Directors warned of possible pain

Press, 27 August 1977, Page 11

Directors warned of possible pain

PA AUCKLAND A warning to directors invited to “join the boards of local companies,” that face “a painful exprerience” if they are not more attentive to their responsibilities and duties, has come from a former senior detective of the Criminal Investigation Branch.

“I would suggest that persons asked to join boards now do so only after reflecting carefully upon the responsibilities they assume and the availability of their time to perform adequately,” said Mr C. E. Sturt, who spent years investigating the collapses of companies, and now is the director of the Sturt Foundation for investment research. He said that recent corporate collapses had heightened awareness that severe liabilities might be inflicted on directors not attentive to their duties. “Indeed, if we follow the overseas pattern, the tumbrils are already rolling and we can exnect to hear the thud of the corporate guillotine more often as boards are being cleared.

“This will be a painful experience for some directors, but it is to be hoped such a cleansing operation will enable the public to again have confidence in their stewards and cause a reflow of investment money into the business community.”

Mr Sturt was giving ah address on “protection of the investor” to a meeting of the Auckland branch of the Institute of Chartered Secretaries and administrators.

He said he was aware that many present were directors, but would be critical of directors be* cause they formed a vital part of the picture of investor protection.

The collapses of the last few years of organisations dependent on large public moneys was causing concern, and indications were that the collapses were not at an end.

The raised questions about the directors, the “watchdogs of the shareholders’ investments.” Mr Sturt said that if recent history were .a guide, many directors could be expected “to be found soundly asleep right up until the time the receiver walked in.” Called to task, they would use as excuses honesty of intention and ignorance of fact. But, as Rudyard Kipling had said, there were millions of reasons for failure but not a single excuse. The company secretary could also be questioned on the performance of his duties, Mr Sturt said. His experience while with the C1..8. was that often in times of corporate stress professional ethics had been abandoned, and when they were most crucially needed standards were not adhered to. “I realise I may well have a biased view, but I must state that criminality is to be found more often amongst the causes of corporate collapses than

many people realise. “There is considerable difficulty in producing sufficient evidence to satisfy a criminal court. This alone has prevented more charges being laid. There have been a number of times my colleagues and I knew of criminality and fruitlessly bashed our heads against a brick wall trying to get evidence. “In the wake of company crashes the plea of ignorance or honest intention is just not acceptable. Where public funds are concerned directors have a duty to ensure the funds are honestly solicited and honestly used. They cannot fulfil that duty unless they keep themselves fully informed. “In the area of commercial crime I am aware of numerous men who had unblemished records and untarnished characters and nevertheless were still criminals. No-one bothers with a burglar’s previous good record, nor do we hear much of the untarnished character of the first offending thief. Yet these items seem to be of tremendous mitigating effect when applied to the area of large fraud.” Mr Sturt said that it was regrettably true that there were few guidelines available for outside directors, many of whom were appointed for social or status reasons. Far too infrequently were they appointed for the right reasons.

It was apparent “the crony influence” had been too common in New Zealand corporate circles. There were no affairs of a company which were justifiably known only to management. The limitation for the directors lay

in what they should not do, not what they should not know, he said.

“There are many honest, highly-competent directors around — in fact they are in the majority. They carry out their duties diligently. Nevertheless, there is ample evidence from our research that many outside directors have approached their responsibilities in a routine, ineffectual manner. “We have also found there has been alarming lowering of business ethics.”

Outside directors must conform to higher standards of conduct. Mr Sturt said that, at a New York conference on the duties and responsibilities of directors, which he attended recently, there was heated discussion over boards having outside directors not truely independent.

A main area of concern centred around the high number of merchant bankers and lawyers on boards.

"The point was made,” he said, "that these men often had dealings with the corporation in their non-director capacities. Indeed, one case was quoted where a lawyer asked for $500,000 of work for his firm as a condition for his acceptance of a seat on the board.

“The conference highlighted the fact that concern is felt in all business communities throughout the E n g 1 i s h-speaking world over the role of directors. The directors at the conference expressed the view that, if they themselves did not do something, it would be done to them."