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How should I behave as a director?

- SATIB InsuranceHow should I behave as a director?

Facebook Design for third article D&O

When determining whether a Director complied with his or her fiduciary duty, the court may consider whether, in the circumstances, a reasonable person could have believed that the act was in the best interest of the company.

 

Directors of a company may be held jointly and severally liable for any loss, damage or costs sustained by the company as a result of a breach of the Director’s fiduciary duty or the duty to act with care, skill and diligence. The Act sets out a range of actions for which Directors may be held liable. Such actions include:

 

  • acting in the name of the company without the necessary authority,
  • being part of an act or omission while knowing that the intention was to defraud shareholders, employees or creditors,
  • signing financial statements that were false or misleading in a material respect,
  • a director should acquire at least any understanding and keep informed of the business activities and the industry in which the company is engaged;
  • a director should be familiar with the financial status of the company by a regular review and understanding of financial statements;

 

This list is not exhaustive and whilst a director is not an auditor, he/ she should still have a questioning mind. A Director is not relieved of the duty of paying attention to the company’s affairs which might necessitate the need to inquire of management, or even an external consultant, if something lies outside the area of their expertise.

 

Conclusions from a case where Directors were found to have jointly misstated the financial statements (many unwittingly) read:

 

“All Directors must carefully read and understand financial statements before they form the opinions which are to be expressed (preferably in writing at Board meetings). Such a reading would require the director to consider whether the financial statements were consistent with his or her own knowledge of the company’s financial position.”

 

“Nothing I decide in this case should indicate that Directors are required to have infinite knowledge or ability. Directors are entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company. What each Director is expected to do is to take a diligent and intelligent interest in the information available to him or her to understand that information”

 

A Director must understand his/ her responsibility, record their thoughts on a matter and ultimately have Directors and Officers liability insurance to defend them if needed.

 

Glossary:

Directors liability: any loss, damage or costs sustained by the company as a result of a breach of the Director’s fiduciary duty or the duty to act with care, skill and diligence.