Spotlight on duty of directors

13 June 2012

Spotlight on duty of directors

The decision in the latest instalment of the long-running James Hardie litigation, in which seven non-executive directors breached their duties, makes the high standards of responsibilities that already exist for directors even more explicit.

It also underscores the importance of directors carefully reviewing board minutes and announcements before they are approved.

The case originated in claims for compensation that James Hardie faced in 2001 in relation to its manufacture and supply of asbestos. It centred on allegations of the company’s directors supplying misleading information to the ASX.

The decision comes at a time when submissions are currently being made over the Financial Markets Conduct Bill, promoted by former Commerce Minister Simon Power as a "once in a generation" review of securities law.

Introduced to Parliament last October, the legislation could allow fines of up to $5million for companiesthat make misleading statements in product-disclosure statements and advertisements.

Gordon Wong, a commercial partner at Duncan Cotterill Lawyers, said that New Zealand could learn several important lessons from the James Hardie case.

“Directors will be judged not only in light of what they know but also on what they ought to know. Particularly if they are placing reliance on management and professional advisors.”

Lessons learnt include:
• Directors must be vigilant at each board meeting. They must be assiduous in asking management questions and obtaining sufficient information on key issues before making decisions.
• Directors need to show proactive, inquiring minds, and be confident that the material presented to them provides a reasonable basis for the resolutions they approve.
• While directors are entitled to rely on information and advice from external third parties, each director is responsible for their own decision when approving a resolution.
• Directors who are not physically present at a board meeting should insist on having the same material as their colleagues or be satisfied that the absence of any material is not important.
• In some cases, directors should abstain from a vote rather than agreeing to a collective decision that they have concerns or reservations about. In that situation, they should request that the minutes record their reason for abstention.
• The minutes of each board meeting are a critical record of the business of the meeting and should be carefully and critically reviewed by all directors who attended the meeting before they are approved. The minimalist approach to keeping minutes should be rejected.
• A complete set of documents that is provided to the board before a meeting should be maintained by the company as evidence of what has been tabled and considered.
• Every announcement should be thoroughly verified before being released to the market, to ensure its contents are not misleading or deceptive. Draft announcements relating to matters of substantial significance to the company’s business should be approved with the board papers.
• Directors should ensure that relevant internal processes concerning preparation of draft announcements have been followed. Directors should place importance on robust communication strategies.

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