November 25, 2016
Duty to exercise independent judgement
Years ago when I was working in Hong Kong there was a spate of spectacular corporate collapses particularly in financial institutions and we were able to advise directors that it was OK to have relied on the work of their fellow directors. Those days are well and truly gone. There is no such thing as a sleeping director. Each director including non-execs have to exercise all the duties imposed by statute. One of those is to exercise own independent judgement. As with all these duties, when you first read them they seem pretty obvious and straightforward. However, when you look at what happens in real life sometimes a bit of explanation helps.
Take for example the director nominated by an investor shareholder. The investor takes shares, possibly preference shares and has a right to appoint a director. When acting as a member of the board can director prefer the interests of the nominating shareholder to the overall interests of the company? Does the nominated director have to follow the dictates of the nominating shareholder?
A director must exercise his own skill and judgement and not that of the nominating shareholder but if the articles permit that director to take account of the interests of the nominating shareholder he may do so.
The company has a Financial Director a Sales Director and an Operations Director as well as a Managing Director. When the FD tables the management accounts can the rest of the board assume that they have been properly prepared and that all is well? All the directors are expected to consider the information put before the board as best they can. Therefore, a director who is not well versed in the details of financial management must consider the accounts from his or her own point of view but is not expected suddenly to become a financial whiz kid.
A director who slavishly follows what is said to him or her will probably breach the duty. To bring it a bit closer to home, I frequently advise boards on various legal issues. I expect them to take my advice. I may even get a bit grumpy if they do not. However, in deciding whether to take my advice they must weigh it up and use their own skill and judgement when deciding whether to accept it. Merely rubberstamping what I say is not a proper exercise of duty.