Shape up or go, directors told

Ralph Chivers warns directors they could face prosecution. Photo / Dean Purcell

Directors who do not know their company well enough are being warned to shape up or ship out.

The Institute of Directors in New Zealand has released a note to its members reminding them they should have a detailed knowledge of their company's public financial documents.

In the wake of a number of court rulings, including this year's Nathans Finance case, the institute said directors cannot rely solely on the word of management and must personally examine documents, such as prospectuses and market disclosures.

Nathans Finance went into receivership in 2007, owing around 7000 investors $174 million.

Following a Crown investigation and High Court trial, Nathans' former directors were found guilty of issuing offer documents that were misleading.

Two of the four directors are serving prison sentences and two are on home detention.

Although Justice Paul Heath accepted the defendants had acted on the advice of senior management, he ruled that "directors have a non-delegable duty to form their own opinions".

As such, the institute recommends directors read their company's investment statements in detail and ensure they understand them.

Bosses who do not understand their business are advised to either up-skill or resign.

"Directors who do not consider they are sufficiently financially literate to adequately monitor the business of a company must take steps to address this shortcoming," it said.

The institute's new chief executive, Ralph Chivers, acknowledged the note was stating the obvious, but said it was necessary to remind directors they could face prosecution if financial statements are not correct.

"If someone doesn't understand the business they are on the board of or they struggle with the accounts [they need to remedy that] because they are going to be held liable and potentially prosecuted if a company fails and they're found to have breached their duties," Chivers said.

"All directors are expected to have a degree of financial literacy," he said.

The Shareholders Association corporate liaison, Des Hunt, said directors should never assume they know too much about a company.

He said some directors still lacked an adequate understanding of their company's financial statements.

"They may be perhaps complacent because there [could be] an accountant on the board with them," he said.

Hunt said directors should also be familiar with how a business operated.

"One thing we're looking at with boards right now is whether they've had any involvement with that type of business before, because you look at some boards and you wonder what they really do know about the business."