A Note on Directors and their Role
Read an article from the September edition of the IOD's monthly magazine, Boardroom, by Kerry McDonald and Richard Baker, which makes some observations on the role of directors given two recent examples of less than stellar corporate performance - Bridgecorp and Stresscrete.
Two recent events have raised some interesting questions on the role and responsibilities of directors.
First, the receivership of Bridgecorp has seen much comment on the roles played by regulators, trustees and ratings agencies. Of equal interest is the role of directors in this sort of situation. Directors must always act in what they honestly believe are the company’s best interests and according to objective standards of what a reasonable director would do in similar circumstances. In addition, directors cannot allow a company to trade recklessly or take on an obligation that it cannot fulfil. Where a company is borrowing from the public under a prospectus directors must be satisfied at the time allotments are made that the prospectus is not false or misleading in a material particular.
Quite apart from these formal requirements however, there exists the issue of a board’s performance and the quality of its decisions. An effective board of a finance company knows the risks of lending to higher risk and longer term borrowers while borrowing from fluid, risk averse and shorter term lenders. An effective board will therefore always insist on rigorous and timely reporting covering such matters as asset quality, funding rollover schedules, liquidity and risk management. Whenever any matter occurs which should put a board into a state of alertness, such as an ASIC prohibition on Australian funding or deterioration in key and illiquid assets, then the effective board will step up its surveillance and oversight. For example, it is not unknown in times of heightened risk for boards to insist on daily cash and risk reporting.
Leaving aside the specific Bridgecorp episode the details of which are unclear, as a matter of governance principle, a sudden and precipitate collapse into receivership when funds are being raised under a prospectus raises important questions about the directors’ responsibilities. Quite apart from protections afforded by an independent trustee, disclosure requirements and creditworthiness ratings, the quality of a board’s decisions and its oversight of management is the first defence against failure. Where funds are raised under a prospectus from the public at large then directors and officers have some specific responsibilities.
The second event of interest is the recent prosecution of Fletcher Concrete and Infrastructure (trading as Stresscrete) under health and safety legislation. Stresscrete was fined $225,000. A wire rope on a gantry crane snapped, dropping a 5800kg precast concrete panel. The crane’s lifting beam struck and killed a worker. The court found that the company knew of faults with the crane, that staff using the crane had advised management of them, but nothing had been done to fix them. Instead, a culture of “harden up” appeared to predominate with an emphasis on meeting targets and budgets.
Just as a finance company board should know and be alert to the special risks specific to that industry, so too should the board of a construction company be alert to the risks of that industry. Important among these are the health and safety risks faced by workers on construction sites
An effective board in any industry will ensure that the health and safety of its employees is of paramount importance. It will demand of management that a culture of risk awareness and risk minimisation is relentlessly promoted and instilled across the entire work force. The board will require regular and accurate measurement of these risks and their minimisation and adverse events should see senior management disciplined and the board examining its own performance. Directors should regularly visit worksites, talk to workers and exercise critical judgment.
In any industry directors have an obligation to ensure that the companies’ ethos, culture and policies are highly supportive of a strong safety culture. This culture encourages identification and notification of hazards and allows any employee to stop a process on safety grounds without fear of recrimination.
These two events provide much food for thought for prudent directors.