability to rationalise fraud, because what they’ll do is they’ll read that and they’ll think, right, I understand what the company’s policy is on fraud, I understand what my responsibilities are, and I understand what will happen to me if I cross the line, if I commit fraud.  And a good analogy there is when you go into a shop and you see a sign in the shop and it says ‘shoplifting is a theft, is a crime, we will prosecute’ and it’s the same principle in an employee manual.  It’s saying this is unacceptable behaviour, if you engage in this behaviour this is what you can expect.  And what it’s trying to do, it’s not trying to stop all potential fraudsters, but it’s trying to prick peoples’ conscience and stop a few of them.  And that as I said is an example of sort of not putting all your eggs in one basket, of actually making sure that yes, you have tight controls, but you also address some of these softer issues around rationalisation and around the motivation of the individual as well."

David Alexander: "The typical roles are the roles that are more likely to create the opportunity are those where they are people in the position of power.  I mean many people in an organisation will have an opportunity to commit fraud.  But a lot of that fraud, because of the position they are in the company will be fairly low level.  For example if you work in the stores then there’s an opportunity to walk out with the company products.  But if you’re in a management position or in a senior management position then you have far more opportunity and because you are in a position of power it can be far more damaging to the business."

David Alexander: "Typical types of fraud normally involve around getting money out of the business.  So people who have control of the payment systems, whether that’s electronic systems or chequebooks, those are the people that have the most opportunity.  A typical fraud for us would involve a combination of two things.  It would involve money going out of the company illegally, and that might be through maybe the submission of a false invoice, or just by the fact that the fraudster has the capability to control the payment system.  But that’s normally in conjunction with some sort of manipulation of the accounting system.  So it’s like a smokescreen.  And why … I often define fraud as theft with a cover up, and that’s essentially what it is, you’re stealing money, you’re stealing product from the company, but in order to disguise that you’re manipulating the accounts and records so it’s not clear as to what’s gone on."