Legal due diligence for strategic hires

18 Apr 2019 By James Froud

How can employers avoid conflicts of interest where a new senior hire plans to retain an existing position at another firm? James Froud reports

Some raised eyebrows may have settled recently after reports that Colin Porter, CEO of lifestyle brand Joules is retiring from his position, following the news that he was joining Moss Bros as non-executive director. 

Slated for chairman of the men’s formal dresswear enterprise, Porter had declared back then: “I would like to reiterate that I remain as active in and committed to my role as chief executive of Joules as ever.” This statement must have been greeted by surprise in certain quarters. How could the boss of one high street clothing store be the chair of another and effectively fulfil his responsibilities to both? It may have transpired he couldn’t; his announcement being little more than a smokescreen. Either that or a month is a long time in retail. 

While on the face of things, Joules and Moss Bros target a rather different customer demographic, it is not impossible to imagine how the latter may stand to benefit from the spell Porter has successfully cast on the former. In other words, with Porter on board, it is conceivable that Moss Bros could (and may intend to) move into Joules’ tailored territory. This possibility will have troubled many observers.  

Whatever motivated Porter’s apparent change of heart, reports of his Moss Bros appointment and subsequent resignation from Joules raise interesting legal questions about the nature of directors’ duties and the due diligence which should be carried out before making a strategic hire. 

Public listed companies such as Moss Bros are subject to the 2018 UK Corporate Governance Code (2018 Code) which requires that there should be a formal, rigorous and transparent procedure for the appointment of new directors. At the very least, this will mean testing whether a candidate is capable of performing the role in terms of other time commitments (anything significant must be disclosed to the board before appointment) and complying with statutory and common law duties. Note that companies listed on other exchanges (e.g. AIM, such as Joules) are subject to governance requirements similar to the 2018 Code.

Indeed, the ability for directors to act in accordance with their legal obligations should be the focus of any strategic hire, particularly for a key non-executive role, where the individual is more likely to hold other corporate positions. This places due diligence responsibilities on both the hiring company and the candidate. 

As a matter of common law, all directors are fiduciaries of the companies they serve. This confers a requirement on them to act honestly, in good faith and in the best interests of the company. Directors must not put themselves in a position where their own interests conflict with those of the company or other duties they owe to a third party, or where there is a real possibility this may happen; they must not profit personally from their position at the expense of the company; they owe undivided loyalty to the company; and they have an absolute duty of confidentiality towards the company. 

These fiduciary duties are codified in the Companies Act 2006. It does not distinguish between executives and non-executives but establishes a number of general duties on directors, which include promoting the success of the company, exercising independent judgement, and avoiding conflicts of interest. As regards conflicts, this applies to the exploitation of property, information and/or opportunity, whether or not the company could take advantage of the same. 

When recruiting for a non-executive director it is not enough to find the most successful, dynamic and inspirational candidates. Due diligence of a different kind is imperative. Both the hiring committee and appointee must also consider the legal frameworks which protect shareholders and customers alike. There should be honest dialogue which, so far as possible, anticipates business developments and the potential for conflicts of interest to arise. Directorship is a privilege. And with privilege comes responsibility.

James Froud is a partner and head of employment at McCarthy Denning

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