12 Oct 2018
By Janice Hughes, Director, Aspiring Law
It never fails to amaze me that there are people who take up governance roles without one iota of due diligence on the organisation or apprising themselves of the many, varied and weighty responsibilities all directors – regardless of the company’s size or its line of business – sign up for.
The company buck stops with the board in virtually every area. As well as the fundamental solvency requirement, there are so many responsibilities spelled out in the Companies Act, general law and in each organisation’s constitution (essentially the rulebook), I can’t cover them all here, but let’s touch on some of the key areas.
Fancy some light bedtime reading? If you are a director, or considering taking up the invitation to join a board, your duties to comply fully with the Companies Act and general law mean you must be au fait with all the relevant legislation – everything from good employer practices and workplace health and safety requirements, to the financial nitty gritty.
You are, by law, required to act in good faith at all times, and in the best interests of the company – any skulduggery, dishonesty or hidden agendas are verboten. And, anyone who thinks a directorship has the potential to feather another of their business nests should do quite a bit more bedtime reading, particularly around conflicts of interest, paying particular attention to the painful penalties.
My advice around conflicts of interest generally amounts to: if in doubt, stay out. That’s right: err on the side of caution. And, if you find yourself in a grey area but are still tempted to proceed, don’t do so before seeking independent legal advice.
Directors must also always exercise “power for proper purpose” – remembering it’s possible to act in the best interests of the company but use improper tactics.
Arguably, one of the toughest areas directors face is around prudence, and ensuring you do not, in any way, condone anything that could bring about substantial losses. A good litmus test for this one is: if the deal goes belly up, could the company survive, and could you justify the board’s decision?
It’s not to say the law demands directors take no risk – you just have to be able to prove, if things to turn to custard, that it was an informed risk, and in no way reckless. Quality research and documentation are good for starters.
Just a wee word, too, for “sleeping directors” … those who stay at arm’s length, aren’t up-to-date with what’s going on, and, in a good year, turn up to a meeting or two. WAKE UP! Either relinquish your role or get with the programme. Ignorance is no defence – even if your involvement has been loose, you’re as liable as the next director if your organisation hits the skids.
The same warning applies to “shadow directors” … those not officially on the board, but whose advice and input amounts to a director’s role. Again, if things go pear-shaped, you could find yourself for the high jump, too.
Remember, also, you may vote against a decision you consider foolhardy, but, if the board proceeds, you may still share the collective responsibility.
Ensure you’re insured
Specialist director and officer liability insurance provides protection for some situations – but make doubly sure you have the right policy with the right cover and that you’re aware of any exclusions.
When the business going gets rough, the Band-Aid can be ripped off most unpleasantly. If, at any stage of your directorship, you’re not completely clear on your responsibilities, or you’re concerned about any aspect of the company over which you preside, seriously consider getting independent advice.
If you are party to a decision the courts find negligent, you may be held personally liable – and, in extreme cases, even face criminal charges.