The Feltex decision : A case of threadbare governance

The Feltex decision, as it may become known, is distraction from what is really wrong with governance in New Zealand and many other parts of the world. It is, in effect, real example of board not performing its fundamental governance role and responsibilities.
Unfortunately, the wider Feltex governance shortcomings have been sidetracked by the Auckland District Court decision to dismiss all Ministry of Economic Development-inspired charges taken under the Financial Reporting Act 1993 against five Feltex directors. And, of course, there are other similar cases pending against Lombard and Nuplex directors.
These cases are primarily about compliance with legal and regulatory obligations. But it is the fundamental responsibility of directors to act in the interests of company and provide effective stewardship. Compliance is given in director responsibilities. It is not the fundamental measure of governance performance.
In reviewing the messages from this case it is critical to remember that the fundamental purpose of governance is to deliver organisational performance, always ensuring that relevant laws and regulations are complied with.
In addition to complying with the laws of the land, directors must ensure the company also complies with accepted accounting standards. But the director’s role and responsibilities are more than that. That’s why they are paid so much.
In her 59-page decision, Judge Jan Doougue said: “There is not one skerrick of evidence to suggest any intention by them (the directors) to mislead the regulatory authorities, market, shareholders, creditors, potential investors or any other person.”
It’s not question of misleading – it is, in my opinion, question of them not performing their full governance role and responsibilities.
Above all, directors have stewardship role and responsibility to the company’s shareholders. To deliver that, directors must, from time to time, obtain advice from specialists. Lawyers, for example, evaluate against the law and advise directors accordingly. Accountants do the same against accounting standards. Directors review the advice and use it to make governance judgments from their perspectives as board members.
Good boards comprise individuals of relevant competencies, backgrounds and perspectives. Directors must work together, considering all inputs and perspectives, and ensure that legal and accounting requirements are satisfied.
To prove effective stewardship, directors may have to go beyond ensuring that minimum legal and accounting requirements are met and consider everything possible that is relevant to the management of the shareholders’ interests – property, finances, or other affairs. That is the directors’ responsibility and what they are paid for.
The accountants might be correct. The judge might be correct. But governance is more than that.
Directors add value and earn money by adding total perspective, embracing the legal and accounting advice and all the other dimensions. Directors must add value in terms of their stewardship of shareholder interests. This was not apparent in the governance of Feltex.
Directors’ obligations are spelt out in The Companies Act. Company directors must act in accordance with these duties. The Feltex case begs consideration of three obligations in particular:
1. The duty to act in good faith – with honesty, integrity and sincerity of intention – in the best interests of the company;
4. The duty to exercise reasonable care and skill – apply experience and expertise to the role of director, in the best interests of the company;
8. The directors are fiduciaries, and owe fiduciary duties to the company.
Above all they are, in all their duties, required to act “in the best interests of the company”.
The five directors were charged with breaches of the Financial Reporting Act 1993. The charges related to failing to publish breach of Feltex’s banking covenants and not properly classifying its $157 million debt facility with the ANZ Bank in the company’s December 2005 half-year accounts.
The directors knew Feltex would need to repay the $157 million to ANZ within the next year. The question of not properly classifying this in the company’s accounts was not question of interpreting the standard; it was question of the directors deciding not to disclose the fact. While this was not breach of the law – it was bad governance.
That the directors knew they had breached their banking covenants was not question of interpreting the standard, it was matter of interpreting the contract they had with ANZ and disclosing the fact. They chose not to. Again, this was not breach of the law – it was bad governance. The shareholders and investors were not informed.
The Feltex directors later conceded the details were not reported in the company’s interim accounts, but claimed at the time they signed the documents they believed the statements met all the required accounting standards for listed company. That’s simply not good enough. The shareholders and investors were not informed.
My concern is about directors performing their duties, meeting their obligations to shareholders and stakeholders, and delivering standards of good governance. These go far beyond complying with
accounting standards and legal requirements. In the Feltex case, the directors might have complied with the standards, but they failed in their duties to the company and its shareholders. They failed as directors.

Doug Matheson is the author of The Complete Guide to Good Governance and Great Governance and professional director and governance consultant.

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