In fact, fear of falling foul (unwittingly or otherwise) with more onerous legislation like the Commerce Act 1986, the Companies
Act 1993, Resource Management Act 1991, Employment Contracts Act 1991 (as is), Health and Safety in Employment Act 1992, the Building Act 1991, The Privacy Act 1993, Fair Trading Act 1986 and Financial Reporting Act 1993, means more executives are saying… “thanks but no thanks!” when directorships are being dished out.
Former chairman of Ceramco David Appleby believes risks from growing cascade of procedural disclosure requirements and compliances to avoid fines and possible criminal prosecution, far outweigh the rewards. One of the problems, says Appleby, is that fees paid to directors bare no correlation to the fees paid to professional contractors.
“I would be reluctant to take up other directorships in other public companies. Directors fees should equal the $300/hour being paid to senior partners of larger accountancy and law firms.” The real danger with such low fees is directors end up restricting their involvement to reflect the fee, and that’s when they’re most at risk.”
From the Institute of Directors’ perspective, the poor reward/risk ratio adds to long list of reasons why smaller companies can’t attract non-executive directors. And even some of the country’s top consulting firms have banned their members from going on boards for this reason.
Colin Notley, managing director of Christchurch-based Cowles Mitchell Beadon, doesn’t blame them. He decided to withdraw from board appointment because the company withdrew the liability cover. He says the liability cover issue is growing burden for larger companies as well as their publicly listed counterparts.
“The risks are too high for people to take chances. There’s growing community awareness of the laws governing directors behaviour.” Notley suspects, it’s only matter of time before individuals start saying to each other… “let’s take these directors on in the courts”.
And Chris Ryan, CEO with the Insurance Council, believes management and directors running “new-economy” companies and tech-stocks will be the first to receive shareholder wrath if they can’t deliver on robust forecasts. “The added complication and international nature of e-commerce widens exposure to litigation. This is why indemnity is the fastest growing insurance sector globally.”
A perusal of Brooker’s Director’s Duties Handbook leaves no illusions as to why directors and company officers need adequate indemnity. In short, the personal risks directors take-on are huge. In many cases, risks drill down well below senior management to rank-and-file employees. The bottom line, says Craig Lankstone, partner with Auckland’s specialist insur-ance litigation practice Jones Fee, is there are risks for individuals that no one in managerial/directors position should overlook. Assuming directors exercise ?due diligence’ in carrying out their duties and there are effective corporate governance structures, plus adequate insurance cover… risks can be minimised.
But Lankstone says while individuals within large corporates are usually well protected, those running SMEs often under-estimate risk and hence under-insure. “Good disclos-ure is the key to keeping abreast of new legislation. While larger corporations show responsible attitude, it’s not always universal.”
Nevertheless, Lankstone adds, an increase in private litigation (class actions), especially for punitive or exemplary damages where there is gross negligence to employees or customers, has heightened general nervousness about protecting personal assets. Despite the potential for greater penalties entwined within various legislation, lack of precedent means individual rights and liabilities remain largely untested. Much of this, says Lankstone, has to do with the way many Acts (like Health and Safety and Resource Management) have been written. Relying more on regime of self compliance, they lack clearly defined prescriptive guidelines.
But the Commerce Commission which monitors breaches under the Commerce Act, Fair Trading Act and Electricity Industry Reform Act has demonstrated it’s prepared to take action against individuals as well as companies where necessary.
Directors and company representatives escaped prosecution over the recent petrol industry price-fixing saga. But that hasn’t always been the case. Successful actions brought against senior managers under the Commerce Act include:
? CEO of Christchurch transport company for price fixing.
? Regional manager of BP for price fixing.
? CEO of Hawkes Bay company (Lowe Walker) for resisting search warrant.
Meantime, directors have been found liable under the Companies Act. The Ministry of Commerce has evoked section 385 of this Act to ban directors for up to five years from being involved in further company management. The Act states: Individuals who cease to comply with the “two strikes you’re out” rule, may expose themselves to maximum penalty of five years’ imprisonment or $200,000 fine.
Principal Geof Shirtcliffe, of Wellington-based law firm Chapman Tripp, says the Companies Act 1993 has virtually taken the director/executive relationship and turned it on its head. The Act says directors can’t rely on the company’s senior executive team to exercise competence within relevant areas, unless they have made reasonable efforts to ensure these competencies exist.
“Directors can’t afford to think that as long as they don’t know what’s going on in the company, they’re not liable, unless they’ve got enormous asset protection.”
Two areas where directors unwittingly expose themselves to Companies Act risk says Shirtcliffe, include:
? Directors of private companies can’t buy or sell shares for less or more than “fair value” assessed by reference to information they have available. This provides potential for action to reopen the bargaining at some time down the track.
? How directors use company information. Directors’ protocols typically bridge the gap between strictly legal and an acceptable commercial position.
A recent spate of work-related deaths has also shown OSH equally willing to bring court action against breaches to the Health and Safety Act. Employees are prevented under the Act from taking their employers to court over workplace injury. However, employers who don’t comply with the Act can be fined up to $100,000. And those who know-ingly expose their staff to danger in the workplace can receive jail sentence under the Act’s section 49.
Nevertheless, the sheer costs involved in going to trial means 95 percent of disputes are settled long before they get anywhere near court. But Lankstone suspects that could change if recent trends in Australia catch on here.
Liquidators, typically too cash-strapped to pursue directors are now being funded by operators who will take share of the monies received. He says migration of this trend into the private litigation domain, (as with personal grievances cases), could boost the number of cases that end up in court. He also believes that plans to extend the ERB to cover indirect sexual and racial harassment, will only fuel more, not less employment court action.
Lankstone says the gap between good corporate governance and individual protection is directors and officers liability insurance. This typically covers any claims arising from alleged default as an officer of the company.
Like Shirtcliffe, Lankstone says directors/management must realise that this cover might not be honoured if they knew about potential risk, but didn’t take adequate steps to fix it. Nor will insurance cover fraud, other criminal liability and in some cases, gross negligence. “The difficulty comes in the middle, which is why litigation can become necessary outcome.”
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