What’s in a name - Managing Director / Chairman?
The basic rule in relation to a board of directors of a company is that they must act collectively. In other words, decisions must be made on the basis of majority rule. In most companies the strict application of this rule is not practical as this would stifle the day to day management of the company. For this reason powers are often delegated to particular board members (or senior managers). Often wide-ranging powers are delegated to the Chairman or Managing Director. However, you should not assume that a person using either of these titles actually possesses such powers, it is by no means automatic.
In relation to the Managing Director, this title does not have any particular significance from a legal perspective. Such a person has no specific powers over and above any other director unless these powers have been specifically delegated to them by the board. This principle has been reinforced in the recent case of Smith -v- Butler [2012] EWCA Civ 314.
In this case the Managing Director decided to exercise what he thought were the powers inherent in his role and removed the Chairman to replace him with somebody else. The Chairman successfully resisted and the Court of Appeal confirmed that the Managing Director had no such power. In order to dispense with a full board decision he would need to have such authority formally delegated to him. As it was, there was no such delegation, the title of Managing Director simply stemming from his employment contract. In the absence of delegated authority he had no right to act otherwise than in accordance with majority rule.
The role of Chairman does have a specific legal meaning as the articles of association of most companies will provide for the appointment of a Chairman and, if one is appointed, they automatically have certain rights. These rights can include a casting vote at board meetings.
However, again it should not be assumed that a person calling themselves “Chairman” actually has any additional rights or powers. There must be an appointment by the board and most articles provide that such an appointment can be terminated by the board at any time. In addition, the rights of the Chairman can be reduced or even excluded in the articles of association.
To summarise, if a director calls themselves Chairman or Managing Director or even Grand High Panjandrum, don’t assume that they have any more rights or powers than any other director. Often a close look at the articles of association or minutes of board meetings will reveal that their powers are as illusory as those of the Wizard of Oz, whose booming voice disguises a small man pulling levers behind a curtain.
Tags: Boardroom Disputes, chairman, directors, managing director
Corporate Governance | Ed Weeks | 
July 5, 2012 2:48 pm
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