Recent write offs and bail outs in the financial services sector have once again focused attention on directors. Professor Colin Coulson-Thomas discusses the knowledge a director ought to possess, and answers the question: what should a director be expected to know?

As well as various personal qualities and competencies, such as visioning and delegating abilities, directors need specific knowledge that they might not have gained while in a managerial role.

The Companies Act 2006 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 its members as a whole'.

As a minimum, directors should understand the structure, composition and operation of boards, their legal duties and responsibilities, and the distinctive nature of direction. Understanding best practice relating to the selection, appointment, appraisal, remuneration, development and conduct of directors is also helpful.

Relevant information

Many directors are neutralised by too much irrelevant information. They need knowledge and understanding that is relevant to the type of company, its stage of development, ambitions, marketplace and line of business. The knowledge required by a director of a large and established public company will not be the same as that needed by the owner-director of a small start-up enterprise.

"Many shareholders and citizens must wish more directors of banks had put up their hands and asked about the meaning of derivatives and swaps."

There are certain areas of knowledge that are desirable in all directors. This includes knowledge of the business environment in which the company operates, the specific company and board.

Specific company knowledge is likely to include understanding the requirements of stakeholders, strategic options and risks, corporate strengths, weaknesses, opportunities and threats, corporate vision, mission, values, goals and differentiators, and the company's articles of association.

Certain governance, legal and financial knowledge is of particular value. Directors should be aware of applicable legislation, regulations and codes of practice. It may also be important to understand corporate finance and accounting principles and practices that are relevant for the company in question. They should have enough understanding of accounting and finance to critique and approve the organisation's accounts and appreciate its financial state. In tough times, when cash is tight, directors should understand their responsibilities towards creditors and know what to do if the company gets into financial difficulties.

Directors also need to understand their rights, for example the right to information, and the support they can demand from the company secretary and others.

Specific new knowledge is likely to be required at particular points in a directorial career - for example, knowledge of the role of a non-executive director or committee chairman prior to taking on a new position. A decision to float may create a requirement for knowledge on prospectus and listing requirements.

Working with other board members

A director needs to understand the people and personalities around the boardroom table, boardroom roles and relationships, board and committee structure, the direction setting processes, boardroom practices, and applicable corporate governance codes and boardroom standards.

An effective director needs the ability to use relevant knowledge in the boardroom context. The personal qualities and knowledge of an individual director are less important than how these come together with those of boardroom colleagues, to add value to the discussions and decisions. The very knowledgeable sometimes contribute little.

An effective contribution often requires a mastery of the dynamics and processes of the board, which may be different from those found in other boardrooms. A 'star' on one board may be a passenger in a different context.

Directors' development

Because someone has been effective on another board, it doesn't follow that they don't require some development. The various elements that allow a person to make a contribution in one boardroom may not be 'portable' to another situation. Directors need to keep up to date with contemporary boardroom issues and directors duties, responsibilities and liabilities.

The boardroom itself represents a potentially rich learning environment. The board as a team could review and assess decisions or developments to see what can be learned from what happened. Individual directors could adopt a similar approach to situations they encounter. Service on a number of boards multiplies learning opportunities and can hone directorial skills.

Directors need to know the extent of their own knowledge. Training may or may not be the best way of addressing a deficiency. Knowledge gaps can also be filled by briefings, securing specialist advice or bringing someone with the required knowledge onto the board.

Particular knowledge development initiatives could involve individual directors, or the board as a whole. It might also be necessary to change the structure or operation of the board to improve its effectiveness.

Enough knowledge to do the job

The acid test is whether a director has the knowledge required to discharge their duties and responsibilities. But of course it's necessary to fully understand what those duties are, and what contribution the director is expected to make.

Among chairmen there is greater consensus than in the past about the overall contribution directors ought to make. However, the contribution expected of many executive directors continues to be expertise, knowledge and experience of their own areas. Because executive directors generally have both managerial and directorial responsibilities, they will also require knowledge that is relevant to their executive role.

A director who is in doubt regarding the contribution expected of them should consult with the chairman. A director who is in doubt about any aspect of the business should ask for clarification. Ignorance cuts little ice during legal cases and formal investigations. Many shareholders and citizens must wish more directors of banks had put up their hands and asked about the meaning of derivatives and swaps, and whether the related risks were fully understood.

Colin Coulson-Thomas is author of 'Developing Directors' and 'Winning Companies; Winning People'. He is an experienced director and professor of direction and leadership at the University of Lincoln. He has advised over 100 boards on director, board and business development. He can be contacted via his website: www.colincoulson-thomas.com

'Developing Directors' is published by Policy Publications and can be obtained from www.policypublications.com