A director’s legal responsibilities
The first duty of any director is to act in the best interests of the company, at all times. The legal duties of a corporate director are enshrined in the Companies Act 1993. This includes:
- acting in good faith
- exercising a power for a proper purpose
- compliance with the Act and the company’s constitution
- exercising the care, diligence and skill that a reasonable director would exercise in the same circumstances
- disclosing personal interest and acknowledging that there are transactions where there is likely to be a conflict of interest
- ensuring that the company is solvent
- performing their duty in relation to their obligations to the company.
Breaches of the Act may be prosecuted in the courts and pursued by regulatory agencies such as the Companies Office, Commerce Commission, Securities Commission, NZX (in the case of listed companies). There are a range of sanctions. Penalties for failure to comply with the Act are in Part 21 and these include pecuniary fines, and in serious cases, imprisonment.
Institute of Directors (IoD)
None of the above is the responsibility of the IoD. The IoD is a voluntary professional association of people committed to promoting the highest standards of corporate (and other) governance in New Zealand. It is neither a regulatory authority nor a trade union.
A member’s responsibilities
Each member on application for, and renewal of membership, must agree to the rules contained in the Constitution, declare that they are not an undischarged bankrupt, or disqualified by a court order from being a director. They also undertake to conduct themselves in a “manner which would be expected of a member of a reputable professional body.”
Members are expected to use the Code of Practice for Directors issued by the IoD. This provides guidance to assist them in carrying out their (external) duties and responsibilities to the highest professional standards. It is an aspirational document, designed to encourage best practice.
Risk and behaviour
Business is all about risk and when a calculated risk fails there can be consequences, eg failure to gain market penetration with a new product, a merger that doesn’t yield the anticipated results, even failure of the organisation.
If a director is negligent in meeting his/her obligations as a director, a complaint may be laid. Each authority (The Registrar of Companies, Securities Commission, etc) has its own process. If you believe a director has broken the law, you are advised to approach these agencies.
It is not the role of the IoD to prescribe precise business behaviour. Risk appetite will always be a determinant but it is not the role of IoD to determine what is an acceptable level. The board determines that and it is ultimately accountable to the market and shareholders.
Being involved in a business failure does not automatically mean there has been negligence or professional misconduct. More likely it may be simply a calculated risk.
Persistent involvement in failed or badly run businesses as a result of bad ethics or poor management is another matter and could provide grounds for termination if it was felt that the good reputation of the IoD was affected. However, even if that were the case, the IoD would still be dependent on the accumulation of evidence of conviction in other fora so that the behaviour of an individual director can be isolated and scrutinised.
If a member of the IoD acts in a manner that compromises or is likely to compromise the position of the IoD, or brings or is likely to bring the IoD into disrepute their membership may be terminated. This will not prevent them continuing to act as a director but it may cause them some reputational damage.
Disrepute is about behaviour that appears to be at odds with the values of the organisation, which in the IoD’s case is about combining integrity with enterprise.
Grounds for terminating membership
Rules 11 and 12 of the IoD constitution (Cessation of Membership) state that Council may terminate membership under Rule 11(d) in the circumstances of:
- disqualification to hold the office of director by virtue of the operation of any act or statutory regulation
- prohibition under section 383 of the Companies Act (disqualification by the court)
- unsoundness of mind under the provisions of the Protection of Personal and Property Rights Act 1988
- conviction of a criminal offence under the Securities Act 1978
- failure to pay subscriptions.
In addition, a majority (75%) of council members may vote at a meeting to terminate the membership of any member whose conduct, in their opinion, has compromised the position of the IoD or brought the IoD into disrepute. Council is obliged to seek the member’s comments and provide them with an opportunity to appear before Council prior to making a determination.
What is required
If an IoD member or member of the public wishes to complain against a current member of the IoD they must:
- identify themselves and the member in question. The IoD does not act on anonymous complaints
- put their concerns in writing. Information should be factual and be sufficient to enable IoD to determine whether there is a case to be answered. Opinion is not admissible
- be prepared for their identity to be revealed to the person complained against
- authorise the IoD to make its own inquiries.
Once the complaint has been received and assessed, if the Council or its delegated agent, eg a sub-committee or the CEO, believes that there is a case to answer, the member will be asked to provide his/her version of events and a response to the allegations.
If the matter can be settled, ie if the Council feels that it has enough information at its disposal to make a determination, it will:
- if a hearing is required council will proceed to establish this. The member will be invited to attend and be accompanied by a support person. The process will be clearly described to both the complainant and the member
- the IoD is committed to acting fairly and follows accepted best practice principles of natural justice and fairness.
- the decision of Council shall be final.