Company director shortage warning as fears of personal liability risk rises

Increased personal liability risk for directors is making some think twice about whether they want the job. Photo / Getty Images

Companies could struggle to get new directors in the future because more are being put off the job by higher risks in the operating environment and personal liability if something goes wrong.

That's the warning from Felicity Caird, the governance leadership manager at the Institute of Directors.

It comes after an annual sentiment survey of its members found 40 per cent of directors are more likely to be deterred from taking a governance role than a year ago - up from 33 per cent in 2018.

It was even higher for directors of publicly listed companies, at 47 per cent.

Caird said that was "quite a jump" and linked it to a number of factors including directors having to operate in a more complex environment.

She said directors were having to deal with cyber risks, climate change and were spending more time on board work in general.

But she said the big factor weighing on directors was the increase in personal liability.

Caird said when the health and safety legislation came in there was an acceptance that it was appropriate for the board to take liability.

"But what we are seeing now is quite a number of different proposals for regulatory responsibility changes."

Feedback from its members was that the "risk-reward" for being a director was "getting out of kilter", she said.

"If we bring in these overt sticks it is the cumulative effect of all these different liabilities. If there is quite a list of things it can be off-putting."

Caird said being a director was a serious role and required a certain level of experience.

"If we haven't got experienced people putting themselves forward, some organisations will struggle to get directors," she warned.

The research also found more directors were being cautious in business decision making because of the increased personal liability risk.

The proportion of directors being more cautious rose from 39 per cent to 47 per cent and was even higher for directors of smaller companies, at 60 per cent.

Fewer directors also felt they had the right capabilities on their board to deal with increasing business risk and complexity.

The survey questioned directors about culture in the wake of the reviews of bank and insurer conduct and culture by New Zealand regulators and the Australian Royal Commission as well as investigations into bullying in the sport sector and sexual misconduct in the legal sector.

Felicity Caird, Institute of Directors manager for governance leadership centre. Photo / Supplied

It found that while the majority of directors (77 per cent) said their board monitored and regularly discussed the culture of the organisation, fewer than half (43 per cent) received comprehensive reporting from management about ethical issues, conduct incidents and follow up actions.

The research found that only 35 per cent said their board was engaged and proactive on climate change.

Caird said while it wasn't new, it was getting more attention from boards and was being put on the agenda as a business issue now.

But those reporting discussions around cyber risk fell from 58 per cent to 50 per cent.

There was also a surprising drop in the percentage of board directors who regularly talked about succession planning for the chief executive, from 63 per cent to 52 per cent.

Appointing a chief executive is seen as one of most important roles of the board. Caird said it may be because it asked if there was formal planning happening and it may be more informal.

"I think it is an area, if it is not on the agenda, it should be."

Caird speculated that it maybe that if something wasn't a burning issue it was being left off the agenda because of the range and complexity of issues boards were dealing with.