Director Responsibility: The buck stops with you

So you've been asked to serve on a board of directors? Good for you. But as professional non-executive director Nigel Payne writes, don't say yes until you've assessed the risks properly.

Being a director or trustee can be a contact sport. It's definitely not for sissies. You need to understand how to play or you're going to get hurt; it's that simple- a fact that more than a few people currently embroiled in the Fidentia scandal or any number of high-profile cases have had to learn the hard way.

Read the fine-print
When you become a director, you're asked to sign a form (CM27) in which you effectively declare amongst other things, and with reference to various sections of the Companies Act, that you already know how to fulfil your role and that you are fully aware of all the implications and personal risks involved.

From a court's perspective, you're saying you're equal to the task- this means there will be no mercy for anyone claiming a lack of experience. You won't be able to say you didn't know.

With an estimate of over 300 laws pertaining in some way to directors and trustees, and several new ones in the works, the decision to take on a directorship is clearly not to be taken lightly. And this is especially true if one considers the fact that the risk of being held personally liable for a company's bad decision has increased in South Africa over the past few years.

South Africa now allows class action law suits (remember the movie Erin Brokovich?) where if one shareholder successfully sues a board, the others can generally claim the same award, subject to prescription. Also, many law firms now fight cases on behalf of clients and only take some or all of their fee if they win. This means that shareholders or creditors with a strong case can sue the board without putting any money on the table.

The bottom line is there are real personal risks involved in holding a directorship or trusteeship, and the reality is that sometimes even well-governed companies make bad decisions. Things go wrong.

But the good news is that if you do your job properly, directing company strategy prudently given the risks faced- and youre able to demonstrate that you did what a reasonable director would have in your position- you're going to be ok. The real trouble comes in when a company is poorly governed and can't account for an ill-conceived strategy. Ultimately, the court will find you liable if youre deemed to have acted recklessly.

Take time to think it over

Before you start taking responsibility for a company's welfare, you need to look out for your own. Here are a few key questions you need to ask yourself before you consider taking on a directorship (or trusteeship?).

What do you need to know?
As a director, its important that you have a thorough knowledge of the Companies Act, as well as the laws with the most bearing on your industry. And just because youve skimmed through them once doesnt mean youre sufficiently well-versed in them, particularly as new laws are being passed from time to time (New Company Act, new Auditing Professions Act due out in 2007). However, you are not required to be a legal expert.

As a director, it's also your responsibility to know the risks your business faces and how well these are being managed. As a new appointee to a board, you should insist on a thorough induction programme that not only covers every aspect of your business in the context of your industry and key competitors, but also one that explains your personal duties and responsibilities.

Remember, since the buck stops with the board, you need to make it your business to know exactly whats going on in the company. Never take no for an answer.

Who else is on the board?
You're going to be making some important decisions together with your fellow board members, so its important that you ask yourself whether youre comfortable being jointly and severally liable with them? A good idea is to ask to attend a board meeting and speak with some of the members before you make your final decision.

Who's resigned and why?
If good people are getting off the ship, you need to ask yourself why theyre leaving. Speak to those who've left- and if you find the board won't assist you in gaining access to them, this response could tell you all you need to know. Accepting a directorship is often as much about your gut feeling as it is about well-reasoned decision making. Sometimes you need to act on an uneasy feeling.

Would you buy shares in this company?
If you're not confident enough to invest your money in this company, consider the fact that if youre held personally liable, it'll be your toys being driven away on the back of a truck.

Does the firm have directors' and officers' insurance?
You cant be indemnified if the board makes a bad decision, but if the matter ends up in court, a D&O insurance policy will pay your legal costs and perhaps even an award against you. It wont pay a fine though.

Do you have a conflict of interest?
If you feel that a potential conflict of interest is not all that problematic, be sure to declare it upfront. If you have a significant conflict of interests, you may have to decline the appointment.

Whom do you represent?
Given your relationship with a major shareholder, they may have suggested your appointment to the board to represent their interests. But as a director, your responsibility is towards the company as a whole, and thereafter to all its shareholders as a group. Swinging board decisions in favour of one party carries serious consequences, both for you and the others concerned.

It's important to note that taking on a trusteeship can be far more onerous in terms of personal liability than a directorship- but many are not aware of this, a fact highlighted by the Fidentia debacle. If some of the trustees had asked the above questions, perhaps they wouldnt have joined the board- or at least the fraud could have been checked.

The point is you shouldn't just join a board because you're flattered at having been asked. Also, a directorship is not just a promotion- as a valuable part of your career growth, you should see it as an entirely new role that you need to prepare properly for.

And even if you've not yet been asked to serve on a board, you can start preparing for it now by attending one of the Institute of Directors corporate governance training sessions.

When it comes to being a good director or trustee, in addition to integrity entrepreneurship and interpersonal skills,, knowledge is your greatest asset and its never too early to start preparing.

Nigel Payne is a non-executive director of three JSE-listed companies, Chairman of the Risk Management Committee of the JSE, Member of the King Committee on Corporate Governance; Chairman of the King Committee Task Group on Risk Management, and a presented on a number of IOD training programs.