Effective delegation of authority by directors can be important for the successful operation of a company. It involves striking a balance between establishing clear guidelines which set out the scope of the delegated authority and remaining adaptable to changing business needs. In this blog, we'll explore four top tips which should be considered when delegating corporate authority.
1. Have clear terms of reference
Effective delegation of authority relies heavily on the establishment of clear terms of reference. Terms of reference set out the boundaries and rules regarding who has what level of authority within a company. For example, they may specify that a particular grade of manager has the authority to approve a transaction up to a certain £ value. These terms also typically specify what the reporting mechanisms or accountability structures are (for example, the manager must report his exercise of this authority to a certain sub-committee of the Board every X weeks) and whether there are any relevant legal or regulatory considerations to maintain proper corporate governance.
It is important to clearly articulate delegated tasks, responsibilities, and decision-making powers within these terms. Clear and concise terms of reference minimise ambiguity and ensure accountability throughout the company. Drafting clear terms of reference lowers the risk of misinterpretation or internal disputes. Through the precise delineation of authority, companies can enable their managers and committees to confidently execute tasks, improving operational efficiency. This also makes it clear how the governance of the company's operations is to be conducted within an overall framework of proper corporate governance oversight.
2. Select appropriate delegates to exercise the authority
It is important to ensure that appropriate delegates are selected within the company, and that any legal requirements regarding the selection of delegates are adhered to. For example, Listed companies are required to establish certain sub-committees of the Board for certain decisions, including remuneration, audit and risk.
While the same requirements do not exist for private companies, directors should still exercise appropriate skill and care in appointing individual delegates or establishing committees, ensuring they consider the relevant levels of expertise, experience and ability to make the decisions that are being delegated to them. Failure to appoint appropriately qualified individuals may result in potential legal ramifications for the directors, such as litigation for negligence or breach of duty. There should also be a clear process to set out when a delegation of authority may be amended or revoked. For example, when the delegate ceases to be an employee of the company.
3. Reserve Key Matters for the Board
Directors have fiduciary duties that they must adhere to, and they are not able to delegate responsibility for these duties. If things do go wrong, there may be significant risks for directors. For this reason, certain responsibilities are typically reserved for the Board's jurisdiction only and should not be delegated. These can include, for example, making significant strategic decisions, approving major investments and decisions around regulatory compliance.
Bypassing proper Board approval for such decisions may breach the directors' fiduciary duties, potentially resulting in legal challenges for them. Adhering to set, pre-established procedures for matters within the Board's purview is important for maintaining legal compliance and mitigating risks. It is also important, for the establishment of such procedures, and in delegating authority more generally, that the Board consults the company's constitutional documents, to ensure that such procedures and delegations are compliant with them as well.
4. Maintain Effective Strategic Risk Management
The Board, as the ultimate decision-making organ of the company, is responsible for ensuring that thorough risk assessments are conducted and effective risk management measures are implemented on an ongoing basis. This includes any processes which involve a delegation of corporate authority. For example, if authority to sign contracts on behalf of the company in a particular geographical region were to be delegated to an individual, the Board should consider whether that individual should also be given the power (or obligation) to draw on the company's tax or legal advisors, to ensure that entering into a contract in a given country will not expose the company to unexpected tax or compliance obligations. Inadequate risk management could potentially expose companies to litigation, penalties, and reputational harm. By prioritising clear communication and proactive risk management strategies, companies can safeguard against potential conflicts, legal challenges, and reputational damage.
Delegations of corporate authority can expose companies to many potential risks. While we have set out above some tips which may help, such matters often need to be the subject of detailed legal advice.
If you require any such advice or have any other legal queries, please get in touch with a member of our Corporate Team or your usual Brodies contact.
