In the last blog we established that the governing body (or board of directors for corporates) has legal responsibilities to exercise leadership over the organization or else face the possibility of legal liability as censure.
A common mistaken assumption is that if one is a Trustee or Board member of a non governmental organization without pay, then they are exempt from legal liability. This is untrue. Your legal responsibility and the resultant liability exist irrespective of whether you are paid or acting pro bono. That is why it is important to demonstrate competency and skill in your directorship. Many directors or Trustees operate on the basis of herd mentality. In other words they flow with the team especially in the non profit sector. However this does not absolve you of personal liability.
A director should exhibit independence of thought, professional skepticism and competency in analyzing and discussing matters for the good of the organization – and I dare say for the director’s good as well since board negligence can lead to litigation. In SA in particular a director may be hauled before the courts and designated as a delinquent director. The case of the former SAA Chair is a case in point. Once designated as delinquent you can easily be barred from serving as a director for a period ranging from 7 years to for life.
It should be emphasized that while the Board acts corporately as a Team, each director personally owes the organization a duty of care and duty of good faith. The painful part of this potential liability is that since its joint and several, litigants prefer targeting the wealthier Board members to recover the full amount. After all the wealthier board members are likely to have more to lose from a potential litigation. If invited onto a Board do a due diligence on both the organization and the other Board members to ensure you limit your exposure.
Some people feel that they are covered by Directors indemnity insurance. Tis insurance will not cover for willful misconduct, breach of trust, reckless trading, acting outside your range of authority and being party to fraud. It is therefore important for directors not to take comfort in so called indemnity insurance. If you serve on a governing body, govern or if it is impossible to do so consider resigning.
I once served on a Board of a financial institution. At some point the CEO openly ignored the Board’s decision on a critical matter that was detrimental to the interests of the organizations because of an emotional bond to an executive who was destroying value. When the Board could not take a meaningful position to correct the anomaly and it became evident that the CEO was overbearing on the Board, I opted to resign. In my resignation letter I clearly explained my reasons for resigning. At times we need to make decisions based on principle.
When you structure your business corporately, be aware that the moment you have a minority shareholder or a substantial public interest in your business or potential impact on the community by your business then corporate governance issues kick in. Many SME bring on board smaller equity partners and continue to operate as if they are sole owners. The moment you issue shares to another party, you now have responsibilities to those shareholders to consider in every corporate decision you make.
In the next blog we will discuss the matter of ethical and effective leadership.