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One bad decision can be life changing for directors

type
Article
author
By Sonia Yee, Institute of Directors
date
29 Oct 2021
read time
3 min to read
Dominoes falling on a table

Crisis management, sustainability, and dealing with brand reputation are just some of the issues boards around the world are currently experiencing. Adding a global pandemic has only illuminated problem areas and weak spots for some businesses, but has also shone a spotlight on new issues, such as cyber security, and a hot topic of conversation - the moral implication of implementing vaccine passports.

Kirsten Patterson, Chief Executive of the Institute of Directors (IoD), knows that being on boards isn’t something you should take lightly, or see purely through the lens of adding another string to your professional bow.

“You’re not going to become rich becoming a director,” says Patterson of a widely held perception.

“But actually, most people are doing it for the purpose, and for giving back, rather than for the reward.”

Patterson has been with IoD for the past four years. A qualified lawyer and distinguished fellow of the Human Resources Institute of NZ (HRNZ), she mentors business leaders and has an interest in women’s initiatives. She is currently Co-Deputy Chair of the Global Network of Directors Institutes and has extensive governance and leadership experience across a range of not-for-profit organisations.

She says regardless of the type of organisation or company, good governance happens behind the scenes.

This is regardless of whether you’re on a school board, a not-for-profit organisation or sit within the top tier of NZX listed companies in the country.

The impact of decision making of boards has wide reaching implications that in some instances can affect a whole community. And the success of the decisions made from the top-down has a flow on effect.

Patterson says two key issues currently concerning directors are firstly around an increasing  workload, which has become exponential, with a remuneration that does not equate to the hours worked.

The second issue is around ‘liability.’

While we might have a bad day in the office and get fired, Patterson says this is something we are likely and hopefully able to recover from. Whereas for a director, the weight of one bad decision can be life changing.

“If they have a bad day at the office or they miss that one little sentence that was deemed to be important five years down the track when someone looks at it, they can not only lose their job as a director, but they lose their personal reputation...they can lose their house and they can also go to jail.”

Over the past two years, IoD have seen a huge increase in personal liability, which affects  insurance obligations related costs with companies struggling to get DNO cover - an insurance policy for the Directors and Officers of an organisation that protects the Directors and Officers from liability in the case of a lawsuit.

Patterson says costs have increased fivefold for some businesses, indicating that it is a riskier time to be a director.

Patterson says 20 years ago boards looked very different and people became board members in order to impart their wisdom on ‘known problems’ that they may have encountered in their own careers.

Whereas today, it’s a very different story.

Boards are operating under the weight of big decisions at a time of increasing uncertainty.

In this current environment, new issues are coming in thick and fast and relate to areas such as climate change, the global pandemic and social inequality.

But how do boards tackle these issues without a lifetime of experience in dealing with them?

And how should they look to protect the interest of stakeholders, members and customers against huge liabilities?

Patterson says people need to do their research and due diligence about the organisations they are going to support, before accepting roles on boards.

She says looking at the financials of a company is crucial. But she also recognises that doing due diligence on financials can be challenging, especially when most individuals are likely to join not-for-profit organisations who are surviving on the bare minimum, and whose main priority is to source funding.

Before joining a board, she says in order to gain some clarity people should look at the organisation and how they are positioned, but also ask themselves: what will I bring to the table, and why do I want to contribute to this company or NFP?

Relationships on a board are also crucial to its success and Patterson draws on a quote from IoD’s President, Alan Isaac: “I need to like and respect the Chair, and I need to like and respect the CEO.”

“Those relationships are incredibly important,” says Patterson.

But the hard work takes place around the table - and these days over video calls - and that is when disagreements can also occur, especially when big questions are front and centre.

“Dissent is okay,” Patterson says.

“The tone starts at the top.”

She equates the arguments and conflict that can happen on a board as being similar to that of a Mum and Dad scenario where it is important to have a connected front.

“But that doesn’t mean you have to agree on every issue all the time. That’s why we have a board. Boards are there because of diversity.”

 

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