I am well aware that my good friend, Prof Prem Sikka, is advising the Commons committee investigating the failure of BHS. I have shared opinion with him on the issue. I have no doubt at all that when that committee comes to report the accounting recommendations they make will, as a result, be well founded. It also means I will ignore the very many such issues that current disclosures are bringing to light.
What does concern me about the revelations from yesterday's hearings is something much more basic. What is very clear from what has been said is that some people who really do not have the basic skill set to be company directors but hold that office nonetheless.
I suggest that this may well be because there is no test of competence to be a company director. At the most basic level of a one person, no employee, company this might, just, be acceptable, but even then I am not sure. We do not let people drive until they can prove that within reasonable limits they can do so without major risk to themselves or others. The right to drive is not absolute: it is granted by society conditionally and only to those who prove they can use it appropriately. That is precisely because we know that driving imposes a substantial risk, not just to the driver, but also to others.
Being a director of a company also imposes risk, not just to the director but also to others. In fact, to others most especially. That is the whole reason for limited liability. It shifts the burden of risk from the owners and managers of a company onto those that they deal with. Most directly in the firing line are the company's employees and (in the case of BHS, for example) its pensioners but others very obviously at risk (and maybe considerable risk) are suppliers, regulators, tax authorities and society at large when issues such as pollution and other breaches of the law are involved.
So why aren't we, at the very least, requiring that people undertake a basic competence test to be a company director? If we can have written tests before you can drive these days (although not when long ago I got my licence, which I mention just to show that criteria can be changed) why not do the same for company directors?
The subject of such a test would not be hard to establish. Basic company, tax, employment, contract and environmental law should do for starters. A multiple choice test would do in the first instance. More extended tests would be required for those wishing to be directors of medium and large companies with a substantial requirement for those wanting to be Plc directors. This is, after all, only the equivalent of those wanting HGV and PSV licences, who have to undergo additional training and testing.
And why shouldn't directors, in fact, be licenced? Doesn't that make sense, especially when we know we face so much corporate tax risk, let alone anything else?
And if we do licence, why not impose a penalties regime? Some penalties could be mandatory. Three points for failing to file a set of accounts or an annual return on time, for example. Twelve points and you face a mandatory twelve month ban on being a director. A second ban would be for twenty four months, and so on.
There could be other bans. Failing to act in the interests of creditors and employees could result in a long ban, for example. The BHS hearing might suggest some who might have risk if that were the case.
Using influence to impact economic outcomes whilst not formally a director (being a shadow director, in other words) might be subject to very long bans. If not the whole arrangement would not work.
And being a nominee director could be subject to a life ban.
Whilst tax offences could also mean penalty points.
I can hear the cries of protest already: in a group situation failure to file the accounts of a few companies on time could resist in an immediate ban from office. And I agree, that is true, and wholly foreseeable. So do the accounts three months early just in case is my obvious, and wholly reasonable, response.
This, I think, is an idea whose time has come, even if I admit I have only just thought of it.
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It’s a good job we don’t make these people pay more tax – such a loss of expertise if they left the country!
I don’t entirely I agree. Surely the need is is for a test of honesty, rather than competence?
(a) How about joint liability where a company is found guilty of an offence or becomes insolvent? Hopefully this would concentrate directors’ minds.
(b) Whenever a director tries to claim he/she doesn’t remember, didn’t know or didn’t understand, they should, as a minimum, be fined all remuneration they received from the company. They quite clearly didn’t earn it.
(c) I agree entirely about banning directors, but surely that power already exists?
(d)I am not sure that there is any way that you get at shadow directors, only their stooges. But could you find a way to extend bans to companies that control other companies. If you could ban at arm’s length fake directors in the Virgin or Cayman Islands, at best it would make tax avoidance far harder and at least it would spread the jam from the stooge directorships more widely.
My personal proposal
Any company or organisation that issues a statement saying it “takes safety/security/whatever very seriously” should automatically be fined £1,000,000, because it means that it doesn’t care in the slightest.
At the most basic level of a one person, no employee, company this might, just, be acceptable, but even then I am not sure.
And a non-trading company? (Thinking in particular of the company which owned the freehold of the house in which I had a flat: an arrangement that was needed because there was no commonhold legislation at that time to allow the 5 flat owners to manage the building)
Maybe
We need to address the widespread mollycoddling of business by Government.
The naysayers will say that it just puts off potential business people but all I see is too many people with no talent except bluster passing themselves off as bona fide business folk to the detriment of the more talented.
The fact that stuck out to me at yesterday’s Committee was that Philip Green had stood behind Chappell’s money that indicated he was a real serious player.
This act is filled with so much conflict of interest it is hard to imagine what sort of moral world these deals operate in.
Licensing? Yes please.
Two issues:-
1) the “going concern” test needs to be given much more prominence. The 2008 crisis revealed that many of our financial entities were actually insolvent, unbeknown to their directors.BHS was not a going concern before the sale,relying as it did upon parent company covenants, and was certainly not afterwards. The relationship of FRS17 pension deficits to the “going concern” tests needs to be clarified.
2)Creditors, employees, the taxpayer all have interests in a liquidation, problem is if the events preceding the administration / liquidation are not policed then the ensuing management and realisation of assets is equally anarchic.
“The subject of such a test would not be hard to establish. Basic company, tax, employment, contract and environmental law should do for starters.”
Utterly ridiculous.
Directors are often hired for their sector ability. Why should (say) an IT expert be required to learn tax employment and contract law? Knowledge that in a large company he would never be required to practice because the company would have experts or consultants to do those things.
It would be a bureaucratic, pointless nightmare, requiring an army of civil servants to administer, slow down business and achieve nothing worthwhile.
And since the law changes (tax law every year!) anyway, what would be the worth of a Director who passed tax law 5 years ago? Or would you require CPD on all these subjects? Administered again by another army of civil servants? Taking up more time for a Director who would never be called upon to put the ideas in practice.
“Using influence to impact economic outcomes whilst not formally a director (being a shadow director, in other words) might be subject to very long bans”
You’d ban someone for being a shadow Director? Ban them from what? Being a Director? Suppose someone was a shadow Director but had passed all your tests for an earlier job? How would you define shadow Director anyway? Someone influencing a company? Haven’t you yourself advised and influenced companies?
One of your sillier ideas and utterly unworkable in practice. I think you should have thought twice about it.
I have thought about it twice
You just prove why it is so important to do it
You want unlicensed people with no qualification to do so to rim companies despite the very lathe obligations directors face
I doing them a favour
And respectfully, your protest males my case.
Richard
I just loove the way your typing goes to cock when you are annoyed.
Or in a hurry…and I was
Fair Tax Mark Limited is registered under the Co-operative and Community Benefit Societies Act 2014 which means they need to file their accounts at the FCA Mutuals Public Register within 7 months of the year end.
According to the Register their accounts to December 2014 were added 3 May 2016.
Are you still a Director there?
We continually have a problem with that register
It is not of course Companies House
And returns seem to take – in many cases – extraordinary times to be submitted
The accounts went to movers in June 2015
I can think of some other excellent examples of unlicensed people with no qualifications doing jobs they seemingly know nothing about:
1) Government ministers
2) Shadow ministers
3) MPs
These people seemingly have the most important jobs of all, so I think we should start with them and move on to other groups later.
Glad to hear that Prem is involved, Richard. That gives me some confidence in the work of this particularly parliamentary committee, though I hope when it comes to questioning Green they do a better job than was done with Mike Ashley.
Incidentally, of all that came out of the sorry saga and sorry bunch that appeared yesterday the things that struck me was surely this was an example of a technique much loved by gangsters of old: set up a patsy to take the fall, while the true villains walk away.
Finally, the best material I’ve read on Green and BHS appeared in Private Eye’s ‘In the City” section of issue No.1418. It should be compulsory reading for all those investigating the BHS debacle and anyone else who still retains any thoughts than Green did BHS any kind of favour over the period he owned the company.
I read that too
I know why you are arguing this point and I agree that directors behaviour does need to be better policed.
But I think it is too restrictive to license directors and have a points system. It could prevent a lot of very capable people from starting companies. It would also be a nightmare to administer.
What I think is needed is a much more comprehensive system of penalties for misfeaent directors.
How many company insolvencies have you seen where the directors have obviously been at fault yet no Acton is taken.
If the penalties were made more severe this would act as a deterrent at the start of the process and may be enough by itself to improve the quality of those becoming directors in the first place.
Regarding BHS I watch wi interest to see what if any action is taken against Green and the dope gentleman racing driver to whom he entrusted the company.
I cmooetely disagree
Conduct would improve enormously
I think you have a good point here. The rules definitely seem to be too lax in relation to business conduct. Whereas a doctor needs many years of training and would be rightly struck off for any misconduct, we have seemingly very little projection in relation to business. Reminds me of Steve Keen’s point about how engineers (and we could add doctors) cannot get away with making mistakes whereas economists (and we could add managers) can. I think that’s at the heart of the problem of why we start to see society malfunction. We should not let business leaders get off so lightly.
But there is the danger that a little knowledge is sometimes more dangerous than none at all!
As it is not feasible to expect all company directors to have sufficient knowledge of the law and accounting to be deemed “proficient” in any true sense of the word, why not make it mandatory for either a lawyer or an accountant (or both for larger businesses) to be a director of every company (over a certain size/turnover threshold if necessary).
Make this a non-market priced activity with government approved fees for the respective lawyers/accountants time and expenses.
And if the lawyer/accountant knowingly allows the company to undertake an illegal activity there should be appropriate penalties on all the directors, up to and including being struck off and criminal prosecutions.
The Directors of Credit Unions (who are all volunteers) have to undergo a course of training to be appointed to that role. When I undertook the training we were inspected by a person from FSA (as it was then) and questioned quite deeply as to our knowledge and motivation. People who had been bankrupted or had a conviction for a financial crime were not allowed within the ranks of management but could be members.
Why not have something of the sort for all other types of directors? I strongly suspect that we were given more instruction than Bank Managers.
You may well be right
Of course it’s a sensible idea. Why should ‘business’ be treated in an exceptional way? Licences are required for all manner of activities and exams have to be passed to prove basic competence. You don’t have to be a professional motor mechanic to drive a car but you do need to pass a basic driving test. Over the years I’ve come across scores of so-called ‘entrepreneurs’ whose inadequate knowledge of elementary law / finance / marketing has led to bad decisions negatively affecting the livelihoods of other people, e.g. employees & suppliers. It seems one thing (among others) the mainstream business community really dislikes is any form of restriction on its activities to generate profit. The IoD could take a lead here … haha!
If the definition of a license is the permission to do something after a test of competence then I am all for it.
There is a wonderful quote in the Steve Martin film ‘Parenthood'(if you have kids you need to see this film).
An older teenager (played by Keanu Reeves) explains to the mother of a dysfunctional younger teenager he has just befriended (paraphrased of course)
‘You know, in this country you have to have a license to own dog; but you know, any jerk can be parent’.
Replace ‘parent’ with ‘business person’ and the sentiment is still relevant.
It seems that the amount of money one brings (real or imagined) tends to count more that ability one brings with it too often.
In BHS’ case, I found the statement regarding staff coming in at weekends to paint the stores particularly troubling and heart breaking since it is they who will pay the ultimate price for yet more business bullshit.
I have no big objection to certification for directors of fairly large companies, maybe based on assets or employees. I doubt it would be a big administrative issues and it can hardly hurt as long as it doesn’t apply to small companies. I would say that any company with less than 10-25 employees is unlikely to need such certification (or the certification should be fairly basic). I doubt it would make much difference to be honest either way.
The certification itself doesn’t really matter in my opinion, but the penalties matter very much. There is already a lot of legislation about director’s behaviour. It is already possible to ban someone from been a company director. Directors already have personal liability in case of fraud or gross negligence. Extending such responsibility much further would be wrong in my mind. It would make independent/external directors basically impossible as the risk would be too big for them. Personally I think the current balance is reasonable.
Why would directors act in the interest of creditors? That seems excessive to me. Are directors as responsible to creditors as shareholders? Creditors can impose covenant on shareholders: no late accounts is often such a stipulation. Do we really need to mandate how creditors and shareholders behave towards each other? I see no strong rationale for this. If all loans required stronger covenants, this would simply reflected in the price. It’s not clear that the end result would be better for creditors.
Should directors be banned from undertaking risky ventures? I think this is wrong. In a market economy some companies are destined to fail, even large ones. Being a director in a failing company is not proof that you were fraudulent or negligent. People in business have to take risk: to invest in ideas which are by definition not tested yet. It’s inevitable that sometimes they get it wrong. Would you ban a scientist that performs a failed experiment?
Limited liability is a great invention that has powered economic growth for a long time. I think you underestimate how important it is in a market economy.
I fully understand limited liability
It was very useful
It is now deeply abused
You are ignoring that
I disagree. Another agency, training and testing co.’s to be paid, inspectors, registrations bodies to get a take and timeserving beaureacrats deciding on the qualities that an entrepreneur should have.
I would rather criminalize the blatantly fraudulent and anti business methods of financialisation.
First up – companies borrowing money to buy their own stock for example.
The owners of BHS were far from incompetent, they knew exactly what they were doing. The long series of thefts were completely legal and executed with supreme skill.
No, I would make financial robbery illegal and jail the perpetrators. Anyone putting their heads in the noose of a company directorship would do well to aquaint themselves with a few basic requirements under those conditions.
And under my system banning them would be much easier
Prevention is always better than the cure Mr Fitzpatrick!!
How difficult should the test be?
If it is too easy, it becomes meaningless. It would just creates bureaucracy, with little improvement in standards.
If it is too hard, then it creates a barrier to entry to running a business through a company. Surely that would have an impact on things like social mobility, plus the loss to society of potentially good businesses. I’m not saying that is a necessary showstopper to your idea, but just to point out: there would be costs.
Anyone can run a business in their own name
I am only drying them limited liability
If they are not willing to prove they can be trusted with it they shoukd not have it
Not a single business will be prevented from trading by what I propose
It will be a showstopper for a lot of business activity though, wouldn’t it.
Are you able to answer how difficult the test should be?
Unless it is a pretty easy test, a lot of people will be shut out of running a business.
Not a single person will be shout out
They will just have to have unlimited liability – which is not a right but a privilege and one that has to be earned
Richard
Not so very long ago, you were maintaining that the Co-Op bank could be run by people with no knowledge of banking. Does this post mean that you have changed your mind about this?
I would maintain non-execs are always useful
I would never argue not knowing how to run a company is
You deliberately conflate the two
Shame on you
Your apology will be accepted this time
There’s no legal distinction between non-executive and executive directors. They are all ‘directors’.
Are you saying there should be a distinction, with the former being exempt from your test?
I never even hinted at the possibility
You must have read it in
I would intend that this apply to all directors
I would like to point out that Credit Union Directors also do not know How to Run a bank but are required To undertake acourse of tuition to understand the laws, rules, Regulation and guidance which help guide and govern a Deposit taking company. Undertaking this is done on a voluntary basis and no financial reward is expected or given. Eventually one becomes an approved person and legally resposible for the proper conduct of the credit union. I would also like to point out , having attended Member Training with the Co-op that they are as aware of the need for training as Credit Unions are.
SO on what grounds can any directors be appointed without basic knowledge of their roles and responsibilities?
I think this idea of licensing company directors is inspired and should have been done years ago!
I, for example, need a licence to sell alcohol for which I had to spend the best part of a day doing exams. Unless I pass them and a Criminal Record check I don’t get a license to sell alcohol. A further example is HGV drivers now also have to have Certificates of Professional Competence giving additional knowledge of loading, transmission and the dreaded elf and safety. This has to be renewed every five years.
This is the quid pro quo for their profession.
I fail to see on what grounds company directors could object to the requirement to be licensed as their profession also gives them the immense advantage of limited liability.
Thank you
Directors do not get limited liability.
In reality they do
Stop dissembling
Would you care to elaborate – seeing as you are now disagreeing with Company Law, lawyers and academics.
Still trying to work out how company directors get an immense advantage of limited liability (and over whom???).
And to think I always believed that limited liability applied to the investors/shareholders.
Any company may indemnify its directors
And pay the necessary premiums to ensure that they are
“I need a licence to sell alcohol”
Yes, because you are selling alcohol. If you now incorporate you are still selling alcohol, you are not suddenly advising on law and tax so why would you need to be tested on that.
Richard, you continually ignore any points made against your ludicrous idea.
You won’t say if CPD would be required, you won’t say how this would be funded, you won’t say how hard the tests would be, you won’t say how many people you envisage would be needed to run the scheme – there are millions of people registered at Companies House as Directors, the scheme would be totally totally unworkable in the real world.
Worst of all you can’t say what the end result would be – Your ‘idea’ springs from the BHS hearings where it’s plain that business incompetence and/or dishonesty are the cause of the problems – how would passing a simplistic exam in tax make a dishonest person honest or an incompetent businessman suddenly able to run a retail business?
You have no answers.
Are you paid to do this Brenda? Who by? I just thought I should ask
The scheme would be self funding: people would have to pay to be licenced
Yes I do imagine CPD would be required
And the tests would suit the licence applied for – I have made that clear. They would be onerous – like a driving theory test, but passable for the diligent
So your only objections are:
1) I thought of it
2) You didn’t
3) You don’t like competence
4) You don’t think people would like to be trained
5) You want society to continue to take the risk
Deal with the issues please, not the fine print
You’re offering standard response to a good idea – except you jumped over the ignoring it stage
Richard
I have to say however that Michael above makes a good point about politicians and their lack of ability in running the country properly.
This is something that needs to be addressed too in fairness as it will just create double standards.
I find it hard to believe for example that people who have been found to be fraudulent in the expenses issues such as Keith Vaz and David Laws (amongst others)are still allowed to within 600 feet of parliament never mind still being allowed in it (forgive me if their status has changed and I’ve not picked this up).
Basic competence is an issue. I came across it myself some years ago in 2009 to be exact when I was installing a 3 kW Solar PV system. Despite the fact that I am a amongst other things a Chartered Electrical Engineer I was not deemed competent abd had to have an electrician to sign it off. Fortunately one of my former students (who had the necessary ticket) volunteered to do it. I didn’t object. Fortunately with engineering it is pretty obvious if you don’t know what you are doing. Not so obvious with the economy for an example.
I was talking to a former company director yesterday who was horrified by Dominic Chapell said he wouldn’t put him in charge of a chip-shop and certainly wouldn’t buy a 2nd hand car from him. He thought Philip Green would also come out very badly from the BHS affair.
In brief I agree but it is unlikely to happen.
I admit this one is not going away now I have thought of it
Give me a decade
That’s how long these things take
This very much sounds a way of excluding people based on education, so much for social mobility. So would you exclude people from being directors in their own company?
Do driving tests exclude people on this basis?
And if they do, do you think that reasonable?
Do you think it right for the state to stop people driving their own cars if they put others at risk by doing so?
Please explain the difference?
You don’t see the difference? That’s a worry.
Should we have licenses for cooking, riding a push bike, managing a shop?
Please explain the difference?
We do for much cooking in public
Bikes cause limited risk
And some shops do require licences
You really do not seem to understand the world as it is
I think you’ve been too literal in you understanding of the issue there Richard.
Do you really think a short course and test will make someone a good director? You can hardly test run a company for a director test like you do a car.
Just sounds like an extra piece of beurocracy to tick a box that’s been invented. One of your more ridiculous ideas I’m afraid.
Yes, I do
Even the most basic awareness is vastly better than none
Perhaps you know nothing about learning curves
Perhaps you know nothing of being a successful director.
History suggests otherwise
We make sure people who drive pass a test but it does not stop bad driving. Having company directors competent is good but there should be something that compels them within reason to do the right thing.
But driving is better than it would have been
And the risk if penalty does have an impact
I concede, standards would undoubtedly improve from your proposal, and that can only be a good thing. I gather you are an Ipswich fan, Mick McCarthy was born just a mile from where I was, Barnsley. Is it England or Ireland?
What are you talking about?
Really this great licensing idea for company directors is only about a right entailing a responsibility.
I want to sell alcohol to a consumer, I have to have a licence, which is even revocable under strict responsibilty.
What is the difference in wanting to be a company director? Well it is true a fracas in the high street may possibly result from mistakes in selling alcohol to a consumer. But then the loss of 11,000 livelihoods is the result of the mistakes of a company director.
A licence is not the complete solution but it is distinct progress — unless — hands up? we really think Hogarth’s Gin Lane was a good system.