The UK High Court case of Newcastle International Airport Ltd (NIAL) v Eversheds LLP has highlighted the importance of a Non-Executive Director’s (NED) exercising their role with due care, skill and diligence and shown what can happen if they don’t. Serving as a timely reminder, the Institute of Chartered Secretaries and Administrators (ICSA) in the UK has recently issued guidance to NEDs aimed at helping them conduct themselves so that they could demonstrate to a regulator or the courts that they have taken appropriate steps to exercise care, skill and diligence and thereby avoid personal liability. This article considers both the outcome of the NIAL case and the ICSA Guidance which offers some useful reminders to NEDs on their role and obligations.
NIAL v Eversheds
The case involved the preparation of executive director service contracts by Eversheds containing valuable bonus entitlements. The NIAL board was comprised of two executive directors and five NEDs, including the Chairperson. The board had a remuneration committee whose function was to determine NIAL’s policy on behalf of the board in respect of senior executive remuneration. All five NEDs were members of the remuneration committee and the Chairperson of the board also chaired the committee. In 2005 when the executive directors’ contracts came up for review, Eversheds received instructions directly from the executive directors in question rather than the remuneration committee. It transpired that despite discussions at remuneration committee meetings regarding the new contracts and the Chairperson reviewing and executing the final drafts of the contracts on behalf of NIAL, none of the members of the remuneration committee had properly understood at the time that; they enabled the executives to claim bonuses totalling £8 million; and that the new contract of one of the executive’s released him from a restrictive covenant intending to restrain him from working at or for a competing airport.
NIAL brought an action for negligence against Eversheds claiming that it knew that the executive directors had a conflict of interest with NIAL in negotiating the contracts. Further, as Eversheds knew that the company had a remuneration committee it should have determined the wishes of the committee through direct correspondence with the Chairperson. It should not have taken instructions from the executive directors themselves but should have put the various options to the Chairperson for her consideration.However, NIAL did not succeed in its claim. The presiding Judge found that ‘Eversheds acted in good faith on the basis of instructions which it was entitled to accept’ and ‘the real reason that NIAL suffered loss was because its NEDs failed to carry out their obligations to NIAL’.
The Court found that the remuneration committee had failed in its function to properly assess the new contract terms. The process the committee followed in considering the proposed variation to the terms of the contracts was inadequate; there had been poor consideration of the committee meeting papers, the external advice, and the legal contracts. The poor communication between the members of the committee further exacerbated the situation.
The Chairperson was the subject of particular criticism with the Judge stating that she 'did not bother with minutiae; she concerned herself only with the broader picture' and that 'any advice which Eversheds might reasonably have been expected to give [the Chairperson] would not have been heeded, as she did not read legal advice'.
The Judge further noted in respect of another of the NEDs that 'his overall approach was clear: he did not regard it as part of his duties to consider anything in the committee meeting papers unless somebody else drew his attention to it'. It was this NED’s view that the blame rested with the Chairperson for not doing so.Although NIAL has been granted permission to appeal the decision, the initial finding is a stark reminder of the repercussions for a company and its board where its appointed NEDs do not fully appreciate the requirements of their role and the importance of carrying out their duties with due care, skill and diligence. It should further serve as a reminder to NEDs of the duties owed by them in the performance of their role and the manner in which these responsibilities should be carried out so as to avoid incurring personal liability.
ICSA Guidance on Liability of Non-Executive Directors: Care, Skill and Diligence
The ICSA guidance note: ‘Liability of Non-Executive Directors: Care, Skill and Diligence’ is a timely reminder of the duties owed by NEDs. The guidance includes steps that NEDs can take to help them demonstrate to a regulator or a court that they have exercised care, skill and diligence in the execution of their role and responsibilities.
The guidance highlights areas of best practice for NEDs both pre and post appointment to a board.ICSA’s suggestions to NEDs, prior to joining a board, include that NEDs should:
- Carry out their own due diligence to make sure the company is one in which they can have confidence and to which they can make a strong and value added contribution. The NED should ascertain the culture, value and behaviours associated with the particular board in order to satisfy themselves that they can uphold standards of integrity and probity;
- Understand that more is expected from a director with a specific skill or specific experience. As such, time should be devoted to refreshing these specific skills; and
- Review their letter of appointment and raise any concerns before signing. The letter should state the minimum time commitment expected and the possibility of additional time commitments.
Once appointed to a board ICSA recommends that NEDs should make sure that they:
- Input into their induction training. NEDs should receive a comprehensive, tailored induction but they should take responsibility for their on-going training and continuous development and request support from the company, when necessary;
- Receive a schedule of future board and committee meetings in advance so they can make sure they attend. They should also ensure that they receive high-quality information sufficiently in advance of meetings;
- Are prepared to provide independence, oversight and constructive challenge to the board;
- Make decisions objectively and in the interests of the company; and
- Speak to the company’s executives at any time about any concerns they may have. They should also take independent professional advice at the company’s expense if they consider it necessary.
The guidance also offers some useful general tips. It states that it is important to realise that the time commitment necessary to fulfil the expectations of the role may be significant, and possibly greater than has previously been expected. When determining whether a NED has breached his or her duty to exercise reasonable care, skill and diligence, a court would consider the steps a reasonably diligent NED in the same position would have taken to familiarise themselves with the company’s business and operations.
The guidance explains that certain elements of the UK Corporate Governance Code that describe the role and responsibilities of a NED are likely to be relevant to a court’s assessment of the NED. It is the responsibility of each NED to reach a view as to what is necessary in the particular circumstances to comply with the duty of care, skill and diligence they owe as a director to the company.
As Seamus Gillen, ICSA’s Policy Director said in the press release regarding the guidance, “Becoming a director confers many privileges – of power, influence and status. But the position also carries great responsibilities. No director wants to make the kind of mistake that sees them lose their house, or their reputation, and even less face legal action. This new guidance directly addresses a question we are often asked – what do we need to do to stay out of jail? It will help directors conduct themselves in a way which avoids lasting damage both to themselves and their company.”