Feltex warnings for directors and their 'experts'

A business governance specialist says the prosecution of individual directors in the Feltex case will sound warning bells for all company directors, who now realise they could be charged individually in relation to any perceived collective failure by boards on which they sit.

Professor Martin Devlin, programme adviser for the University's Master of Business Administration, says even though the five Feltex directors were found not guilty of charges laid by the Ministry of Economic Development under the Financial Reporting Act, other company directors will feel they are putting their own reputations on the line when they join a board.

“Many directors will be concerned that they can, individually, find themselves in court on such charges as faced by the Feltex directors, even after relying upon experts for advice and guidance,” he says. “At the end of the day, it is the board of directors which is ultimately responsible for the accuracy and transparency of reports to shareholders, not the experts, and this responsibility cannot be devolved.

“The challenge will be to ensure that a director does not become over-reliant on external expertise, that every effort is made to ensure such expertise is actually correct, via second or even third opinions, and that directors do not assume that the defence employed in the Feltex case automatically applies in all similar situations – it may very well not.”

Professor Devlin, who has lectured in corporate governance, says the Feltex case also shows an increasing focus by regulators on the activities of governance bodies, which he says is long overdue.

The University's head of executive education, Dr James Lockhart, also says the Feltex case raises questions over the role of the board and its responsibility to shareholders. “Is [a board] primarily there to ensure that no shareholder loses their investment or is it primarily there to ensure that management is continuously striving for exemplary performance? The Feltex ruling will provide little comfort to both investors and stakeholders trying to assign responsibility for the company’s collapse.”

Dr Lockhart says the findings also raise the likelihood of investors, in future, pursuing third party providers in cases of corporate failure. “Law firms, mostly with near unlimited liability, will find this uncomforting while accounting and business advisory firms, who often have tight and well specified levels of liability, could be expected to pull their shroud even tighter."