Recent comments by Chief Justice Susan Denham have highlighted the need for directors to act ethically and to do the right thing in managing their companies.
Speaking at the launch of the Courts Service annual report for 2012, the Chief Justice said the financial crisis had uncovered malpractice in business as figures for 2012 revealed a 50% increase in the number of orders to restrict company directors and a 350% increase in the number of company directors disqualified as compared with 2011. She emphasised that Ireland’s boardrooms must be mindful of ethics rather than keeping a “a constant eye on the needs of shareholders” if trust in the economy is to be rebuilt.
The Chief Justice said that boards of directors hold a privileged position of trust, “they are relied upon, primarily by the company and shareholders, but also employees, customers, suppliers and the public at large," she said, adding that we rely on boards to "do the right thing". She also said that “knowing what the right thing to do in a situation, and then doing it, comes from exercising no small amount of courage”.
The increase in restriction and disqualification figures is a useful reminder to directors to take steps to understand their role, perform it effectively and thereby reduce their exposure to personal liability.
Tips for Non-Executive Directors – Managing Personal Liability
On a related note, earlier this year, the UK Institute of Chartered Secretaries and Administrators (ICSA) issued guidance for non-executive directors (NEDS) suggesting ways in which they can take action to demonstrate to a regulator or the courts that appropriate steps have been taken in exercising care, skill and diligence in their roles, thereby reducing their exposure to personal liability. The guidance highlights areas of best practice before and after-appointment as a director.
Before joining a board, NEDs should:
- Carry out due diligence to satisfy themselves that the company is one in which they can have confidence and to which they can make a strong and value-added contribution
- 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 and devote time to refreshing these specific skills
- Review their letter of appointment, in particular the minimum and additional time commitments, and raise any concerns before signing
- Understand company law requirements in relation to conflicts of interest, and gifts and hospitality
- Once appointed to a board, NEDs should make sure that they:
- Contribute to the planning of their induction programme and take responsibility for their on-going training and continuous development
- Ensure that they receive a schedule of future board and committee meetings and high-quality information sufficiently in advance of meetings
- Provide independence, oversight and constructive challenge to the board
- Make decisions objectively and in the interests of the company
- Raise any concerns with the company’s executives at any time and take independent professional advice at the company’s expense, if they consider it necessary
In the context of Irish court decisions and changes in Irish company law signalled in the Companies Bill 2012 which require non-executive directors to exercise high standards of skill, care and diligence, this recent guidance is highly recommended reading for all directors.
To read a more detailed article on this topic, please click here.