Written by David Zahra, 22 May 2013
A recent case in the UK, where a company sued its legal advisors for alleged negligence in relation to service contracts (containing valuable bonus entitlements) for two of its executive directors, has exposed a worrying laissez-faire attitude among non-executive directors (NEDs) which has led to an update of guidelines for NEDs published in the UK.
In its judgement in the case Newcastle International Airport Ltd (NIAL) v Eversheds LLP  EWHC 2648 (Ch), the High Court of Justice (Chancery Division) rejected NIAL’s claims that its legal advisors had acted negligently instead stating that ‘[t]he real reason that NIAL suffered loss was because its non-executive directors failed to carry out their obligations to NIAL’.
By way of example, NIAL’s chairperson ‘did not read legal advice’ and did not bother with taking of minutes of the board committees she chaired, the NEDs only scanned the papers presented to the board (in particular one of them did not regard it as part of his duties to consider anything in the papers unless somebody else drew his attention to it!) and there was poor communication between board/committee members.
In other words, the NEDs, as members of the remuneration committee, had not taken the appropriate steps to exercise care, skill and diligence as is expected of their position.
It is for this reason that directors, be they executive or NEDs, should always act honestly and in good faith in the best interest of the Company and should ensure that s/he can demonstrate to a regulator or a court that they have acted so. In particular, board members must take informed decisions. They must ensure, and object or insist (and request that such objection or insistence is included in the relevant minutes) if need be, that the board is provided with sufficient regular and timely information to enable the members of the Board to discharge their duties. Furthermore, board members shall ensure that they have enough time and availability for preparation for meetings of the Board, aim to attend all meetings and actively participate in meetings of the board and its committees.
A copy of the judgement can be found here: http://www.bailii.org/ew/cases/EWHC/Ch/2012/2648.html