Governance in New Zealand: Retrospect and Prospect
The governance paper from which Chairman Brent Wheeler drew his remarks for the TBPL 10th birthday party recently
Governance in New Zealand
Strategy and Boards
Tapping the potential of boards
This from the February edition of the McKinsey Quarterly
Strategy and Boards
Director Perspectives
This article by William George, a former CEO of Medtronic and a veteran of ten corporate boards reflects on common governance pitfalls and how to overcome them.
Director Perspectives
Court of Appeal rank directors’ defence costs first
Two recent cases heard together in the Court of Appeal overturn a prior High Court decision concerning the relationship between s 9 of the Law Reform Act 1936, and defence costs in relation to claims against an insured party.
Section 9 aims to protect third parties by creating a 'charge' in favour of the third party over any insurance money 'that is or may become payable' in respect of the insured’s liability to the third party.
In the first case the appellant, Peter Steigrad, was a director of Bridgecorp Ltd and Bridgecorp Management Services Ltd (both in receivership and liquidation). Mr Steigrad and several other directors were convicted of offences under the Securities Act 1978, and Bridgecorp now seeks $450 million worth of damages based on breaches of director duties.
Bridgecorp held two insurance policies with QBE Insurance (International) Ltd (QBE). The first was a directors and officers liability policy (D&O policy), indemnifying the directors for up to $20 million against any liability incurred in their capacity as directors, and providing for the payment of defence costs. The second was a statutory liability policy covering defence costs up to $2 million, all of which was exhausted by the directors in defending the Securities Act proceedings.
Mr Steigrad and two of his fellow directors applied to the High Court for a declaration that s 9(1) Law Reform Act 1936 did not prevent the insurer from meeting its obligation under the D&O policy of reimbursing them for their defence costs. In the High Court, Lang J held that the charge created by s 9(1) applied to the whole of the amount available under the policy at the date the charge was created (assuming notification). Accordingly, the charge prevented the directors of Bridgecorp from having access to the insurance money to meet their defence costs. Mr Steigrad appealed against that ruling.
Another case involving a materially similar insurance policy was argued alongside Mr Steigrad’s appeal. In this case, the first appellant, Chartis Insurance New Zealand Ltd (Chartis), issued a prospectus liability insurance policy to Feltex Carpets Ltd (Feltex) in 2004. It provided cover up to a specified limit for 'losses' incurred in respect of 'securities claims' against the company’s directors, and the term 'losses' was defined to include reasonable defence costs incurred. Feltex went into receivership and then liquidation in 2006.
Mr Houghton represented 3,100 shareholders in proceedings against the Feltex directors. They allege that the prospectus and investment statement issued included an untrue statement. Following the delivery of Lang J’s judgment in Steigrad, Mr Houghton gave Chartis notice of a charge over the proceeds of the prospectus liability insurance policy under s 9(1) on behalf of the shareholders. Chartis and the Feltex directors issued a proceeding against Mr Houghton, claiming a declaration that the charge did not operate to prevent Chartis from paying the directors’ reasonable defence costs under the policy.
The key issue raised by these two factual scenarios was whether the phrase 'all insurance money that is or may become payable in respect of that liability' in s 9(1) of the Law Reform Act 1936 includes insurance money that is or may become payable on account of an insurer’s liability to reimburse an insured party for defence costs incurred in defending a claim.
The Court held that Mr Steigrad’s appeal must succeed on two interrelated grounds. First, it held that Section 9 does not by its terms apply to insurance moneys payable in respect of defence costs, even where such cover is combined with third party liability cover and made subject to a single limit of liability. Furthermore, the Court noted that combining the two forms of cover – defence costs and third party liability – in a single policy with separate sums insured, or combining the two forms of cover in a single policy subject to a single sum insured, would not change this. In each case, the charge attaches to the balance that is available to meet third party claims after any defence costs liability has been met.
Second, the court noted that QBE had made a contractual promise to pay Mr Steigrad’s defence costs. It noted the established jurisprudence on s 9, affirming that it takes effect subject to the terms of the contract of insurance. Thus, it stressed that s 9 cannot operate to interfere with the performance of mutual contractual rights relating to another liability.
The Court thus allowed Mr Steigrad’s appeal, and quashed the declaration by the High Court. In relation to the Chartis case, it issued a declaration to the effect that Mr Houghton was not presently entitled under s 9 to charge the money payable by Chartis to the directors’ for their defence costs pursuant to the prospectus liability insurance policy.
This is a sensible decision by the Court of Appeal, as it ensures s 9 Law Reform Act is kept within its intended ambit. In doing so, the decision provides directors with greater certainty with respect to the insurance policies that they undertake.
Thanks to Dan Hughes, a Partner in the Auckland office of Kensington Swan for this article
Board decision-making - how informal is too informal?
A recent New South Wales Court of Appeal judgment has created a stir in Australian legal and corporate circles about the culture of board decision-making.
At issue was an appeal by former non-executive directors of James Hardie Industries Limited (JHIL) to have their disqualification orders reduced. They had been disqualified from occupying a management or governance role for five years after they were found to have approved the release of misleading information to the ASX.
The evidence to the Court was that, after the meeting had discussed the draft announcement to the ASX, the Board Chairman asked: “Is the board happy with that?” All the directors present had either nodded or remained silent and, as was usual practice for the board, this was taken as sign-off.
One of the Appeal Court Judges (Barrett JA), however, did not consider that the board had satisfied the requirements of section 248G of the Australian Corporations Act and felt moved to comment on what he considered was appropriate procedure, saying:
“Value is often attached to collegial conduct leading to consensual decision-making, with a chair saying, after discussion of a particular proposal, “I think we are all agreed on that”, intending thereby to indicate that the proposal has been approved by the votes of all present.
“Such practices are dangerous unless supplemented by appropriate formality.
“The aim is not to consult together with a view to reaching some consensus, although it may well be, as a practical matter, that such consultation facilitates the making of the decision that is ultimately required. The aim is rather that members of the board should consult together so that individual views may be formed and the individual will of each member may be made known in a clearly communicated way.
“The culmination of the process must be such that it is possible to see (and to record) that each member, by a process of voting, actively supports the proposition before the meeting or actively opposes that proposition; or that the member refrains from both support and opposition. And it is the responsibility of an individual member to take steps to ensure that his or her will is expressed in one of those ways”.
These “observations” were incidental to the decision, but in the opinion of at least one legal commentary, may have “a lasting legacy” on board conduct. Whether these ripple effects make it across the Tasman is hard to predict.
The strong Australian presence in the New Zealand corporate sector would suggest that there may be a roll-on effect. But the default position under the New Zealand Companies Act is different to that in Australia. (In both jurisdictions, the default positions can be contracted out of in a company’s constitution.)
The default position under section 248G of the Corporations Act is that board resolutions “must be passed by a majority of the votes cast by directors entitled to vote on the resolution”. This is not a requirement in the equivalent provisions in Schedule 3 of the New Zealand Companies Act, which state:
•a resolution of the board is passed if it is agreed to by all directors present without dissent or if a majority of the votes cast on it are in favour of it, and
•a director present at a meeting of the board is presumed to have agreed to, and to have voted in favour of, a resolution of the board unless he or she expressly dissents from or votes against the resolution at the meeting. [Emphasis added.]
The New Zealand courts are clear that there is an obligation on each director to read their board papers, make any additional enquiries that are necessary and form their own judgement on the matters before the board. But the New Zealand legislation also permits decisions to be made by acquiescence. Does this suggest that New Zealand law places a higher value on consensus decision-making than Australian law?
Casual readers of the High Court’s judgment last year against the Nathans Finance directors might think so. In that case, the Court criticised the board for not meeting to discuss the final content of the company’s 2006 prospectus and investment statement.
“At such a meeting, the directors could have read through the two offer documents and compared the content with the position they knew existed. Further advice could have been sought on any agreed approach, based on an updated factual position on which the lawyers could advise.
“The absence of a collective discussion meant that the directors “considered” the documents on an individual basis and, in my view, failed to treat the issue with the solemnity it deserved,” the Court said.
The point the Court was making was that the Nathans’ directors were (or should have been) aware that there were serious concerns around Nathans’ exposure to VTL (of which it was a wholly-owned subsidiary) so should have met to discuss and ensure that this risk was presented accurately to the market.
This is not the same thing as consensus. Indeed, the “casual” consensus which arose from the directors’ individual consideration might have been upset had there been a meeting at which the documents were properly discussed. Which is, in essence, the same point being made by Barrett JA in the New South Wales Court of Appeal – directors’ meetings are not merely for the sake of form, but for the purposes of ensuring robust consideration and discussion of proposed courses of action.
New Zealand has a highly consensual governance culture. This is a good thing to the extent that it encourages collegiality. But it can have a downside if directors censor themselves to avoid disturbing the consensus.
The standards to which decision-making directors will be held are the same, however their decisions are made. Whether decisions are made by formal vote or by acquiescence, they should only be made after appropriately robust engagement by all directors.
Thanks to Geof Shirtcliffe, a partner at Chapman Tripp for this article which appears in the February 2013 issue of Boardroom magazine
Pike River: New director obligations?
The following recommendations have been made by the Royal Commission into the Pike River Disaster. Recommendations (potentially) affecting directors are:
• The statutory responsibilities of directors for health and safety in the workplace should be reviewed to better reflect their governance responsibilities.
• The health and safety regulator should issue an approved code of practice to guide directors on how good governance practices can be used to manage health and safety risks.
• Directors should rigorously review and monitor their organisation's compliance with health and safety law and best practice.
Regardless of whether these recommendations end up in legislation or regulations affecting workplace safety and health, and regardless of whether or not you operate in the mining industry, they serve as a sharp reminder that health and safety are (rightly in our view) considered to be prime amongst the areas for which ultimate responsibility rests with boards and their directors.
If you are unsure of:
1. Whether or not your current governance practice covers this adequately; or,
2. How to devise suitable policy; or,
3. How to administer, monitor and review in this area
contact us. Now that these matters have been given (further) prominence ignorance, niggardliness and unwillingness to invest in this area is unlikely to be regarded as an adequate defence by any Court.
What is a Non-Profit Organisation
Mark von Dadelszen is a Hastings lawyer and author of Law of Societies in New Zealand. In this recent article he explains the definition.
Read the article: www.brentwheeler.com/media/1/20121011-What%20is%20a%20non-profit%20organisation.pdf
Directors' responsibilities – when things go wrong
We pinpoint some useful tips for clients who may be considering taking on a governance role in a company for which they do not necessarily have all the prerequisite skills or experience.
This case concerns a foreign exchange investment broker.
The elements of the case involved fraud, breaches of directors' duties and, ultimately, the need to define the role and responsibilities of non-executive directors.
The defendant was a non-executive director in the company – he was a medical practitioner.
The defendant absolved all responsibilities to the executive director. He did, however, sign on behalf of the company an employment contract that required the executive director to report directly to him.
The defendant allowed the executive director to have sole charge of the running of the company, including being the only signatory to the cheque account.
Directors' meetings were never held, no accounting records were ever maintained, no budgets or plans existed and segregation of duties were non-existent.
As a consequence, the executive director committed fraud while in charge of investors' funds. The defendant relied on the executive director's "vast experience", which amounted to learning about Forex trading on a rugby trip.
No checks were made into the background of the executive director.
If checks had been carried out, even the most basic of inquiry would have revealed that he had been involved in suspected fraudulent activities in South Africa.
As a consequence, the executive director faced seven counts of theft brought by the Serious Fraud Office in relation to these matters. The court, in its judgment, found against the non-executive director for $300,000.
The message is clear for all professionals when advising clients who may be considering taking on directorships involving companies in which they have no experience:
• Be fully aware of the financial situation of the business at all times.
• Ensure basic controls are firmly in place.
• Attend all board meetings.
• If they do not have experience, they must be prepared to find out what is involved.
• Seek advice where possible from experts in the industry.
• Understand the risks and rewards associated with the industry.
Unless the clients are prepared to take on these responsibilities and put in the time and effort required they should either:
• Decline the directorship.
• Take out expensive insurance protection.
• Be prepared to face the extremely punitive consequences if things go pear-shaped.
In conclusion, we are left with the opening statement of Justice Geoff Venning:
"This case highlights the risk of a director becoming involved in a company whose business is outside the director's expertise. It also highlights the risk to investors who pursue high returns in speculative investments such as foreign exchange. It has led to loss by all parties concerned."
It is also pertinent to note that this case ultimately resulted in a successful prosecution by the SFO against the executive director, concluding with a term of imprisonment. This, however, was of little help to the non-executive director, who ultimately paid the financial penalty.
DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.
Roy Horrocks is a Partner at McDonald Vague, an Auckland and Hamilton-based specialist insolvency and business recovery firm which handles assignments throughout New Zealand.
He can be contacted at rhorrocks@mvp.co.nz or on (09) 306 3332, or see www.mvp.co.nz