I'm only a director... Yeah, right.

Auckland mayor John Banks was quoted recently as dismissing his involvement in one company’s troubles with the explanation, “I’m only a director.”

How much should a director know? How responsible should he or she be for what goes on in the company?

It's quite reasonable that non-executive directors (who by definition don’t work in the company day-to-day) don’t have the detailed operational knowledge that we would expect of the chief executive and senior management.

I’m no lawyer, but the Companies Act seems quite clear: the board is responsible for management of the company. Even when the board delegates management to the chief executive, as normally happens in larger companies, the board remains responsible. So it’s understandable that, when a company runs into difficulties, all directors - including the non-executives - come under the microscope.

It may come as a surprise, but the courts won’t normally try to second-guess the commercial decisions a board makes: it’s not a crime to make poor decisions - we’ve all done that - or sometimes even to go broke. However, what the judges will consider is whether, in making those decisions - good or bad - the directors complied with their legal obligations.

In most cases, the main test for directors (section 137) is whether they have acted with “the care, diligence and skill that a reasonable director would exercise in the same circumstances.” Where I think that bar has been lifted a little in recent years is in what we expect a reasonable director to do. At the very least, the days of what we used to refer to as a “sleeping director” (the one who lends his or her respected name to the company’s letterhead and shows up for the annual general meeting, but makes little further contribution) are - or should be - past.

More positively, thanks to some recent cases, we have a few pointers about how the courts define a “reasonable director.” Among these,

• A “reasonable director” is one who turns up at board meetings - anyone who’s been around for a while will know that this is not a universal attribute of all directors. It’s no defence that you missed the meeting where the board took a bad decision. The logic here seems to be that the company has a right to the wisdom of its directors, so they in turn have a responsibility to show up. We can all applaud that one.

• A “reasonable director” is one who takes an active interest in the affairs of the company, and asks for the information he or she needs, to understand the company’s business and financial position. They have a duty of diligence and care to make sure - within reason - that the information they receive is complete and accurate. The longer I sit at board tables, the more I realise that one of the most important skills of a good director is the ability to ask good, thoughtful, questions, and to understand the issues well enough to ask the follow-up, “So, if that’s the case...”

From what I understand of directors’ duties, and of the courts’ attitude, I don’t think Mr Banks’ alleged comments would provide him much legal defence... Or even whether they’d sway that other jury, public opinion.

Running the company or asleep at the wheel? The director's duty of care

A couple of weeks ago, I discussed whether it was possible to run a company by consensus. The emphasis was on ‘consensus’. In the last few months, however, we’ve seen more people asking the question we’d like to be able to take as read: whether the directors were actually running the company at all.

The last six months have seen more spectacular company failures than most of us have ever seen before. And let’s be honest: a government bailout is actually a failure - just ask the traditional shareholders in British or American financial institutions or US car makers. Closer to home, we’ve seen a string of failures in New Zealand finance companies. Now the shareholders and investors with some of these companies are looking for their day in court, and perhaps for some vindication, even if they may not get their money back.

First, though, another moment of honesty: it’s not a crime for a company to go broke. It’s just a part of the free enterprise system that companies come and go. Sometimes a company fails because a major supplier or customer goes out of business; sometimes the bad news just becomes overwhelming. The law acknowledges this and directors won’t be legally on the hook.

But where the law does become interested is usually in one of two areas: were the directors asleep at the wheel, or did they continue trading when they should have known the cause was hopeless?

I’d like to think about the former, what we call the director’s ‘duty of care’ (the general legal requirement is to act ‘in good faith’ and ‘with reasonable care, diligence and skill’ in what the director believes to be the best interests of the company). Most directors I work with are very aware of this duty and I suspect that the general level has increased recently.

But there’s still the notable exception - for example most of us can name at least one director who regularly fails to read their board papers before arriving at the meeting (although it’s a while since I’ve seen a director blatantly rip open their courier pack as they sat down). In this case, how can they possibly understand the issues or know what’s going on?

Worse still, and one that gets my blood boiling, is the director who consistently fails to turn up for board meetings: I’m not talking about a director who misses one or two meetings a year - we can all get sick or have to travel overseas - and I’m happy to say that I’ve seen less of it in recent years.

But one notable exception jumps to mind. The pattern is familiar - a last minute phone call just before the meeting starts, to tell us about an unexpected visitor he has to see; or a family member who urgently needs to be taken to hospital. Given the pattern of the last few years, he must have a huge family, or they all have a genetic predisposition to sudden serious illnesses - and, thinking about it, he must be the only family member who can drive too. In a case like his, I’d describe it not so much as reasonable care that's lacking, but a total abrogation of his duty as a director.

While a company is doing well, the absent or ill-prepared director may not seem too much of a problem. But a company is entitled to the benefit of its directors’ collective wisdom. My guess is that, if it goes to court (which will occur only if things have gone horribly sour), the judge is likely to decide that that entitlement was retrospective: in other words the board meetings a director failed to attend in earlier years will count against him or her.

And I haven’t even discussed those directors who turn up for the board meeting, enjoy lunch (in fact are often good company), nod sagely at everything that’s said and never contribute an original thought or worthwhile question of their own...

Ah well, back to that latest courier pack for another evening’s reading. Did I hear someone say, ‘Get a life, Richard’?

"It's a no-brainer"... but when should the Board get involved?

I'd like to share a small quandary with you. The last month has involved a lot of activity around some of my Boards - the main reason for the relative silence on this page.

A couple of weeks ago, on a Saturday morning, our company's legal adviser rang to ask if I would sign an urgent document that needed the signature of two directors. I don't need to go into the details, but it related to a fairly large transaction, which I knew was coming up. But it had emerged since our previous Board meeting and we'd never discussed it together as a Board.  

I talked it over with our lawyer and asked whether he thought this was a matter that ought to go to the Board first. 'Well, it's really a no-brainer, isn't it?' was his reply. I agreed, and signed. I did ask him to confirm that in his opinion it was in the best interests of the company for us to sign this document, which he did. 

Looking back though, should I have pushed back a little harder? Certainly, there was some urgency about the transaction. And yes, I did (and still do) believe that going ahead was in the company's best interest (one of the legal tests for a director's actions). But I have this feeling that we might have been a little lax in our process. All Board members had seen the emails on the subject, so I suppose they could have raised any concerns. But my main question is where the boundary is: when does a 'no-brainer' become a 'half-brainer', or a matter that might actually benefit from some considered Board discussion, or finally a decision that really needed some thorough testing? And who decides where these borders are? After all, part of our reason for being there is to test and challenge management thinking.  

As directors, we don't usually do much in our individual capacity, and the whole Board is likely to be responsible for the actions of any of us. So the other directors were - possibly without knowing it - putting their faith in the two of us who agreed to sign.

I think I have learned from the experience. If I'm in the same position again - whatever the need for haste - I think I'll at least ask for a Board conference call to discuss it first - as much for the benefit of the other directors as for my own peace of mind. 

We've just had another Board meeting, at which the Board ratified our actions. What if they hadn't? I'd be interested in any similar experiences you may have had - and what you did.

Never a good time - increasing directors' fees

There are some things for which it's never the right time: closing a major highway intersection for repairs, refurbishing the company's head office, and testing the office fire evacuation procedures, for example. And raising directors' fees.

Last week we saw another classic case of an unpopular motion to raise directors' fees in a large public company, Contact Energy Limited. I'm the first to argue that directors need to be adequately rewarded: Contact is one of the two largest listed companies in New Zealand and its independent directors currently receive about $100,000 per annum in fees (read details in the annual report). While this may sound a lot, I believe it's actually quite reasonable, even modest, given the calibre of people Contact would hope to attract, and the demands and responsibilities placed on directors in large public companies. For the record, I have great respect for the technical abilities and professional achievements of Contact's Board members, which is not to say that some of them haven't made some big mistakes in the past.

Besides this, the fees have not been adjusted since 2004 - and I don't know many senior executives who would have accepted zero adjustment to their salaries for the last four years.

And that's where it seems to have gone all wrong. The rational case for an increase seems strong. But I believe the way the Board has gone about seeking this increase has smacked of either insensitivity to the company's small shareholders and customers (many of whom, including your blogger, are both), or an arrogance that tends not to go down well in this country.

As I say, it's never a good time to raise directors' fees - someone will always get upset, if only through pure envy. Now put yourself into the Board's shoes and consider the following - none of which is a secret:

• The world's economy seems in danger of stalling, if not of going into a flat spin;
• We're two weeks away from a general election, so everything is political fair game; and
• On the actual day of the Annual General Meeting, many of Contact's customers (yes, me too) received a letter from the company telling us that our power bills were going up by about ten percent.

When I was learning to fly, many years ago, my instructor gave me his definition of a superior pilot - "a pilot who uses their superior judgment to avoid situations that would require their superior skill." If the directors of Contact had applied superior judgment, I suspect they could have seen the fight they were buying for themselves. Instead of ignominiously retreating at the AGM, and handing a moral victory to a shareholders' representative in a Viking helmet, the directors might have modified their proposal: rather than asking for a doubling of the approved fees (which they hadn't intended to use in full), perhaps they could have argued and gained greater support for a smaller increase, based on the long period since the last pay rise.

It's not the increase itself which is so significant, but broader questions that this issue (not the first) raises about the Company's attitude to its large base of small (and definitely minority) shareholders - and whether the Board is too far removed from the real world to appreciate that the Company doesn't operate in a vacuum. Telecom has paid the price for such arrogance (or corporate myopia); it would be pity if our next largest listed company also fell victim to its own hubris.

Social responsibility, however you define it, is not an optional add-on to a director's role. It is an integral part of governing a company that operates in a real world of people who pay their power bills, read the papers, vote at elections and try to make the best living they can. No company can afford to ignore this for long.

A recipe for New Zealand

Last year, John Williams, one of New Zealand's relatively unsung entrepreneurial heroes wrote a piece for the website nzedge.com setting out ten strategies that would restore New Zealand to the league of wealthy nations, where most of us - I suspect - believe we should be. John used to own Marton-based company PEC (New Zealand) Limited, which developed some revolutionary petrol-pump technology that is now in common use around the world.

From this smart, technology-based platform, which has successfully been taken to global markets, John has produced a list of his 'must-dos' that would see New Zealand transform itself into a genuine knowledge-based, smart economy that we need to become if we are to remain globally competitive.

The list begins, not surprisingly, with a suggestion that New Zealand industry should emulate his success, by 'maximising growth in the sectors where we currently produce world-class products and/or services.'

He includes several strategies for business and commerce, but he also recognises the need for a sound basis in a strong and fair society, recommending (No.4) that the values-based "Kiwi-Can" programme should be extended to all primary and secondary schools.

Whether you agree with the details of this 10-step recipe is, I think, less important than that here at last is someone taking a long-term, strategic look at what New Zealand needs to do. One of the features that I feel has been sadly absent from our national debates over the last decade has been that we have not really talked about what sort of a country we want New Zealand to be. We have argued at length about policies, fairness and tactics; and we've even talked loftily about 'knowledge economies', 'growth waves', 'innovation frameworks' and so on; but without some hard decisions about what we're actually going to do, these will remain simply as cliches.

This debate isn't optional: if we don't at least have the discussion, we'll continue on the current path, where, while enjoying its best trading conditions for decades, New Zealand has barely held its place in the OECD's income rankings. If we have the debate, it's quite valid that we might reach a consensus that we don't want to get back among the rich nations. But I doubt that will be the answer.

What I think we might discover is that dragging ourselves back up the growth curve is in reality the best path to those global standards of health, education and social outcomes that most New Zealanders instinctively want. Unless we're generating the wealth, we can't spread it around. New Zealand's general election is only seven weeks away. Let's challenge ourselves, and the people who aspire to represent us, to take this national debate seriously... to show us their strategies for growing the pie, rather than changing the way we divide the existing one... and to make sure that all sectors of society take part and help to develop a sense of vision and purpose for the next decade.

And, while we're at it, let's not leave it just to the politicians. As leaders in our own sectors, we need to have these discussions around our board tables: how do we build our company to take advantage of the global opportunities (and counter the threats) of the increasingly complex global environment we're in? If we all address these questions, the sum of our answers will go a long way towards providing the answer for New Zealand.

Measuring real success

I realised I'd had enough of the Olympics for another four years when I found myself staring at a semi-final of the women's Handball tournament between, I think, Norway and Georgia. Now come the analysis and post mortems, including the recent discovery that Bronze medallists ('Wow, I got an Olympic medal') are generally happier than those who win Silver ('If only I'd gone just a little harder ...').

New Zealand has had a successful fortnight, with a haul of three Gold, one Silver and five Bronze (that's why we needed that earlier analysis), placing it twenty-fifth in the overall Medal rankings.

We're sure to see commentary around New Zealand's traditional area of strength - medals per head of population. Here we are near the top again this year, with just over 2 medals per million of population, pretty much in line with Australia. On this measure, we're six times as successful as the USA (three million people per medal) or Britain (1.2 million per medal), but we all trail Jamaica, who dazzled on the track with eleven medals in total (six of them Gold), from a population of fewer than three million (remember 'Cool Runnings' - the movie about the Jamaican bob-sleigh team?). If you want more, see this forecasting model produced by Professor Andrew Bernard in the United States and this clever graphical analysis by the New York Times, showing relative performance at each Olympic Games since 1896.

Enough jingoism for one blog post! What I really want to write about is a more meaningful, and sobering, measure of a country's success - New Zealand's ranking in GDP per head of population. Here we have little to be proud of over the last forty years. From being one of the wealthiest countries in the 1960s, we slipped to 22nd out of 30 OECD countries by 2005, sitting between South Korea and Spain, with about 85% of the OECD average Real GDP per head. In 1970, we were up at about 115% of the OECD average.

The good news is that we stopped sliding in the early 1990s. The bad news is that, despite stated political ambitions to return to the top half of the OECD ladder, and enjoying New Zealand's best terms of trade for some decades, we've made no real progress in the last few years.

Looking ahead, I think we face two dark clouds, both related to our remoteness: the growing issue of 'food miles' presents yet another non-tariff barrier to our food exports. Regardless of the science, and the proven fact that total carbon emitted in sending our produce to Europe is less than that of European produce (where stock are generally housed under cover during winter), what really matters is what the supermarket shopper believes. We need to get our message across.

The second point is similar: whether we can remain a destination of choice for the world's tourists, if they get more concerned about the carbon footprint of long distance travel.

As a resource-rich country, we're blessed with some of the world's best conditions for producing protein, we have plenty of fresh water (usually) and a broad range of options for our energy needs. Until recently, we've been sheltered from the adverse trends by high prices for our commodities and a strong and growing global economy. The latter is fading fast, while the former may continue for a few years. But we need to face the reality that one day we won't be the world's cheapest food producer: South America and Eastern Europe are not standing still.

This is a challenge for governance at all levels: for Boards, it's important that we all play our part in thinking how we can genuinely transform our businesses, to get ouselves back onto a faster-growth path. We have the raw materials, we have the brains and the education; we need to commit to investing in a country that wants to grow the pie faster, rather than simply distributing what we have differently.

Next time, I'll look at one person's recipe (non-party political) for restoring New Zealand to the levels of wealth we could enjoy - with all the other benefits that flow in health, welfare and life expectancy.

Welcome a-board - more news on better balanced boards

If you read The Economist, you'll know that it never lacks confidence in its own rightness.

It promotes a liberal, free-market view of the world and, healthily, has little time for the fuzziness of much modern economic policy making. So I think that an article this week, Getting more women on board, is quite significant. As you'd expect, this article is about the improving gender balance on Boards and in top-level management (known these days as 'The C-Suite' - as in 'C' for 'Chief [insert function - Financial, Information, Executive ...] Officer').

The article discusses the slightly disappointing findings of a survey by Catalyst, an NGO that promotes equal opportunity in workplaces, indicating that the rate at which women have reached the top floor offices has 'stalled' in the last few years. Even now, Catalyst estimates that women occupy only one in seven board positions in Fortune 500 companies.

One interesting, and not surprising, finding is that the strongest predictor of how women will progress into the top executive positions in the future is the current proportion of women on their board:

• 'Companies with 30 percent women board directors in 2001 had, on average, 45 percent more women corporate officers by 2006.'

You'd expect this if a company has a culture that creates a work environment providing opportunity for all its people - as seems probable if there is real diversity around its Board table. There is also some evidence that female directors are seen as role models who both inspire and support aspiring female executives.

The Economist takes this a step further, getting close to what I see as the real point - the incentive for shareholders to select leaders from the broadest possible pool of talent, regardless of gender or other demographics (apart, one would hope, from ability).

Several years ago, I was a member of a Board of five directors. Normal succession processes had resulted in my being the only male on the Board. The best part of that experience was that it was three or four months before anybody even noticed this rather unusual circumstance. And that, surely, is the end-game - when surveys such as Catalyst's, and blog posts like this, are redundant, because all of us around the table are seen simply as directors, each appointed because the shareholders considered us to be the best person for the role.

Realistically, I think it'll be a while yet.

Paying dividends - a director's duties

If you've taken any interest in financial markets over the last year (and if you either borrow money or have some to invest, it would be a good idea - especially now - to take an interest), you'll know that a number of finance companies in New Zealand have found themselves in difficulties.

You're also likely to have heard various commentators allocating blame. Some commentators have known what they're talking about, but others we might describe, charitably, as having less than a full understanding.

I thought it might help to explain some of the basic duties of directors in these situations (remembering that I'm a company director, not a lawyer, so I'm drawing any inference as an informed layman, rather than a legal expert), so you'll be in a better position to judge the facts:

1. Dividends

In general terms, dividends are income that shareholders receive as a return on their investment, usually paid from the company's tax-paid profit. Section 52 of the Companies Act says that the Board of directors may authorise the payment of a dividend if it is 'satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test' - together with a few other conditions.

So what's the 'solvency test'? For this we look at Section 6: '... A company satisfies the solvency test if -
(a) The company is able to pay its debts as they become due in the normal course of business [my italics]; and
(b) The value of the company's assets is greater than the value of its liabilities.'

My guess would be that finance company deposits which fall due on a particular date would be classed as 'in the normal course of business'. In determining the value of the company's assets, 'the directors must have regard to the most recent financial statements of the company ... and all other circumstances that the directors know or ought to know ...' [again, my italics].

Even allowing for the tidal wave of changes in financial market conditions, and the precipitous decline in reinvestment rates (the amount of deposits that are renewed when they fall due, rather than being repaid to the investor), which has led to the liquidity difficulties of some finance companies, these provisions in the Act should prompt some searching questions of a few people who are known to have been paid large dividends in the not too distant past.

2. Reckless trading

There's another Section (135) in the Act, entitled 'Reckless trading' which may also turn out to be relevant. Under this, a director 'must not agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss ...' to the people the company owes money to.

The Act provides various defences for people charged under these Sections, so you can expect any legal actions to be lengthy, strongly contested, affairs and, naturally, to be far more complicated than this simple explanation.

But I hope that, after reading this, you will be better able to form your own view of the actions and responsibilities of various parties likely to feature in the news in coming months.