BSOG 1.3 Constitutional matters

Building societies have a particular constitutional form: they are mutuals run for the benefit of their members (i.e. their borrowers and savers). A society cannot therefore be owned or controlled by an outside institution or major shareholder. Society boards and management have a special responsibility to protect the interests of their members through the highest standards of corporate governance.

Although societies are not publicly quoted, they should have regard to the UK Corporate Governance Code or the 1Combined Code as appropriate 1when they establish and review their corporate governance arrangements.

A building society's directors are elected by its members. Subject to certain exceptions, any natural person may be elected as a building society director (section 60 of the 1986 Act). Members have the right to nominate any candidate for election. Unless that person is subject to a prohibition order made under section 56 of the Act2, the board cannot refuse to accept a candidates nomination because the board does not regard that person as fit and proper. Prior to the election, the board should take reasonable steps to establish whether there are any facts or matters concerning the candidates fitness and propriety which the members should be aware of. If there are, the board should bring them to the members' attention before the election takes place. The Prudential Regulator2 will not vet candidates for election.

A person elected as an executive or non-executive director of a building society must not exercise a controlled function unless the appropriate regulator gives its approval (sections 59 and 60 of the Act). The appropriate regulator will not approve a director unless it is satisfied that he meets, and will continue to meet, the Fit and Proper Test for Approved Persons (see the Fit and Proper Test for Approved Persons sourcebook in the Handbook (FIT)). An approved person must also comply with the requirements of the Statement of Principle and Code of Practice for Approved Persons sourcebook in the Handbook (APER).

Part VII of the 1986 Act contains requirements relating to the management of building societies.

Every building society must have at least two directors and one of the directors must be appointed chairman (section 58 of the 1986 Act). The chairman should not hold an executive position in the society. This helps to separate strategic direction from the day to day management of the business and helps the chairman to take an independent view of management issues. It also protects against undue concentration of power.

Every building society must have a chief executive (section 59(1) of the 1986 Act). The chief executive should be a member of the board.

A small building society may not need as many executive directors as a large building society, but every society should have at least one.

Given the mutual status of building societies, a clear majority of directors on a societys board should be non-executive. Non-executive directors should not be given the expectation that they will remain on the board until retirement. They should serve for a fixed term, both initially and for any subsequent term. The appropriate ratio of non-executives to executives will vary with the scale, nature and complexity of the societys business.

It will rarely be appropriate or desirable for a chief executive or other executive director to remain as a non-executive board member after his or her retirement.

The board should have an appropriate range of skills and experience to control and direct the societys activities effectively. The composition of the board should be reviewed at regular intervals to ensure that its management and other resources are at least adequate for the society's current business and the business it proposes to undertake.

When a director is to be appointed under a formal service contract, the board should consider carefully the terms of the contract it offers. When it does so, it should take into account (for example) the need to attract and retain directors with appropriate experience, knowledge and skill; the need to preserve the boards freedom of action; the potential cost of the contract proposed; the period of notice the society will have to give, and the potential liability it will incur, if it terminates the contract other than for misconduct. The objective should be for notice or contract periods of one year or less.

The Accounts Regulations require a building society to give particulars of its directors and chief executives service contracts in its annual Report and Accounts. If there are no service contracts, the building society should say so.

Every building society must have a secretary (section 59(2) of the 1986 Act). The secretary should ensure that board procedures are followed and regularly reviewed. He should also provide guidance on the boards responsibilities and how they should be discharged.

Part VII of the 1986 Act places restrictions on certain types of dealing between a building society and its directors. For example:

1. (1)

   it requires a director, who is interested in a contract with the society, to declare that interest to the board (section 63 of the 1986 Act); and

2. (2)

   it prohibits a building society from entering into an arrangement, by which a director will acquire a non-cash asset of more than a certain value from the society, unless the society has approved the arrangement by resolution at a general meeting.

A building society should maintain written procedures and controls which ensure compliance with these restrictions.

The 1986 Act also restricts a building societys ability to make loans to a director or a person connected with a director (section 65 of the 1986 Act). In the circumstances, it would be inappropriate for a building society to follow its usual loan procedures when a director or connected person makes a loan application. The responsibility for approving such loans should not rest with staff members, even if the loan falls within a normal staff mandate. A building society should have written procedures for dealing with loan applications from directors or persons connected with them and every director should be familiar with them. Those procedures should include consideration by the board, or a board committee, before any loan application is approved. That review should have regard, for example, to the terms of the proposed loan and whether it is permitted by the 1986 Act.