Full Circle...Or Not Fit And Proper Take 2
- 17 July 2012
When the SFA took action against Rangers in handing down their punishment on “bringing the game into disrepute” they were highly critical of the actions or non-actions of Rangers directors. I think everyone accepts the charges against Craig Whyte are justified but it is worth considering the charges laid against the likes of Alastair Johnston, John Greig and John McClelland, especially in the aftermath of the decision by the SFL clubs to admit Rangers into Division 3 and the resultant panic it appears to be spreading in the minds of SPL chairmen and directors.
Stewart Gilmour of St Mirren has predicted “major redundancies” at the club and at the time of the SPL vote there were comments about six or so clubs facing administration if Rangers were ejected from the SPL. Fans appeared to be happy to accept their club going into administration rather than have Rangers back in the SPL but fans do not have legal responsibilities to consider in their decision-making.
It is therefore worth considering what the responsibilities of company directors are.
The Companies Act 2006 contains seven general duties of directors:
• a duty to exercise reasonable care, skill and diligence
• a duty to promote the success of the company
• a duty to act within their powers
• a duty to exercise independent judgement
• a duty to avoid conflicts of interest
• a duty not to accept benefits from third parties
• a duty to declare any interest in a proposed transaction or arrangement
These statutory duties are owed by a director to the company and not to any individual shareholder.
The duty to promote the success of the company is an interesting one. It is set out in section 172 of the Act and replaced the common law duty of loyalty, often phrased as the duty to act in good faith in the best interests of the company. The duty requires a director to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of the members as a collective body: not just the majority shareholders, or any particular shareholder or section of shareholders. In doing so the director must have regard (amongst other matters) to six specified factors:
• the likely consequences of any decision in the long term
• the interests of the company’s employees
• the need to foster the company’s business relationships with suppliers, customers and others
• the impact of the company’s operations on the community and the environment
• the desirability of the company maintaining a reputation for high standards of business conduct
• the need to act fairly as between members of the company.
The concept of promoting the success of the company, and the non-exhaustive list of factors, were the most controversial aspects of the Act. The Government has described section 172 as a radical departure in articulating the connection between what is good for a company and what is good for society at large. This is said to reflect a cultural change in the way that companies conduct their business – that it is now recognised that pursuing the interests of shareholders and embracing the wider responsibilities flagged in the list of factors are complementary purposes, not contradictory ones. The Government also claims that section 172 should resolve any confusion in the mind of directors as to what the interests of the company are;
There is no excuse, for example, for thinking that acting in the interests of the company’s members necessarily precludes acting in the interests of those who depend on the company, like its employees and its supply chain.
Kilmarnock Chairman Michael Johnston, much-maligned by fans at the time, was the one SPL Chairman not to vote “yes” in the SPL vote. He understood his legal responsibilities under Section 172, stating “I elected to abstain in order to reflect the result of the consultation process and in recognition of a number of other factors, not least of which was Section 172 of the Companies Act concerning my fiduciary duty as a Director to act in the long term interests of The Kilmarnock Football Club Limited and to ensure its success as a business.”
In view of the doomsday scenario that many clubs are now predicting, they presumably took this into account before the SPL conducted its vote. As responsible directors, they would have sought to establish the impact on their clubs of various scenarios and weighed up the consequences. These consequences would have included the effect on employee jobs, the effect on the business suppliers, as well as the effect on the fans supporting the clubs. In the current climate, they will have considered the reaction of their lenders to Rangers disappearing from the SPL. After all, Rangers was not just a club suffering financial difficulties folding, Rangers was a club continuing and a decision had to be made to remove this “cash cow” from the SPL.
We are certain, of course, that the directors would have instructed their management staff, their finance staff, and their business advisers to produce the guidance and plans of future prosperity that would allow them to come to their decision with a clear conscience. Or, more likely, did they wing it and take a calculated risk that Rangers would only be out of the SPL for one season?
The agenda for the SPL meeting following the SFL vote suggests the latter. As such, does sporting integrity and fan power continue to rule over legal responsibility? Do the directors now, given the time that has passed, have all the financial information at their fingertips?
If the SFL vote is respected, as our First Minister Alex Salmond has said that it should be, will clubs be forced into administration or redundancies as many are suggesting? I would make it clear that is not something Rangers fans should wish to see – no club should want to see the loss of a club or employees losing their jobs.
But if this is the outcome of the SPL decision, will the SFA step in and take action? Will the directors of these clubs be considered to be derelict in their duties and as a result be deemed responsible for “bringing the game into disrepute”? And will the SFA be as critical of these directors as they were of Rangers’ directors who took action by resigning and by making their voices heard on the front pages of national newspapers?
Arnold Black is a Chartered Accountant and long-time Rangers fan and season ticket holder.