Sustainability and risk management now a key ingredient of boardroom strategic decision making process.
Strategy is the process of planning and executing a course of action to achieve the desired objective.
As such, a strategy must be well thought out and tailored to the specific circumstances of the situation to be successful. Indeed, a sound strategy can help an organisation achieve its goals and objectives, while a poorly conceived or executed strategy can lead it to graveyard.
Companies and their directors are legally accountable to shareholders – and that means factoring in not only the financial but also strategic risks in decision making. This is especially so for projects of large scale and pace and which are likely to affect the bottom line of the company.
Indeed, the management of Polish energy giant Enea are suing the company’s former directors and its insurers for lack of due diligence over and in approving the development of Ostrołęka C coal power plant investment that lost the company more than PLN 650 million ($160 million).
The company is seeking this as damages from former management and supervisory board members who had voted in favour of the investment, and from its insurers under its directors’ and officers’ liability insurance.
Industry experts and independent economic analysts warned from the outset that the plant would be unprofitable, in light of rising carbon prices, competition from cheaper renewables, the impact of European Union energy reforms and difficulties securing financing.
ClientEarth, an environmental charity with a unique approach of using the law to create powerful change that protects life on Earth, had sent demand letters to Enea’s board members in 2018, arguing the investment would breach board members’ fiduciary duties of due diligence and destroy shareholder value. But the company and its joint venture partner Energa pressed ahead with the project.
ClientEarth took legal action against the project in 2018 and won the case in 2019. The companies abandoned the project mid-construction in 2020 and the PLN 1 billion investment was ultimately written off.
In 2021, Poland’s Supreme Audit Office reported improper risk management by Enea and recommended action against its former board members.
The company subsequently obtained legal advice finding former directors who voted in favour of the investment had failed to exercise due diligence in the context of the Company’s affairs or supervision and were liable to the company as a result.
Speaking of governance, this case is a notable first and underlines board directors’ potential liability for failure to exercise diligence, duty of care and think strategically while appreciating the need for sustainability, legal and regulatory compliance in investments decision making especially in a rapidly shifting economic, policy and regulatory landscape.
Indeed, litigation risk on breach of fiduciary duty and non-strategic decision making by boards is no longer theoretical – and directors are increasingly being held accountable for making non-strategic decisions exposing the companies and shareholders to strategic risks and loses.
The writer is a Certified Secretary & Legal Counsel. Email: [email protected]
