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What Have We Learnt From Board Failures?

As some directors of failed finance companies face the judge, we should all be asking the hard questions: are investors now protected more than they were before the corporate collapse? and; are directors carrying out their fiduciary duties within the law and to the benefit of their stakeholders and shareholders? We could all pontificate from the pulpit, but it's when the judiciary makes such deliberations that 'moments of truth' stare us in the face.

As New Zealand recovers from the spat of company collapses, directors, some very experienced, are being called to account. Some have already been found to have acted fraudulently with some holding strong beliefs that they were carrying out their fiduciary duties in a professional manner.

A quick look back at previous corporate collapses suggests little has changed over the span of three to four decades: we can associate failures with weak chairmanship, dominant CEOs, poor money management, lack of transparency, poor risk management and at the extreme, fraudulent behaviours. While we recognise that such matters are evident and impacting on our governance capabilities we can add more to the list such as related parties transactions.

So what have we learnt since Intercity Distributors (1958), Standard Insurance (1961), JBL (Jeff Brothers Limited) (1972), Cornish Lamphouse (1974), Securitibank (1976), Public Service Investment Society's (PSIS) near collapse in 1979, Equiticorp (1989) and more recently Fortex (1994), collapsed.

Since 1994 we have placed considerable emphasis on developing a robust regulatory framework. Despite this valuable work our regulatory framework has not uncovered the behaviours of rogue directors before such collapses occurred. It's easy to say that all directors of failed companies were rouge directors but there are some who have worked hard, achieved much in their business lives and have made a valued contribution in this country.

While it's easy to see how the rogue directors were driven by self-belief, withheld information and entered into fraudulent behaviour it is easy to label all others who stand before the Judge as rogues. But what did some of the professional directors do wrong? From our perspective one clear message stands out: they took advice from others without carrying out a form of due diligence on the advice that was given.

Lessons learnt:

  1. Fraudulent behaviour is unacceptable at all cost;
  2. As the Lombard and South Canterbury Finance cases highlight, chairmanship is not for all. Chairs have to lead from the front and from behind, work with their CEO and know the management-board boundary;
  3. As all cases illuminate, ethical behaviour should be an entry level criterion;
  4. All directors must reflect on what information is provided to them, seek out what additional information may throw a different light onto the subject or test the proposition proposed.

As the Lombard case demonstrates, having an honest belief in the truth of the statements is not sufficient; you have to be able to satisfy your shareholders and maybe a Judge that what you understand and are providing, is accurate and complete information, and that your decisions have been well thought through.

The over-riding lesson - All board members need to have an indepth understanding of the business they are serving, how its wheels turn, the likely risks and more importantly where value is or can be created. Only then can our investors be reassured that directors are carrying out their fiduciary duties effectively.