A lack of clarity around directors’ personal liability while on extended leave means they’re more likely to resign than take leave of absence, diminishing New Zealand’s pool of strong, experienced directors and potentially challenging board diversity, according to a report released today by the Institute of Directors (IoD) with leading law firm MinterEllisonRuddWatts.
“There is nothing to stop a director requesting leave of absence when they need extended time off. However, New Zealand’s law does not explicitly address the process, nor what happens when they take such leave. A director is not automatically absolved of personal liability if something goes wrong in the organisation while they’re absent,” says MinterEllisonRuddWatts Partner and Head of Corporate, Silvana Schenone.
“The onus would be on them to defend themselves against liability, if it came to that,” Schenone says. “And with recent high-profile court decisions putting directors’ duties in the spotlight, and liability insurance becoming costlier and harder to get, directors will be particularly wary of the risks.”
When faced with the dilemma, many directors will take the ‘safe’ option and simply resign, with no promise of a role when they are ready to return. This has important implications for the strength and diversity of our governance talent pool, according to the IoD’s Principal Governance Advisor, Selwyn Eathorne.
“The issue is not limited to women who have or plan to have children. However, they are by far the largest cohort who are likely to seek extended leave of absence. If directors do not feel there are structures in place to support such leave, they may be compelled to hang up their governance hats, taking their valuable skills and experience with them – possibly to never return,” Eathorne says.
Schenone believes it’s time for a wider discussion on how New Zealand might best address the issue. Germany, for example, has proposed suspending all director rights and obligations while on leave in certain circumstances.
“Failing that,” she says, “Boards can provide valuable clarity themselves, by covering director leave in the company constitution, as well as setting out specific policies and procedures, including the use of alternates.”
Eathorne notes the limited guidance currently available to directors on taking leave of absence.
“The paper aims to shed more light on the topic, as well as outlining important points for boards, directors and organisations to consider. We welcome further conversation.
“New Zealand’s future wellbeing and prosperity relies on the diversity of highly skilled and experienced individuals choosing to serve as directors,” Eathorne says. “They should be actively encouraged, not deterred.”
Also see the IoD and MinterEllisonRuddWatts' report Should I stay or should I go?: Directors, leave of absence and liability
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