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THE ISSUE: Important to understand responsibility

Natasha Beckles

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Directors assume a significant amount of responsibility when they agree to oversee the affairs of companies on whose boards they sit.  
However, as the issue of corporate governance gains global and local attention due to perceived failings on the part of some boards of directors, one has to ask whether those who serve are adequately prepared to do so.
Last year local private and public sector directors benefited from presentations by two international corporate governance specialists.
The first was the academic director of Directors Education Programme (Canada), Richard Powers, who led a workshop hosted by Certified Management Accountants.
His programme is considered to be among the most robust accreditation programmes in the world for governance in the corporate and non-profit sectors. Among his many pieces of advice was that personal relationships between corporate directors should be made known in the interest of good corporate governance.
Powers noted that according to the Sarbanes-Oxley Act, directors on a board should be independent but relationships were inevitable in small societies like Barbados. He said interlocking directorships – when directors sit on the boards of different companies together – broke down the objectivity of decision-making.
He noted that such directors often developed friendships and when one put a motion on the table, he knew he could count on his friend’s support.
“When the average size of a board is between nine and 12, a voting bloc of two can have a significant influence.
“Good governance practices tend to migrate from one board to another but the corollary is also true; poor governance practices tend to migrate from one board to another as well,” he said in the May 5, 2011 DAILY NATION.
Powers added that directors must be upfront about conflicts of interest.
“You have to declare the conflict. Do not participate in the discussion,” he said, noting that the board member should also leave the room since other directors may be hesitant to ask “some of the tough questions if he’s there”.
He noted that the director’s absence must be recorded in the minutes in order to ensure that his reputation was protected and the decision-making process was fully transparent.
Powers also advised company directors not to keep meeting notes for extended periods of time and stressed the difference between director’s notes and meeting minutes.
“Director’s notes are . . . the notes you’re scribbling down as the issues are discussed. When you talk to corporate lawyers, they say keep them. [When] you talk to litigators, they say get rid of them,” he said in the May 9, 2011 BARBADOS BUSINESS AUTHORITY.
He noted that while some people like to be able to revisit their notes if they need to justify a decision they made, “litigators can make those notes say anything that they want them to say” since they often are not in complete sentences.
He added that notes can also be quite damaging.
“Think of if you’re letting the CEO go . . . and you’re sitting there and you’re writing ‘this guy is a jerk’. Think of if that comes up in a wrongful dismissal suit. Does that show a bias, perhaps?” he asked.
He said since the minutes are an official record of what took place at a board meeting, personal notes should only be kept until the next meeting.
“Once you’ve had an opportunity to compare your notes to the meeting minutes and you’re satisfied that those minutes capture the discussion and the decisions that were made, why do you need your notes?”
The specialist went on to suggest that local corporate directors should ensure that they not only have directors’ and officers’ liability insurance, but that their policies contain a run-off provision.
Directors’ and officers’ liability insurance is payable to the directors and officers of a company to cover damages or defence costs in the event they suffer such losses due to a lawsuit for alleged wrongful acts while acting in their capacity as directors and officers.
A run-off provision covers them for a period of time after they no longer sit on the board.
Powers urged board members to consider “what happens if someone sues the organization after you’ve left the board but they are referring to an incident [that took place] while you were on the board”.
“What you want is a run-off provision. Without the run-off provision, you are personally liable.
You may have done nothing wrong but you’re going to have to fund the defence costs,” he said.
Powers told the directors that due diligence, indemnity and a proper insurance policy were critical in protecting against liability.
Meanwhile, Professor Bob Garratt, an adviser on board effectiveness and corporate governance to KPMG LLP, urged Barbadian companies to be careful about how they used the title “director”.
Speaking during a strategic thinking workshop hosted by the Barbados Youth Business Trust, he noted that while human resource departments could sometimes give out the title arbitrarily, this practice was illegal in many Commonwealth countries.
“Human resource departments can be very naughty in this area. [They would say] ‘We can’t pay you any more this year but we’ll make you director of something’.
“That is an illegal act because only people who are statutory directors and who have signed the right forms as a director of the board of that organization can be directors,” he explained in the July 25, 2011 BARBADOS BUSINESS AUTHORITY.
“A lot of people don’t realize that. A lot of people put themselves in quite a risky position because under most Commonwealth countries’ laws, if you hold yourself out to be a director and you are not, that is a criminal activity,” he said.
The academic who also specializes in organizational change noted that even if this practice is not a crime under a particular country’s laws, “it’s a civil tort and you can be fined a large sum of money for doing that”.  
“You have to be very, very careful with the term director. The term manager is much easier to use,” he said.