To govern or not to govern – why is it important?
For many directors and business owners, corporate governance is a background function that is secondary to the day to day operations of the company. For those whom strong corporate governance is an ingrained way of life, independent non-executive director positions may follow with other larger, often listed companies.
However, companies rarely start out with an independent non-executive director on their board. Most companies in New Zealand are small and medium sized businesses, with a director or directors who started the company and are majority shareholders. They may not know the intricacies of corporate governance, but they do know their business. Nowadays, after five minutes spent online, you can be on your way to incorporating your own company on the Companies Office website. Great, you’re a director. You have a company number to give to your accountant and you have protected yourself with limited liability status.
Well not quite. For the protection to work you need to adhere to your director duties and run your company properly. So what are your director duties you may wonder? Well the Companies Act 1993 (Companies Act) sets many of these out. It also sets out a multitude of rules around how you must run your company. I’m not going to lie to you, it is a long read and it isn’t the only piece of legislation you need to focus on, but for the purpose of this article it is where we will draw the line. What you might notice is that whilst some of the duties are very specific, others are rather vague, such as the ‘Duty of Care’ and the ‘Duty to Act in Good Faith and in the Best Interest of the Company’. On top of the Companies Act you also have the common law duties to adhere to, these are rules that have been set by the Court as part of a judgement from a Court Case. There is a lot to consider.
A lot of directors ask me if there is really any risk – ‘surely I’ll just get a slap on the wrist if I make a mistake?’ Well actually, if things get really bad a director could be looking at prison for up to five years or a fine of up to $200,000. You can also take on personal liability for actions if you have breached your duties. You may be a gambling kind of person, but as a lawyer I’m a little more risk averse, especially with my daily freedom on the line. At the end of 2017 the High Court released the judgement on the case of FAF Holdings Ltd (in liq) v Bethune. They found that the director, Mr Bethune, had breached his duty to act in good faith and not trade recklessly. Due to these breaches he opened himself up to personal liability and judgement was made against him for the amount of just over $500,000.
The question is how do you comply with something that at a first glance appears somewhat overwhelming? A good starting point is corporate governance. The Companies Act contains a small selection of defences for directors which focus on having taken ‘reasonable steps’ to ensure compliance. Good corporate governance can be the first of those ‘reasonable steps’ to get protection.
In 2017 the NZX published the NZX Corporate Governance Code and on 28 February 2018 the Financial Markets Authority (FMA) released a handbook Corporate Governance in New Zealand – Principles and Guidelines. Whilst strong corporate governance won’t ensure your company complies with all the legislation it needs to, it is a good start to getting your business into the practice of thinking about it. If you follow the principles it should get you in the mind-set that corporate governance is an important everyday part of your business.
Both sets of guidance set out eight basic areas to go through:
- Ethical standards
- Board composition and performance
- Board committees
- Reporting and disclosure
- Risk management
- Shareholder relations and stakeholder interests
Whilst the NZX guidance is predominantly published to give guidance NZX listed companies and the FMA guidance is focused on FMA regulated companies, they both set out key principles that apply to all companies. Ensuring your company has strong corporate governance will reduce your risk of exposure as a director and likely lead to a more successful and effectively-run business.
If you have questions around corporate governance, please contact Phoebe Davies or a member of our corporate and commercial team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.