Can a virtual board function effectively?

According to the first version of the UK Corporate Governance Code, corporate governance is: “the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.” A well functioning board of directors (often simply referred to as the ‘board’) is vital to ensuring the smooth running of a limited company.

Coronavirus has created obstacles to the traditional manner in which company boards operate, namely through physical board meetings held in the office. In response, company directors have increasingly moved operations online and are conducting business virtually. We will consider whether a virtual board can function effectively.

What is a virtual board?

For purposes of this blog, a virtual board of directors is one which does not have to meet face to face in the same physical space. In other words, it is a board which can conduct its business entirely remotely.

How do boards normally conduct business?

Other than for sole directors who can make decisions on their own*, the board of directors will generally need to collectively approve key decisions and company strategy in board meetings. Board decisions (also known as board resolutions) are legally binding decisions taken by the directors of a limited company during a board meeting. According to article 7 of the model articles of association: “The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.” Article 8 of the model articles of association relates to written resolutions, which provide an alternative way of passing board decisions (ie without the need to hold a meeting). A written resolution is made under article 8 when: “all eligible directors indicate to each other by any means that they share a common view on a matter … Such a decision may take the form of a resolution in writing, copies of which have been signed by each eligible director or to which each eligible director has otherwise indicated agreement in writing.”

* Sole directors are not required to actually hold any meetings to make board resolutions, but any decisions they take must still be either recorded as minutes or as written resolutions.

Can boards conduct business virtually?

According to article 10 of the Model Articles for Private Companies Limited by Shares, there is no need for board meetings to be held in person: “In determining whether directors are participating in a directors’ meeting, it is irrelevant where any director is or how they communicate with each other” as long as “they can each communicate to the others any information or opinions they have on any particular item of the business of the meeting.” Therefore, a virtual board can conduct business as usual under the model articles, where each director is working remotely and attending the ‘virtual board meeting’. There are plenty of ways in which a virtual board can conduct meetings, including:

• Videoconferencing tools such as Zoom, Skype, Google Hangouts Chat, Apple FaceTime. It is a good idea to also provide an option for phone dial-in where a participant does not have good internet.
• Collaboration software such as Microsoft Teams. This will generally involve extra functionality such as shared documents.
• Virtual reality (VR) can recreate a board meeting in a virtual environment. However, it requires a fast internet connection in addition to special hardware such as a VR headset.
• Instant messaging apps such as WhatsApp can potentially be used to hold a board meeting. However, this can become complicated with more than a small number of participants, and there may be evidentiary problems since there is no voice or video.
• Email is unlikely to be an effective way of holding a board meeting, although theoretically it can work almost as well as instant messaging as long as each participant sends a group email in turn.

An effective virtual board meeting will also take advantage of cloud based document sharing software (eg Google Docs or Microsoft 365) so that all the participants can see the meeting agenda, add notes and keep minutes.

NB: Companies which have bespoke articles of association (ie which have not adopted the model articles in full) will need to check whether their articles require board meetings to be held in person. If their articles prevent board meetings being conducted virtually, they may need to alter their articles (see below for more information).

How can a virtual board use written resolutions?

The model articles of association (and most bespoke articles) permit the board of directors to make written resolutions. This means that company business can be conducted without the directors having to physically meet. However, unlike with board meetings where a decision can be made by a majority vote, written resolutions require unanimous approval. As discussed above, it is sufficient that “all eligible directors indicate to each other by any means that they share a common view on a matter” which can be done using virtual methods such as email. A virtual board may find that decisions which do not require much debate and are not contentious are more easily made via written resolutions rather than a virtual board meeting. An added bonus is that, since no board meeting is held and the decision is already in writing, minutes are not required.

What if the company’s articles of association require physical meetings?

Some companies have bespoke articles of association which do not allow written resolutions and specify that board meetings must be held in person. In this scenario, the only way a virtual board will be able to function effectively will be to change the articles of association to remove any such restrictions. In order to amend the company’s articles, a special resolution must be passed by the shareholders. This means that 75% of shareholders (by total voting rights of eligible members if done through a written resolution or a poll, or by number of shareholders present if voting by a show of hands) must agree to the amendments. The process of amending company’s articles is as follows:

• A vote on a special resolution can either take place by holding a general meeting of the shareholders or alternatively via a written resolution.
• The resolution and amended articles should then be filed with Companies House within 15 days of the resolution being passed.
• Copies of the amended articles and special resolution should be sent to every director and the company auditor (if applicable).

The amended articles will take effect as soon as the special resolution has been passed.

Virtual boards: top tips

A useful guidance note on holding virtual board meetings has been created by the Chartered Governance Institute (ICSA) to help companies adapt to the Coronavirus pandemic. Some of the main tips include:

• Choice of communication channel – thought should be given to the most appropriate channel of communication, whether this is videoconferencing or voice calls. Appendix 5 lists some of the most popular virtual meeting software including Zoom, Skype, Microsoft Teams etc. The organiser should consider whether all of the directors have fast enough internet to use videoconferencing (if not, they should be given the option of dialling in).
• Prep – instructions should be prepared and distributed to all the meeting participants in advance, particularly if this is the first virtual board meeting. Basic instructions should be provided for less tech savvy directors with details of any software which needs to be installed and how to use it. It may even be a good idea to hold a ‘test call’ – especially for anyone new to videoconferencing technology – so that everyone knows how to switch on microphones and webcams and see if their internet connection can handle the call. A meeting agenda should also be prepared and either emailed to all the participants in advance or made accessible on a cloud platform (eg Dropbox).
• Laying the ground rules – since many (or all) of the directors will be logging on from home, it may be a good idea to provide tips on virtual board meeting etiquette. This can range from wearing appropriate attire to muting microphones in noisy environments. If there are a lot of participants, it may be necessary to adopt a system of putting virtual hands up and being selected by the chair before talking.
• Tech savvy chair – the chair of the virtual meeting should be especially familiar with the technology being used so they can intervene if one of the directors is encountering technical problems. In order to be a valid meeting, all the directors should be able to fully participate and the chair should be vigilant that any technical glitches do not cause problems with communication.

Virtual boards should also be cognisant of cybersecurity threats and directors should ideally be provided with an IT security policy, detailing the main threats to look out for – particularly if the virtual meetings involve trade secrets or other sensitive information.