To jump or not to jump - 1st Sep 2010

Directors are sometimes faced with situations where they must weigh up the prospect of “alarming investors and spooking the market” with their own discomfort regarding the financial state of a company. On the face of it this looks like a clear enough decision – if a director is unhappy with internal goings on and is unable to do much – at least in the her and now – about it, then surely resigning is the obvious course.

Things are rarely this clear. A surprising resignation is likely to lead to difficult market conditions under which investors might feel they have to sell, with subsequent price dips and losses to investors – outcomes which, should the company survive and go on to prosper might well be seen as inappropriate. Clarity is only apparent after the event.

Justice Miller in Davidson v Registrar of Companies (High Court, Wellington CIV 2010 – 485-76, 27 August 2010) as reported in NZ Lawyer 145 September 2010, has thrown some light on the issue in dealing with the matter of resignation and Bridgecorp Holdings Limited. His Honour accepted that the motivation in not resigning was an honourable one but noted that the long term health (and wealth) of shareholders would have been better served in this case by resignation.

In other words, resignation can be a signal – albeit an unwelcome one – to investors that trouble is afoot. Moreover because resignation is a serious matter its occurrence signals the strong probability that matters cannot be out to rights. Helpfully the Judge notes that where there are potential problems one might expect to see a review having been initiated by the board, of both the company’s cash resources and its ability to pay its debts as they fell due.

The detail of the Bridgecorp case is of no great import here and it might – indeed we would hope – it represents an extreme case but the message is clear. Regardless of the honestly help hopes and aspirations which directors may have, when the probabilities shift materially to the likelihood that collapse is imminent or likely then investors deserve the benefit of that signal which resignation provides. The caveat of course, is that the signal is not always as strong as might be hoped for. Two directors of South Canterbury Finance resigned well before there was general knowledge of the true state of affairs at the company underlining the fact that resignation is an important but last ditch measure.

Dr Brent Wheeler

September 2010

Feltex Directors: What can we learn…..? - 1st Aug 2010

Directors charged with failing to discharge their duties as directors in ensuring full compliance with the financial reporting legislation were today 2nd August 2010) found not guilty of the charge. While this finding is welcome not only to those charged but to the director community at large there are valuable lessons to be learned from the case – particularly when we bear in mind that those charged included some of the country’s most experienced finance professionals and directors.

Much of the case revolved around the acceptability of relying on advice (in this case from big brand accountancy firm Ernst Young [EY]) and the extent to which directors are otherwise required to take measures to ensure compliance. In this case their reliance was found to be reasonable and thus the directors were deemed to have acted appropriately.

In the long winded debate which led to this conclusion however there was considerable discussion over just what kind of advice was sought and given, its status and its meaning relative to the requirements of the legislation. In particular EY argued for example that their advice was a “review” not an audit and thus they could not be expected to uncover all matters which might need to be disclosed.

The lessons then seem to be:

1. Be very clear what kind of advice is being sought.
2. Make sure that the advisor knows (in writing) what the advice is going to be used for.
3. Ensure that terms are defined – what is a “review” compared with an audit and so on.
4. Where is liability (if any) to fall should matters become heated and difficult.

Briefing advisors of all types is, in other words, critical. A lesson taught in the Boardroom Practice “Risk Management for Boards” modules runs under the heading “Use Advisors and Know How to Use Them”.

Despite today’s decision it is clear that simply relying on advice in an “all care no responsibility” fashion is likely to lead to trouble.

Brent Wheeler

August 2010

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