Balance of responsibility

Boardroom August/ September 2019 issue

The increasing trend of laws and regulations extending directors’ personal liability is deeply concerning. We are seeing this across different regimes on a piecemeal basis.

Accountability is absolutely critical to corporate governance and directors’ personal liability has its place. There is no shortage of statutes in New Zealand imposing obligations on directors, accompanied by civil or criminal liability. However, in the past 12 months we have seen numerous director accountability proposals/reforms including:

• the introduction of civil and criminal liability for the decision-makers of cartels (effective April 2021)
• the Credit Contracts Legislation Amendment Bill introduces a due diligence duty on directors and officers, and personal liability
• the Government has signalled that it will make directors personally liable for company PAYE and GST debt (a recommendation of the Tax Working Group)
• the Ministry of Business, Innovation and Employment is considering introducing a accountability regime for financial institutions (with personal liability for directors) and this is also considered in the second phase of the Reserve Bank Act review.

In the past, the IoD has supported reform where directors could be civilly or criminally liable in appropriate circumstances (eg under the Health and Safety at Work Act 2015). However, care is needed to ensure that honest and diligent directors are not unfairly prejudiced.

There are, of course, complexities for policymakers in allocating accountability and liability between a company, directors, officers and other corporate stakeholders. However, we need to take a long-term approach with policy rather than a kneejerk reaction to high-profile examples of substandard governance.

Coherent regulatory approach required

A piecemeal approach by policymakers to imposing liability is worrying and risks tipping the scales too far, prejudicing directors. If left unchecked this approach could result in significant and adverse effects on governance and ultimately impact on New Zealand’s prosperity and wellbeing.

New Zealand needs skilled and experienced leaders. It needs leaders willing to take on the responsibility of guiding organisations, and making challenging choices and decisions that will result in a strong and sustainable future.

The impact of good governance is far reaching with the potential to provide benefit to shareholders, customers, organisations, employees and communities.

Any proposal to impose director personal liability deserves careful, and considerable, attention from policymakers. There has to be a holistic and system-wide view that takes into account existing director liability, and balances this with the need for, and importance of, non-executive directors and good governance.

It is vital that there is more dialogue between policymakers and other relevant stakeholders. The IoD sees this as a priority and will continue to engage, and to strongly oppose proposals that place a disproportionate burden on directors.

We have raised some key concerns about increasing director responsibilities in recent submissions on policy and legislative initiatives.

Risk: Merging roles and responsibilities of the board and management

Some proposed duties on directors/ boards merge the role of the board and management, undermining the essence of corporate governance in New Zealand. A core role of boards is to hold management to account through effective and independent oversight of performance and compliance matters. This was reinforced in the Final Report of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (2019): “Boards cannot, and must not, involve themselves in the dayto- day management of the corporation … The task of the board is overall superintendence of the company, not its day-to-day management.” It is critical that this separation is maintained.

Risk: Liability chill deterring directors 

The increasing responsibilities and liabilities on directors can have a cumulative impact on directors and organisations. There is a very real likelihood that increased responsibilities and personal liability will be a significant deterrent to directors and potential directors seeking board roles (especially in relation to listed issuers or financial institutions).

Directors have the choice to contribute to New Zealand in a range of ways, and we are already seeing signs that some directors favour serving on the boards of private companies with a relatively low risk profile.

In our 2018 Director Sentiment Survey, one in three directors (33%) said that the scope of director responsibilities was more likely to deter them from taking on governance roles. In an increasingly complex operating environment for organisations, it is now more critical than ever that boards are able to attract well-qualified, experienced directors to lead New Zealand organisations for sustainable success, and to build trust and confidence in business.

Risk: Personal reputation

Being a director can carry a high level of reputational risk. There have been a number of examples in New Zealand and Australia in the past 12 months where directors have faced significant public scrutiny when things have gone wrong in their organisations.

Personal reputation is front of mind for directors and is already a strong driver for them to ensure their organisations are well governed. Extending the personal regulatory responsibility of directors extends the risk to their reputations. It is prudent to ask where responsibility should properly lie between directors and management before making such a shift.

Risk: Compliance and risk adverse boards

Balancing the time spent on conformance, performance and strategy is an ongoing challenge for directors.

The increase in director responsibility and liability adds to a board’s growing regulatory burden, meaning they may spend disproportionally more time on compliance. In our 2018 Director Sentiment Survey 71% of directors reported spending more time on compliance-related activities in the past 12 months.

Boards have a fundamental role in setting, driving and overseeing strategy to promote the long-term success and sustainability of their organisations. This includes taking appropriate risks to drive performance. Managing risk is already challenging in a world of dynamic change and disruption and increased personal liability exacerbates this.

The danger with undue risk aversion is that boards can miss opportunities and avoid innovation, failing to realise the potential for their organisations. It’s important to understand the broader implications and potential negative effect on organisational performance when proposing greater liability for directors.

Risk: Costs and D&O Insurance

The greater the regulation, the greater the increase in compliance costs for organisations, directors and consumers. Some of the proposed reforms will require extensive due diligence processes, procedures, and policies and training. The cost should not be underestimated, especially for large organisations.

The cost of Directors and Officers insurance, generally, has risen markedly in recent years and is prohibitive for some organisations. Premiums for some organisations have more than doubled in 2019 and these costs will ultimately reduce shareholder returns.