It seems that almost every day in the world over there is a report of a corporate scandal and a recurring, default and key question is “where was the board? And the board’s response is almost always, ‘‘we did not know’’.
The Board has an oversight function. It oversees corporate performance and the performance of its senior executives. It oversees the effectiveness of the organisation’s financial controls and compliance programmes. Through this the board morphs into a driver of value enhancement and overall corporate success and sustainable business performance
Directors rely on officers to provide the much-needed information for effective and informed decision making for the betterment of the institution governed. The big question then for every corporate entity has always been, to what extend and when does the board remain accountable?
While directors are entitled to rely on management, they cannot substitute their own due diligence, particularly regarding material financial information or legal compliance.
In the ASIC v Healey (Centro Case – Australia 2011) the directors were held liable for failing to detect errors in financial statements that management had prepared. The court ruled that directors cannot rely solely on management or auditors if the information contained ‘blatant’ inaccuracies that a reasonable director should have questioned.
Similar verdicts were issued in Carillion Collapse (UK, 2017 – 2018). The board can easily be found culpable are failure of oversight otherwise known as Caremark claims. In this case boards are liable if they fail to implement reporting systems or ignore warnings of systematic failure, allowing illegal acts or major losses.
The Board can equally be found liable in cases of gross negligence or passivity, for example if the directors sign-off on reports without active or critical questioning. Liability equally may arise in cases of conflict of interest, failure to disclose the same and in case of breach of a duty to inform.
In some jurisdictions, directors must ensure proper information flow. Failure to do so or ignoring missing information is a breach. Such was the case in Hyundai Corporate Governance Failure when management withheld bid prices and the board failed to insist on receiving that material information crucial for decision making.
This year in the Australian Star Entertainment Group case, the courts emphasised that the board should, among others, publish accurate information and ask enough probing questions when risks are evident; that a director, whether executive or non-executive, is required to take reasonable steps to place themselves in a position to guide and monitor the management of the company and is expected to take a diligent and intelligent interest in the information available to them, understand that information, and apply an enquiring mind to their responsibilities; that non-executive directorships of public companies, particularly those conducting high-risk enterprises, are not just tokens or glittering prizes decorating a resume; the job requires intelligent people prepared to engage actively.
Emerging out of this is that directors must be informed, remain keen and ensure sustained scrutiny of information provided.
Boards must ensure robust internal audit and reporting functions, and importantly ensure reasonable information flow and symmetry, and that there exist credible, accurate and timely reporting systems within the organisations they serve.
The writer is a corporate governance professional, legal counsel and member of the Institute of Certified Secretaries Kenya. Email: [email protected]
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