EC writes: I sit on the board of a company that has recently agreed to a
contract that has an element of unlimited liability in the small print. This
has raised a concern at board level about our personal liability and what we
could do to mitigate it. What exposure does a director have for a commercial
decision that is not taken negligently or apparently recklessly?
The standard of care required for directors is that of a reasonably diligent
person, writes Jon Sutcliffe, partner at Kingston Smith LLP.
This assumes that the director has the general knowledge, skill and experience
that may reasonably be expected of a person carrying out the same functions
as are carried out by that director in relation to the company. It also
takes into account the general knowledge, skill and experience that the
director has.
In practical terms, this means a person should not take on a directorship
unless he is sufficiently qualified or experienced to be able to fulfil the
functions that he might reasonably be expected to carry out. Furthermore, a
particularly highly qualified or experienced director must exercise that
high level of skill and expertise in carrying out his duties.
Directors must also exercise their duties diligently and keep themselves
informed about the company’s affairs and join their co-directors in
supervising and controlling them.
This does not prevent a director from relying on the experience and expertise
of colleagues nor, generally, does it prevent sensible delegation or
division of tasks, provided that a director does not attempt to absolve
himself or herself entirely of responsibility by delegation to others.
So, provided these criteria are fulfilled when making a commercial decision
(together with consideration of the list of factors contained in the
Companies Act 2006), and as long as there is no manifest recklessness and
negligence involved, a director could probably be absolved of responsibility.
Your company could consider taking out directors and officers liability
insurance, although there are limits to what this will cover.
If you have a real concern about a specific board decision, then you should
take independent advice.
MAKE THE MOST OF APPRAISALS
LJ writes: I have read previously that you believe appraisals play an
important role, but as a small business what should our aims be when
performing appraisals and how do we get the best out of such meetings?
An appraisal, if used effectively, can be both useful and helpful for both
your business and the employee, writes Peter Done, managing director of
Peninsula.
For a performance appraisal to be effective it requires all to play their
part. Management is required to give full commitment to the appraisal scheme
by allowing time for preparation, discussion and monitoring. Employees need
equally to be fully committed by allowing time for honest and frank
discussion.
The appraisal should be carried out in an honest and unbiased way by employer
and employee. Appraisals record an assessment of a worker’s performance,
potential and development needs.
The agenda for appraisals, therefore, is looking back over the last review
period and discussing formally work performance, content and volume. It is
also a platform for agreeing objectives/targets for the next review period.
There are three frequencies of appraisals. The first kind is continuous,
completed on a regular basis to check on how the job is being performed,
praising when it warrants it and pointing out where something could have
been better.
Periodic appraisals should be conducted on a semi-formal basis, three or four
times a year and usually conducted at times agreed for reviewing the
targets/objectives from the previous annual appraisal.
Finally, an annual appraisal means formally once a year.
Ensure that you prepare for the appraisal, arrange a time and day and provide
advance notice to the employee. Review past appraisals and talk to others
for whom the employee has worked.
At the meeting, have all prepared documentation ready and discuss issues
openly and frankly. Both parties may need to face difficult issues, so focus
on performance, not personality. Remember that an appraisal is not
implemented solely for the benefit of the individual, but is a means of
improving the performance of the whole company.
Agree a plan of action within reasonable timescales and ensure that both you
and the employees agree to discussions and targets. Remember that any
concerns raised by the employee must be taken seriously. Finally, do not be
overcritical or “nit-picking” and always praise before you criticise — and
always finish with praise.
