ISSN: 1391 - 0531
Sunday, April 08, 2007
Vol. 41 - No 45
Financial Times  

Under new Companies Act

Errant directors can be sued

It was no April fools joke, as a newspaper correctly reported it. The new Companies Act is here at last. Whatever the defects, shortcomings and difficulties of adjustment to the new environment, the new Companies Act is a great step forward in the directon of establishing good governance, improved transparency and of course more accountability.

The provisions of the new Act and the consequential legal liabilities for failure of strict compliance should now drive persons who have accepted positions on boards of directors, to beware that their future is not the same as in the ‘good old days’. The board meetings will no longer be a party, an old age pensioners club meeting, a place for the practice of cronyism and nepotism, nor an opportunity to make ego satisfying trips.

Those who managed to chair board meetings living on their past glory, those who have faded in current knowledge and necessary competence, those who pretended to have great wisdom, those who lived by dropping names of their connections to VVIP’s, those who took their regular nap during meetings, those who came with unopened board paper packets and those who repeated after others or only joined in the chorus had better pack their bags and walk out, before the law catches the great pretenders and dwarfs from “Snow White”.

The new Act, amongst the many new responsibilities cast on directors, has codified the responsibilities of directors and thus places the onus of strict compliance. The directors are now required to act in good faith, in the interest of the company and also not act in any manner which is reckless or grossly negligent. The directors are duty bound to exercise the degree of skill and care that may reasonably be expected of persons of their knowledge and experience and required to ensure strict compliance with the Companies Act and Company Articles.

It is also common with some chairmen to rush through papers the day they have other commitments outside the board room, ignore key papers or not allocate enough time to review important papers and issues raised by other board members, especially on finance, economics or technical related matters.

Some chairmen when challenged on issues use one of four tactics, - ignore, drop a name of an eminent personality consulted who agreed with his point of view, look towards his cronies for support or lay it by for a latter meeting. Worse still are Chairmen of board sub committees, especially audit who come to meetings not having reviewed the accounts and audit reports in the agenda for review and approval recommendations.

The dynamite cases in the board rooms are chairmen who have no knowledge of the business of the company as well as its articles, regulations and laws primarily governing the entity, industry best practices and have no clue on the difference between cash and profits, funds flows and cash flows, free cash flows and the present value of future cash flows.

The Chairmen who do not believe in and will not allow an evaluation of the collective board performance yet head important companies.
To them the age limit of 70 years specified in the Act is the time to begin accepting responsibilities for companies and selection criteria for cronies on the board.

The boards with majority of its directors above 65 are even today trying to compete and make an imprint in competitive sectors of the economy. It is sad that some of these so called directors, totally misuse perks and benefits and even cash the non cash benefits thus jeopardising the interests of all other directors.

In decision making, the directors are now required to comply with the law and ensure that the benefit accrues to the company and not to any single segment of stakeholders. What these errant directors must wake up to is that compliance failures are no longer subject to marginal fines. The fines are substantial and are accompanied by criminal liability.

The sword of Damocles is now hanging over the heads of directors, for there is provision for litigants to sue errant directors, in the name of the company, using the resources of the company, where the directors have failed to act in the interests of the company. Those directors on committees and boards that represent expertise in certain fields will now be personally liable for board decisions made based on their presence and reliance on their competencies.

It is timely to go before the crystal ball and the magic mirror and assess ones future and the “ugliness of the face of competence and capability” and pack the bags early, before the legal liability and bad publicity catches up.


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Copyright 2007 Wijeya Newspapers Ltd.Colombo. Sri Lanka.