So you want to be a director?

Tighter rules on corporate governance and the risk of personal liability for executives at rogue firms make a boardroom seat less inviting, reports Alexander Garrett.

Last Updated: 31 Aug 2010

For nine former board members of insurance company Equitable Life, it is probably an understatement to say that the attraction of being a company director has faded somewhat. Some time in the next year - April 2005 has been pencilled in - a court case will begin in which the insurance company seeks more than £3 billion from its erstwhile directors on the grounds that they were negligent and 'acted unreasonably' in the terminal bonus dispute that led to its virtual demise four years ago. If successful, the action will result in a group of high-flying business people, pillars of the establishment, being made bankrupt by virtue of the position they once held.

Disgruntled policyholders may have little sympathy, but Sir John Banham, chairman of Whitbread and a veteran of Britain's boardrooms, believes the action is a travesty. 'I know some of the individuals involved in Equitable Life, and I think the prospect of such decent, honest, clever people being sued down to their cufflinks because of a rogue judgment by the House of Lords is outrageous,' he says.

Does he think it will act as a deterrent to people considering taking up board positions in future? 'I'm sure it will. It is not just a matter of finance, it is also a question of reputational risk. In the last few years, some of the finest people I know, who have made a major contribution to British business, have had their reputations trashed and seen the end of their careers. It (a non-executive directorship) has become a much less attractive proposition, and if somebody rang me and asked me to become chair of one of the several companies currently being touted around the market, I wouldn't dream of it - even if I had the capacity.'

Banham sums up how the equation has changed: 'The liabilities and risks on individual non-executive directors have increased substantially, and the amount of time you have to put in has increased dramatically. You have a lot more responsibility without the concomitant authority.'

Non-executive directors have been in the spotlight ever since the Enron affair first erupted in 2001. As allegations of massive fraud surfaced, critics began to ask what the non-execs - among them former Tory grandee John Wakeham - had been doing.

More corporate scandals ensued, amid a growing clamour for non-execs to be held to account. The Government appointed former UBS banker Sir Derek Higgs to look at how the role of non-execs should be tightened.

His report, published last year, not only increased the number of non-executive directors a company must have, but spelt out their increased responsibilities. Higgs also made it clear that the days when leading business figures were allowed to 'go plural' by taking on a dozen or more directorships would soon end.

It may be hard for the rest of us mere mortals to feel a twinge of sympathy for non-exec directors. After all, earning a respectable salary for a few days' work a year, which consists mostly of attending meetings, might sound like nice work if you can get it. But the rising crescendo of bleating from company boardrooms reflects a serious concern that the people who are really qualified for the job increasingly don't want it.

The result, headhunters have discovered, is that high-calibre non-execs are becoming harder to recruit. Julia Budd, a founding partner of the Zygos Partnership, says the problem is particularly acute with chairmen of FTSE-100 companies and chairs of audit committees. 'A number of people are simply saying: why bother? I don't need the grief,' says Budd.

And Stephen Lawrence, chief executive of Whitehead Mann, says that whereas inside the FTSE 250, candidates for non-executive roles are becoming more choosy and exercising more due diligence, those in smaller companies are demanding higher rewards for the increased workload.

Says Robert Bittlestone, MD of management consultancy Metapraxis: 'There's an upside and a downside to being a company director. The upside has always been that it is flattering to be invited, there are opportunities for networking, and you may find the issues that the company is facing to be challenging. That hasn't changed, but the downside has.'

Possibly, the biggest deterrent to taking on a non-exec role is the risk to your reputation. Observes John Collier, a director of Glen Irvine Executive Search: 'You have City editors and analysts studying your every move. If you get it wrong, your reputation can be shredded pretty quickly.'

Then there is financial liability. The big financial claim against Equitable's former board may be considered exceptional on this side of the Atlantic, but in the US such suits have become common. And as Zygos' Budd notes: 'Where the US leads, we follow, and so there is certainly a fear of this.'

She is not alone in pointing out that Directors and Officers (D&O) insurance has plenty of exemptions - not least if you are no longer serving - and that potential directors should study the policy carefully before they sign on the dotted line.

The burden of increased time and commitment is a slightly different issue.

A few years ago, a non-exec role may have been considered a cosy sinecure, requiring the commitment of a few days a year, but now the number of meetings, their duration, and the amount of preparation required have proliferated.

Few think this a bad thing in itself. Says Budd: 'We don't want people who are only concerned about the quality of the lunch.'

But the immediate consequence is a demand for bigger rewards to compensate.

Until recently, £25,000 to £30,000 was par for the course for a non-exec directorship with a mid-cap company. Already, the ante has been raised to about £35,000-£40,000 and a few big players are paying £75,00-£80,000, according to one headhunter. Recent research by Income Data Services found that the average remuneration for FTSE 100 non-execs has risen 36% to £40,000 in the past 12 months.

And remuneration is one thing, but many feel the expectations now placed on non-execs are too high. They have the same responsibilities as the execs ('a director is a director is a director' runs the old adage) and more, since they are increasingly expected to scrutinise the behaviour of the executives. Says Budd: 'If there is mismanagement, it can be very hard to get to the bottom of it, however good you are, if you are employed for only 12 days a year.'

Another consequence of the increased spotlight on non-execs is that it is becoming much harder for companies in any sort of trouble to recruit new board members, even though they need the help most. If you are a serving financial director, for example, why would you take the risk of becoming associated with a company where there was any taint of mismanagement or financial wrongdoing? Your fellow executives at the day job would not be too keen, either, even though taking on non-exec roles has been regarded as a good development step.

Says Collier of Glen Irvine Executive Search: 'There is a flight to quality. I think some people will take on positions only with top-flight, blue-chip companies in future.'

Rod Armitage, head of company affairs at the CBI, advises: 'Anyone offered a directorship really needs to do the due dilligence these days before they accept. You need to ask: how good are the execs? How likely is there to be a problem of litigation? It's not a bad thing, but it all takes time.' Adds Bittlestone: 'You have to feel confident there aren't any black holes.'

So much for the part-timers; what about the execs, the ones who take off their jackets and roll up their sleeves? There is a growing reluctance to take on even these roles, it seems, although few will admit publicly to such lack of ambition. One high-flying director at a FTSE-100 company - who is not on the board - says: 'I just think it's a nightmare, the pressures you are put under, the relentless scrutiny.' Another 30-something director of a private company adds: 'When I was at university, all my peers had the ambition of being on the board of a FTSE company; now none of them wants to. The potential rewards are just so much higher in private firms, where you have the chance to own real equity, with none of the hassle.'

There are plenty of easier ways to earn a thick crust, as Luke Johnson, chairman of Channel 4, observed in a recent article in the Daily Telegraph: 'High-fliers in the City laugh at the roasting the poor mugs who actually run large industrial companies suffer at AGMs and in the press. Hedge fund managers, private-equity partners, senior investment bankers and other financiers mostly earn much more.'

Whitehead Mann's Lawrence points out that among smaller public companies, the cost of bearing a larger number of non-executive directors, in conformance with the Higgs recommendations, is prohibitive. 'If you have five or six execs on the board, then under the new rules you would need seven or eight non-execs. Our experience of what many companies are doing in this situation is simply taking most of their execs off the board, and instead having an executive committee that runs the business. There is a risk that we are moving towards a German-style two-tier board system by default rather than design, when all of our corporate governance is designed for a unitary board.'

Fat cats or not, directors will never be popular figures among the public at large. But if nobody wants to take the responsibility any more, will we all be worse off?


When you become director of any limited company - even if that simply means incorporating as a sole trader - you will receive a nifty little booklet from Companies House spelling out your responsibilities. Under the heading 'Directors: powers and responsibilities', it gives the following vague summary: 'Since the directors can act as and for the company, they must ensure that the company does everything that it is obliged to do by law and that the decisions they make are in the best interests of the company.' Specifically, you must complete the directors' register and ensure that accounts are filed.

In practice, though, this is just the tip of the iceberg. Simon Goldring, a partner at lawyers Reynolds Porter Chamberlain, says: 'The range of potential claims against directors is very broad.'

Most civil claims against directors are brought by the company itself, or its liquidator in the event of an insolvency. The two main types of duty a director owes are fiduciary - which broadly entails acting in the best interests of the company - and a common law duty of care, which entails an obligation to manage the company without negligence.

Directors should also take particular care over the interests of creditors once the company approaches insolvency, as they can be personally liable under the Insolvency Acts.

As far as criminal liabilities are concerned, the Companies Act outlines some 200 offences that directors can be charged with, including filing accounts incorrectly. In addition, directors have been convicted under health and safety laws and pollution legislation. As a general rule, it's the company that is prosecuted, but directors are vulnerable where they have 'connived or consented' to offences in the eyes of the law.

Non-executive directors owe the same duty of care as their executive brethren, says Goldring, but each will be judged on their individual actions.

'Non-executive directors also have potentially an additional duty to investigate and supervise the executive directors, although there hasn't been a successful action brought on those grounds yet.'

They could also find themselves prosecuted by the regulator, the FSA, on grounds ranging from giving false information in a share prospectus to market abuse/insider trading.

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