by Thea Saliba LLB., Dip. Not. Pub.
As the culture of appointing non-executive Directors (NEDs) and independent directors to the Boards of Maltese companies increases, regular discussions on how the law regulates their position and role become ever more relevant.
NEDs are normally described as directors who do not have an active role in the day-to-day management and direction of a company, but would normally make sporadic visits to the company. They are often appointed in large companies typically with the role of scrutinizing managerial decisions in order to enhance the company’s long term success. Thus their independence is crucial, given their typical involvement in such areas as appointment and removal of senior management, remuneration of executive directors and overlooking the general governance of the company.
The law makes it clear that directors owe a duty of loyalty to the Company, and are responsible for the general governance of the company, its proper administration as well as the management and general supervision of its affairs. Directors are legally bound to use their powers honestly and in good faith, to seek the best interests of the company and to promote its well-being. These duties and responsibilities apply to all directors, irrespective of their designation. Cases dealing with the position of NEDs are not numerous. In Malta, the typical problem involves liability for VAT, given that directors are jointly and severally liable together with the Company for such payments.
Until the local courts decide on how the liability exposure of a NED may differ, if at all, from that of other directors, a person accepting such a role would be wise to heed the directions of some foreign cases, such as the Australian case of ASIC v Vizard, where a NED was found to be in breach of his fiduciary obligations as a director, for having gained a personal advantage using company information. In Howard v Herrigel, Goldstone J A, opined that even if a director omits to take steps in the management of the company, one may still be a party to a fraudulent conduct.
Clearly, NEDs owe fiduciary duties to the company they serve like all other directors. It is therefore essential that a NED insist on some basic risk management measures, such as laying down clear yardsticks for behavior, when invited to sit on a Board in a non-executive capacity.
The OECD Principles of Corporate Governance, states, in Section VI, that the board should appoint non-executive board members who exercise independent judgement on matters where conflicts of interest can arise.
The Financial Reporting Council (FRC) of the United Kingdom promotes The UK Corporate Governance Code which covers a variety of issues, including the way a board should be composed and its suggested operating procedures. In its most recent 2012 iteration, the Code states the following:
The board should include an appropriate combination of executive and non-executive directors (and, in particular, independent NEDs) such that no individual or small group of individuals can dominate the board’s decision taking.
Various authors state clearly that the person’s functions matter much more than his title, when it comes to determining his liability at law. However, it is also true that when a person accepts the formal title of director, he is making very clear implied affirmations in connection with responsibility, irrespective of his actual executive function within the company, and should therefore ensure that basic risk management measures such as appropriate corporate governance rules are duly adopted.