At our recent “Chatham House” meeting (graduates of the AICD course in Perth) we discussed the issues of:
1. Some of the great practical advice that graduates of the AICD Company Directors course had been able to apply; and
2. The legal issues and risks of being a director, particularly non-executive

The course is very good at outlining responsibilities and legal issues for directors - highly recommended if you are considering or are a director. Interesting, a number of participants indicated it is significant enough for them to never consider being a director. I have asked many people including various directors as well as Professor Bob Garrett who wrote The Fish Rots from the Head, amongst other books (signed copies proudly on my bookshelf) whether they shared the view that the legal position against directors is too onerous. No one seems to share the view.

In some respects, the purpose of a limited liability company is to encourage considered risk taking. However in recent times a great deal of that risk has been transferred to the board.

I was very pleased to see a great article by John M Green in this month’s Company Director magazine that succinctly gets to the heart of the issue. He also proposes a better way.

As John describes it, the key issue is that non-exec directors fees may be (depending upon the size of the company) from $30k to $200k per year. If the company faces a significant claim, directors can face unlimited liability, a weak business judgement rule and a newly burgeoning litigation industry? So, small amount of fees against potentially catastrophic risk. He makes a very good point.

Non executive directors are always going to be disadvantaged in business knowledge as compared to company management. Those people who have the talent to be non-executives also potentially can add value to companies by consulting - without the legal liability, and with the ability to involve their own consulting firm to deliver on other projects to the company without conflict of interest becoming an issue.

Non execs play an important role however in the governance of companies - and the role is required as more companies take the path of listing to expand their capital base.

John M Green’s suggestions (to apply only if fraud hasn’t occured):
1. Cap NED’s liability in proportion to their fees
2. Consider Charity NED’s and cap a fixed flat amount
3. Consider NED’s shares as part of settlement.

In summary, the reason why many people I have asked indicate that nothing is wrong with the current system is that the penalties are necessary to have big deterrents to avoid situations like HIH. I agree wholeheartedly. The area of reasonable concern is where directors act in good faith, being diligent and genuinely acting in the company’s best interests. Potential consequences are catastrophic but the rate of prosecution is low. John’s suggestions leave the big stick against fraud, but provide a more sensible position for NEDs. I look forward to the outcome of the government review in this area.

What do you think? Please leave your comments on your experience and views.