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Retirement Of Friendly Society Directors

Retirement Of Friendly Society Directors

Some Certainty Among The Confusion

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:

  • Friendly Societies should no longer set a compulsory retirement age. Schedule 11 permits them to do so but it is not a requirement and the permission is overridden by the Equality Act. Any societies that still have rules imposing a compulsory retirement age on directors should amend them.
  • Directors approaching the normal retirement age of 70 must still notify the Society of the fact - this is a requirement of Schedule 11.
  • Boards must consider whether to approve the candidature of any person aged 70 or more for election or re-election as a director and notify members of their decision - again this is a requirement of Schedule 11. However, in coming to that decision, they should not discriminate against candidates on grounds of age (or on the grounds of any of the other "protected characteristics" under the Equality Act 2010).
  • Boards must not co-opt anyone aged 70 or more as directors; such persons can only become directors by election - this again is a requirement of the Friendly Societies Act 1992.

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.

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Corporate Governance Questionnaire Keyx

A

AFM PREDECESSOR

AFM Predecessors are Association of Mutual Insurers and Association of Friendly Societies

Annual election

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.

B

BOARD

Board includes committee of management.

C

CODE

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

Company means a mutual insurer and includes a friendly society.

CP

Code Provision of the Code.

D

Diversity

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.

E

Entrepreneurial leadership

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.

F

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.

I

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.

L

LARGE COMPANY

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.

M

Major shareholders

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.

MP

Main Principle of the Code.

MR

A recommendation from: "The Myners review of the governance of life mutuals published in December 2004"

P

Performance evaluation

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.

S

Senior independent director

The role of the Senior Independent Director includes the following:

  • Providing support for the Chair in the delivery of his or her objectives;
  • Ensuring the views of the other Directors are conveyed to the Chair;
  • Attending sufficient meetings with a range of members, perhaps in company with the Chair, to develop a balanced understanding of their issues and concerns;
  • Ensuring that the Chair is passing on the views of the members and especially that any concerns are conveyed to all Directors;
  • Ensuring that appropriate succession planning procedures are in place in relation to Board succession;
  • Carrying out the annual evaluation of the Chair in conjunction with other Non-Executive Directors while also taking account of the views of the Executive Directors; and
  • Taking responsibility for an orderly succession process for the Chair.

SMALL COMPANY

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.

SP

Supporting Principle of the Code.

Statutory duties

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:-

  • to act within powers in accordance with the company's constitution and to use those powers only for the purposes for which they were conferred
  • to promote the success of the company for the benefit of its members
  • to exercise independent judgement
  • to exercise reasonable care, skill and diligence
  • to avoid conflicts of interest
  • not to accept benefits from third parties
  • to declare any interest in a proposed transaction or arrangement.

The statutory duties do not apply to the directors of friendly societies, although they must comply with very similar duties under the common law.

U

Unfettered powers of decision

No one person should be able to make major decisions about the organisation on his or her own.

Unitary board

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

Y

YEAR

"Year" means the financial year of the company in respect of which the questionnaire is being completed