The issue of directors’ liabilities has received a lot of recent attention, especially in regard to directors’ personal exposure over breaches of disclosure and insolvent trading. While recent focus has been on public company directors, the existing legal and regulatory environment also has a significant impact on how privately owned businesses are governed.
The law works to try to protect society from the harmful actions or decisions of directors, and that is a good thing. However, when it is so onerous that people do not want to be appointed as directors we need to consider whether it has gone too far. Perhaps this environment actually discourages SMEs from having properly functioning boards.
The owner/operators of many privately owned companies go to great lengths to minimise exposure to personal directors’ liabilities. You just have to look at how many private companies have taken up the option of having only one director; many of these companies have other stakeholders who, in other circumstances, would have been directors.
Often in family businesses, one suitably asset-poor family member will be offered up as the sacrificial sole company director while other executives make sure their titles never contain the ‘D’ word. Some never have formal meetings except for management meetings at which they are seen to discuss operational matters but never high level issues.
Indeed many private companies are reluctant to hold any meetings that could look like board meetings and result in the attendees being viewed as acting in the capacity as directors.
And if the owners are reluctant to act as directors you can be sure that external people will not be keen to take on the role.
Gone are the days when being a company director was a sought-after status symbol, at least for private businesses. Years ago it was common for private companies to have their accountants or other advisors on their board – that practice has now generally ceased and advisors strive to make sure that they remain just advisors. The discipline and formality of having a real board has slipped away as many of the people who would once have been directors run for cover.
The result of this general paranoia is that many private businesses do not have effective corporate governance; they have no forum to address strategic and risk management issues and they never develop the governance skills needed to take the business to the next level.
Surely that’s not in the interests of the individual businesses, the SME sector or the community in general. What our regulators should be doing is actively encouraging all businesses to have functioning boards – because this is the mechanism by which many of the problems can be prevented.
What we have now is the very large stick of personal liability which is used to beat directors of companies which have traded while insolvent, failed to pay PAYG withholdings, or breached a myriad of other regulations. But the stick comes into play after the damage has been done.
What we need is a carrot to entice private businesses to establish boards and formal corporate governance processes that will help prevent the problems arising in the first place – processes like risk management, strategic business planning, monitoring financial performance; setting key performance indicators and monitoring and reporting in relation to regulatory requirements, such as OH&S and environment protection. These functions generally require formal agendas and regular, properly convened meetings of people who understand such matters; people who really can act as company directors.
Overcoming the deterrent of onerous directors’ liabilities is an important issue if we are to attract people to act as directors of private companies. While public companies have special responsibilities to their shareholders, which require stringent controls such as board independence and separation of the board from management, many of the general corporate governance principles are less relevant to private companies where management and ownership are embodied in the same individuals. What is really required is the discipline and formality of looking at the high level issues, instead of the minutiae of management. At the risk of being controversial, perhaps there is an argument for differentiating the liabilities of directors of SMEs from those of public companies; for example, having a protected class of non-executive/advisor director of private companies, as long as at least one director exists who carries the usual liabilities.
Many private companies desperately need an external view and board experience that comes with external board members. All private companies would benefit from the additional expertise and formality of experienced directors.
So while regulators in the past have focused on the stick approach, my wish is for a more positive pro-active strategy that would engender more professional, well-governed SMEs.
Sue Prestney FCA is spokesperson on SMEs for the Institute of Chartered Accountants in Australia.