Much has been written, and some anxiety has been caused, by the apparent conflict between the requirements of the Friendly Societies Act 1992 on age limits for directors and the prohibition against age discrimination under the Equality Act 2010. John Gilbert of Hogan Lovells believes the legal position is more clear-cut than it has often been described and sets out in this article his view on how the apparent conflict can be resolved.
Schedule 11 to the Friendly Societies Act 1992 imposes various age restrictions on friendly society directors (referred to as "members of the committee of management" in the Act and in the rules of some societies). The schedule establishes a "normal retirement age" of 70 although it says that individual societies may also set a compulsory retirement age (which may 70 or may be higher or lower than 70) for their directors in their own rules. It is important to note that the "normal retirement age" and a compulsory retirement age are not the same thing: a compulsory retirement age is the age at which a director must retire permanently without possibility of re-election, while a director who reaches the normal retirement age must also retire but can submit himself for re-election provided certain conditions are met. It is not obligatory for a society to set a compulsory retirement age under its rules but the normal retirement age applies to all friendly societies regardless of whether they have opted to set a compulsory retirement age or not (unless of course a society has set a compulsory retirement age of less than 70, in which case all of its directors will have already retired before they reach the normal retirement age).
The requirements for directors approaching the normal retirement age are that they must notify the Society of their impending birthday and can only stand for re-election if the committee of management approves their candidacy. If a director who has reached the normal retirement age does re-stand for election, the fact that they have reached normal retirement age and the reasons for the board's decision to allow them to re-stand must be notified to members entitled to vote. Persons who are over the normal retirement age cannot be co-opted on to a friendly society's board, but can only become a director by a member vote. If a Society has chosen to include a compulsory retirement age greater than 70 in its rules, the age restrictions described above still apply at 70 and the rules will require directors to retire permanently when they reach the age specified by the Society.
All this was a little complicated but relatively clear until the Equality Act 2010 came along. The Equality Act applies the same rules to directors as to other employees and makes it unlawful to discriminate on grounds of age. This causes an apparent conflict but - and this point is often overlooked - the conflict is resolved in paragraph 22 of the Equality Act, which states that it is not unlawful to discriminate where doing so is unavoidable in order to comply with a requirement of other legislation. The Friendly Societies Act 1992 is other legislation and therefore no conflict arises under the Equality Act where practices that would otherwise be discriminatory comply with a requirement of that Act. Some provisions of Schedule 11 to the 1992 Act are permissive and therefore not requirements whereas others are requirements. Those which are permissive are superseded by the Equality Act. Those which are requirements still apply.
Our interpretation of the law is therefore as follows:
We hope that this generic advice will allay some of the confusion which exists about the apparent conflict between the two Acts of Parliament. It is offered as our interpretation of the legislation but we recommend societies do take their own specific legal advice about their own circumstances.
AFM Predecessors are Association of Mutual Insurers and Association of Friendly Societies
Annual election of all board directors has become commonplace in PLCs, since it was incorporated into the Code in 2010. This was a reaction to governance failures and their contribution to the financial crisis. Annual elections give members an opportunity to react to the performance of the company and are also required for directors that have served for more than nine years.
Board includes committee of management.
The UK Corporate Governance Code (previously called The Combined Code), subject to the annotations made by AFM in the Annotated Corporate Governance Code (current version dated 2012).
Company means a mutual insurer and includes a friendly society.
Code Provision of the Code.
Diversity includes but is not limited to gender. Directors may differ in many important characteristics, such as educational and functional background, industry experience, social connectedness, insider status, gender, and race. The Davies report in 2011 put forward a voluntary target for gender diversity for the boards of listed companies of 25% by 2015.
The organising of a group of people to achieve a common goal using proactive entrepreneurial behavior by optimising risk, innovating to take advantage of opportunities, taking personal responsibility and managing change within a dynamic environment for the benefit of the organisation
Externally facilitated performance evaluation
An external facilitator brings rigour and struture to the performance evaluation of a board, as well as an independent and impartial perspective. Evaluation of the board of larger companies should be externally facilitated at least every three years. The external facilitator should be identified in the annual report and a statement made as to whether they have any other connection with the company.
Fair, balanced and understandable
This broad definition of the basis on which the annual accounts was prepared is intended to address the concern that the narrative report should reflect the board's considered view of the information that members and other users of the annual report and accounts needed, rather than being viewed as promotional in nature, and to ensure that the narrative and financial sections of the report were consistent.
Independent non-executive director
Member of the Board of Directors of an entity who is an outsider, meaning he or she is not an employee of or otherwise closely connected with that entity. An example is a broker sitting on the Board of a client company. Such directors are important because they bring unbiased opinions regarding the company's decisions and diverse experience to the company's decision-making process. In order not to have a conflict of interest, independent directors should not participate on the boards of directly competing businesses. Directors are typically compensated based on a standard fee for each board meeting, or on an annualised basis.
A Large Company is any mutual that does not meet the definition of a small mutual i.e. because it has gross premium income on average over the preceding three years of £20 million per annum or more and/or it has assets on average at the end of the last three financial years of £100 million or more.
Although mutual insurers do not have shareholders, the principles underpinning the provisions of the Code are relevant and should be considered in relation to appropriate methods for facilitating direct member dialogue and involvement that may be in place (such as member forums or panels and/or delegate systems) and/or any members with significant membership rights. Also referred to as principal shareholders and significant shareholders in the Code.
Main Principle of the Code.
A recommendation from: "The Myners review of the governance of life mutuals published in December 2004"
Performance evaluation is a key means by which boards can recognise and correct corporate governance problems and add real value to their organisations. Boards who commit to a regular evaluation process find benefits in terms of improved leadership, greater clarity of roles and responsibilities, improved teamwork, greater accountability, better decision making, improved communication and more efficient board operations.
Senior independent director
The role of the Senior Independent Director includes the following:
Small Company means a mutual with gross premium income of under £20 million per annum on average over the preceding three financial years and assets of less than £100 million on average at the end of the last three financial years.
Supporting Principle of the Code.
The Companies Act 2006 codified certain common law and equitable duties of directors for the first time. The Act sets out seven general duties of directors which are:-
The statutory duties do not apply to the directors of friendly societies, although they must comply with very similar duties under the common law.
Unfettered powers of decision
No one person should be able to make major decisions about the organisation on his or her own.
Unitary boards include both executive and non-executive directors and make decisions as a unified group. By comparison a two-tier board has a separate management and supervision board
"Year" means the financial year of the company in respect of which the questionnaire is being completed