Directors need to think twice

THIS week’s LeisureNet court case may herald the start of more aggressive shareholder action to hold directors accountable. Two former LeisureNet directors, Rod Mitchell and Peter Gardener, are being sued by the auditors.

 

Directors need to think twice

 

By: Gaenor Vaida

 

THIS week’s LeisureNet court case may herald the start of more aggressive shareholder action to hold directors accountable. Two former LeisureNet directors, Rod Mitchell and Peter Gardener, are being sued by the auditors.

 

Jeremy Grist, who runs the board leadership programme at the Gordon Institute of Business Science, says although this case is not the first time directors have been sued, shareholders are becoming more outspoken about their expectations from directors. As a result, Grist says, potential directors need to consider the following issues before taking up a position on a board.

 

Accepting the risk


A director’s personal liability to the company is generally unlimited. The companies Act does not allow a company to provide professional indemnity insurance for its directors. However, a company can take out insurance to protect itself from the actions of its directors. Directors can take out their own insurance. A number of directors in high-profile corporate collapses have found themselves being sued for the recovery of the losses incurred by the company. One well-known example is that of Alan Hiscock, the “financial brains” behind Macmed Healthcare, who was personally sued for R647-million.

 

Having the time to get to know the business


The days are gone of arriving for a board meeting and immediately taking off for a bush resort for the weekend. Both executive and non-executive directors share a common responsibility to the company, although non-executives have the distinct disadvantage of potentially not having regular insight into the day-to-day activities of the business. However, non-executive directors must remember that they have the right and obligation to ensure that they are as informed as possible to be able to be in a position to make informed decisions in the boardroom.

 

The purpose of being appointed

 

Jeff Levenstein, former head of the now defunct Regal Bank, was repeatedly asked by the Bank Supervision Department to split the roles of CEO and chairman. Levenstein finally complied and appointed Jack Lurie - his brother-in-law – as chairman. In his report on the collapse of Regal Bank, Judge Myburgh said of this appointment: “And ultimately, in an act of cynicism, Lurie was appointed as chairman …… Lurie had never been mentioned as a potential candidate ……. {and he} had no experience of running a large corporation or a bank.”  It is important for potential directors to question why they are being offered a board appointment – to bring particular skills and objectivity to the board, or to comply with a regulation.

 

The regulation of the boardroom


In the US, the Sarbanes-Oxley Act lays down clear conditions under which regulatory authorities may become involved in the boardroom. There is keen interest around the world as to how far these regulations will reach into the boardroom. In South Africa, corporate governance principles have been given some enforcement through the JSE’s reporting requirements. The question remains whether this will be enough to influence directors’ performance and actions. As the rules of directorship become more onerous, expectations on a director will increase. This will make the role more demanding and time– consuming, and potentially less attractive. Such increased pressure of expected performance, with no escape clause, will make directorships more risky.

 

The reputation of the company


Professional directors will always ask this first question: “Do I want to be associated with this company as a director?”  Accepting an appointment as a director is not a gamble it is a strategic role in any company and requires that the incoming director be able to align him or herself with the ethos and culture of the company.

 

Having the courage to serve on a board

 

One of the biggest challenges a board of directors faces is being prepared to fire the CEO. In the US, leading CEOs who departed include Walt Disney’s Michael Eisner after a shareholder dispute and Harry Stonecipher of Boeing for conducting an extramarital affair. A key demand facing a director is courage to make direct and sometimes tough decisions for a company.

Often such decision will create confrontation and concern in the market, but often they are necessary to change the direction of the company and set the business onto a more appropriate course.

 

Members of the board: the appropriate mix

 

An effective board needs adversity: a mix of views, perspectives and representation. More directors need to make it heir business to create spaces on their boards to ensure that business allows a new generation of business leadership to emerge.