Spotlight on directors' role

Former Nathans Finance director Roger Moses leaves the Auckland High Court after being found guilty of Securities Act breaches. Photo / Dean Purcell

The Nathans Finance case judgment raised the bar for directors and resulted in more vigorous boardroom scrutiny of public offer documents and financial disclosures. That's the view of 63 per cent of respondents to the Herald's CEO survey.

Nathans Finance went into receivership in 2007 owing investors $174 million. Two of the four directors are serving prison sentences and two are on home detention after the Court found them guilty of issuing misleading offer documents. Justice Paul Heath accepted they had acted on senior management advice but ruled they had a "non-delegable duty to form their own opinions".

CEOs' views were mixed. "The Nathans Finance business case was a sham and we were stunned at the level of money they purported to make," said a consumer goods company chief. "There is no need for a new standard for that it already exists."

Several mentioned parallels with the Centro case in Australia which has resulted in claims that directors have to be "accounting-standard gurus" to spot "ticking time bombs" in board papers.

The Australian Securities and Investments Commission had successfully argued Centro's directors breached their duties because the company's 2007 accounts had misclassified a number of borrowings as non-current liabilities when they were actually current, should have disclosed post-balance date guarantees in the annual report and made sure the CEO and CFO signed compliance certificates. The upshot was the 2007 financial statements did not disclose Centro was due to repay billions of dollars of debt within months.

"There is a danger that bad facts make bad law," said one chief executive. "If you take Centro, what the court is suggesting - every director should be on top of it - is going too far. Directors should not have to know the intricacies of international accounting standards."

The Nuplex case highlighted directors' exposure to breaches of continuous disclosure obligations in the NZX listing rules. The case was settled out of court. There has yet to be a judicial ruling in area. But it is a minefield.

Fifty per cent of survey respondents agreed with the proposition that continuous disclosure rules should be amended to provide a safe period for financial rescues or bank recapitalisations without impacting on directors. Nineteen per cent were against this and 31 per cent unsure.

"It's a great pity that the courts were never given the opportunity of deciding this matter under law," says Hellaby Holdings chairman John Maasland. "There are now very grey areas for directors' decision-making as the views of the board in regard to acting in the best interests of shareholders could in some cases now be contrary to law."

Kathmandu director John Harvey says it is difficult to provide an across-the-board safe period "as each case is different and therefore requires judgment by the directors".

"We should see an amendment made, however this should be subject to an independent arbitrator - the Financial Markets Authority - at the time it is needed," adds Mainfreight's Don Braid.

Another listed company chief executive said shareholders suffer at present. "There must be a legitimate opportunity for the company to work with the banks. Forecasting a breach is easy in this economic environment. The key is what you do about it and the banks need time to understand your plan. Two weeks' grace period is plenty."

Sixty-two per cent of respondents believe directors' fees should be raised to reflect the tougher judicial and regulatory expectations - 24 per cent are against this and 14 per cent unsure.

"Fee levels are appropriate to time commitment - there is a risk in any executive role and liability for company officers as well - in that case one could argue that their salaries should increase as well, which most people don't suggest!" says a recruitment firm boss.

"Boards should insist on increasing fees - there is no way fees today reflect the risk," says a professional firm chief executive.

A company chair says the proposition is too general. "Perceptions of tougher judicial/regulatory expectations is a factor but not determinative of when, why and by how much fees should be raised. The biggest components are workload, responsibility, degree of risk and market factors." Fran O'Sullivan