Directors should never sleep

By Peter V O'Brien

Friday 15th November 2002

Revelations of sudden writedowns at Tower raises the issue of company directors' activities. Tower's details were reported in The National Business Review last week.

Acting chief executive Keith Taylor said items leading to substantial writedowns, which would affect profit for the year ended September, were matters reviewed at the end of the financial year. That was a doubtful proposition, as outsiders noted in the NBR report, given the matters involved capitalised expenditure, capitalised losses, insurance experience losses and investment losses related to assets backing an annuity fund.

Investment losses should not suddenly be revealed at the end of a year after actuaries went to work, though it would be understandable given the general investment situation over the past 12 months.

People have argued Tower board members should resign. That was also understandable, particularly when one remembers former chief executive James Boonzaier "resigned," apparently at the board's behest.

The Tower board will defend itself. It could need to show directors, collectively and individually, acted in accordance with the rules governing their conduct.

The Companies Act and case law describe those rules. Sections 131 and 137 are the key statutory provisions defining directorial behaviour. The generality of their wording would require judicial interpretation.

S131 (1) says: " ... a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be in the best interests of the company."

A director's duty of care is described in s137: "A director ... must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances ... "

The "care, diligence and skill" of a "reasonable director" is a tougher standard than the attributes a reasonable "person" would exercise in the conduct of their own affairs: an old definition of a trustee's duty. That person was famously described (in pre-politically correct days) as "the man on the Clapham Omnibus."

"Reasonable" directors of public Stock Exchange-listed companies travel in more salubrious and expensive transport, given their fee structure and what they earned in the progression to director status.

The provision that the duty of care could vary depending on the company's nature was sensible, being a "horses-for-courses" concept.

It did not change the Companies Act's clear statement that the board is responsible for a company's management.

S130 provides for delegation of management powers but says the board is responsible for the delegate's (employee's) exercise of the powers as if the board had exercised the power.

A subsection of the section removes liability if the board had "monitored, by means of reasonable methods properly used, the exercise of the power by the delegate." That means boards must ensure appropriate and regular reporting systems from management.

In the case of a financial services company, such as Tower, the board should ask management constantly about the state of investment portfolios, costs involved in acquisitions, the condition of those acquisitions and unforeseen expenses associated with them.

Anyone involved in a non-executive but monitoring role with a public company or state organisation must be prepared to offend management's collective egos and emotional susceptibilities if necessary. Explanations are required to get doubtful, or glossed over, decisions or transactions resolved.

Time, full reporting (without spin doctor waffle) and shareholders' questions could get answers to what happened at Tower and other groups such as AMP where the information is unsatisfactory.

It is interesting to note Tower's constitution must have a provision regarding directors that is unusual, but not unique, in a public company. The board has two directors aged over 70, one approaching 75. There is nothing basically wrong with that. Some people are more alert and competent in their late 70s, 80s and even 90s than others in their 50s; witness Federal Reserve chairman Alan Greenspan and the apparently ageless Alistair Cooke, whose BBC Letter From America still attracts worldwide audiences, although he is now past 80.

Directors have serious responsibilities and serious penalties for failing to meet them. They should have appropriate respect for presumed management competence but be prepared to dissect mercilessly management decisions, stripping off the corporate speak, if necessary.

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