Being a company director is now a high risk gamble
WITH the debate on executive pay raging, the wider question that everyone should be asking is: Why would anyone want to be a director in the first place?
Over time, directors’ duties have been aggressively extended and however well they do their job, directors are at risk of criminal and other serious liabilities quite apart from risking reputational ruin. The bonus you get paid this year could be your last – next year you could be unemployable forever.
Executive directors cannot underestimate the risks of trading, particularly through financially difficult times. Apart from the duties that directors have as set out in the Companies Act 2006, there are a plethora of obligations which arise under statute. Directors can be personally sued and potentially criminally liable for breaches of health and safety, as well as environmental, competition, employment and data protection laws. Add to this the risk of failing to ensure that the correct tax, VAT and national insurance is paid correctly and on time; as well as ensuring that companies don’t trade while insolvent.
For directors of public companies, there is the additional dimension of being exposed to possible liability for market abuse whether by way of insider dealing, misuse of information, manipulating transactions or disseminating information that conveys a false or misleading impression.
For directors of FSA-authorised companies, there is the interview required to become FSA approved in a significant influence function plus continuing obligations to the FSA in relation to competence and capability.
Side-by-side with the liabilities directors face is the risk of having to pay potentially huge legal costs from their own pocket. They will have directors and officers liability insurance and they will probably have indemnities on top of this, but we have seen of late the risk that these are often not as wide ranging as they may seem. Andy Coulson must have assumed that as editor of News of the World the indemnity he had been given by the paper would cover the costs he faced arising out of the criminal investigation undertaken over the phone-hacking allegations. The High Court found otherwise.
With Eric Daniels and Sir Victor Blank – the former chief executive and chairman of Lloyds Banking Group – named in a US class action complaint from American shareholders unhappy at the bank’s takeover of HBOS, prospective directors can see that the stakes are very high. In Australia, the appetite for taking on board roles has noticeably decreased – the Australian Institute of Company Directors conducted a survey last year which found that directors are unwilling to accept new boardroom seats and could quit their existing positions in the wake of the landmark case against the board of beleaguered property group Centro.
The picture looks increasingly bleak in the UK. Against all this, remuneration is crucial to recruiting and retaining business leaders at public companies – shareholders ride roughshod over this at their own peril.
Elaine Aarons is a partner at Withers LLP and is a leading employment law specialist.