In article one of this series we touched on the possibility that Directors, which includes Prescribed Officers, can be sued by any stakeholder that has suffered a loss. Stakeholders include staff, suppliers, shareholders and Government departments. We also noted that Directors can be held liable jointly (i.e. the entire Board including Prescribed Officers) or individually.
Executive directors work in the business and non-executive directors don’t. An independent non-executive director does not work in the business and doesn’t have any dealings, presently or in the immediate past, with the business. All these different designations of directors are potentially equally liable.
A Director acts in a fiduciary capacity towards company. The fiduciary duties of Directors include the duty to exercise their powers in the best interest of the company.
To expand on the term, ‘conflicts of interest’, a Director is accountable to the company for secret profits made by virtue of their position or from the “stealing” a corporate opportunity. A Director must also not compete with the company or allow their personal interests to interfere with their duties.
In simple terms this means that the interests of the company must come first, and all actions/ decisions should be for the benefit of the company. That is why any dealings with the company, where a director or any family member stand to benefit, must be disclosed and the director with the conflict should leave the room when that decision is made.
A Director must also act in good faith and for a proper purpose, with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions and having the general knowledge, skill and experience of that director.
Being a director is no longer just a prestigious title. It can have devastating effects if one doesn’t know how to mitigate and transfer risk. In the coming articles in the D&O series we will explore what behaviours are expected of Directors and how Directors can protect themselves by demonstrating that they have acted in the company’s best interest. Proof of which becomes critical when defending a claim against your Directors and Officers insurance policy. Behaving as required and the recording thereof, are great risk mitigation tools and having a comprehensive Directors and Officers Liability policy (D&O Policy) is an essential risk transfer mechanism.
Companies Act: an act of parliament which regulates the workings of companies
Stakeholder/s: include staff, suppliers, shareholder, Government departments
D&O Policy: essential risk transfer mechanism