Could staff negligence lead to directors walking the plank?
The success of any organisation relies on the management decisions of the directors as they chart the course of its success. The duties bestowed on these captains of industries are vast, and for them to sail successfully through these unchartered waters, they rely heavily on the advice and assistance of their employees.
Could directors be held liable in the event that the company sustains a loss or inflicts damage on others, as a result of a wrongful act rendered by their employees?
Not mandated to do so
Reginald de Ghee was a branch manager at First National Bank (FNB) and was found to have conducted business outside of his designated mandate, causing an FNB client, Craig Keshwar, to sustain a significant financial loss. In such cases, financial institutions and their directors could be held indirectly liable for the actions of their employees, as the man on the street would have had every reason to believe that the branch manager is representing the bank.
Keshwar brought a complaint against FNB to the Ombud for Financial Service Providers. However, the Ombud dismissed the complaint for numerous reasons, including the fact that Keshwar was aware that the branch manager was involved in improper conduct. Another factor to consider is that once FNB and its directors were made aware of the incident, they implemented remedial actions and terminated the manager to protect their other clients.
Not always sunshine and roses
Not all cases end in the directors’ favour. And in certain cases, directors may be disqualified from serving as a director, or incur personal liability. When the Barings Group collapsed, the courts disqualified some of the directors from serving in such positions as they were considered unfit to manage a company.
While the honesty and integrity of the directors were not in question, the disqualification was based on the premise that they did not investigate how Nick Leeson’s division accounted for more than half of the Group’s revenue. It was also determined that the directors failed to monitor and control, or segregate, Leeson’s role.
Court intervention may be necessary
Section 162 of the Companies Act allows the company, shareholders and registered trade unions to apply to the court to declare a director unfit for his/her position should they believe the said individual was grossly negligent.
The business judgment rule under section 76(4) of the Companies Acts assists the directors who can demonstrate that they had taken reasonable steps to be informed and that they acted in the best interest of the company and therefore may not be held liable. The directors would also have to show that they acted with a degree of care, skill and the diligence which is expected from them. King III recommends that directors should establish a framework for the delegation of authority and does not abdicate them from their responsibility.
A Directors’ and Officers’ liability policy (D&O) covers directors for mismanagement and not for professional services which is covered more specifically under professional indemnity insurance. Organisations need to ensure that their D&O policy covers the directors for failure to supervise should one of their employee’s abuse the authority entrusted to him/her.
Directors can be held liable by third parties, due to wrongful acts of their employees, making a D&O policy vital in defending and protecting them and their personal assets. In today’s high paced world, directors need to rely on professional individuals who place a value on ethics and will not cut corners that could have disastrous repercussions.
William Arthur Ward sums it up perfectly, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” Directors need to be realistic and address situations by making informed decisions in the best interests of the company and stakeholders, not hoping that a bad decision goes away but rather addressing them appropriately".
