Feltex decision shows lack of clarity for boards

The Feltex directors were found not guilty of breaching financial reporting rules. Photo / Sarah Ivey

There is a lack of clarity for boards about who directors ultimately serve and the debate about the Feltex decision has highlighted this, a Massey University lecturer says.

Research by Massey University's head of executive education James Lockhart found about 92 per cent of directors believe their main duty is making money for the company's shareholders, rather than to the company itself.

Just under 200 directors from medium to large companies from the private and public sector were interviewed for the survey.

Lockhart said the Feltex judgment had highlighted a need for clarity on corporate governance for listed companies.

Auckland District Court Judge Jan Doogue found Feltex's five directors, Tim Saunders, John Feeney, John Hagen, Peter Thomas and Peter Hunter, not guilty of alleged Financial Reporting Act breaches on Monday.

The Crown alleged Feltex failed to report it was in breach of its A$100 million loan with ANZ and that its debt with the bank was current, meaning it was on call, in the interim half-year accounts to December 31, 2005.

The directors concede those details were not disclosed when the statements were registered but claim at the time they believed the accounts were compliant.

Lockhart said an "overwhelming" majority of respondents, some 86 per cent, considered the involvement of independent audit committees decreased malfeasance, while 82 per cent said directors needed to have a capital stake in the firm in order to be effective.

The Feltex directors hired Ernst & Young to conduct a voluntary review of the company's interim accounts, but the firm did not pick up the lack of disclosure, and the directors had personal investments in Feltex but the company still failed.

Lockhart said to understand why the company collapsed, you would have to go back 10 to 20 years from the time the company went into receivership - September 2006 - and analyse the decisions that were made along the way that led to Feltex's insolvency.

"They [directors] had to steer the boat into the eye of a storm. There is a long history there [of financial difficulty]. It's hard to nail those people who were responsible for steering the boat in a direction for the collapse of the company just because they were directors at the time.

"The Crown didn't get it right in the eyes of the law. This doesn't explain anything about why the company collapsed," Lockhart said.

"The wider community needs to understand that company boards and directors are a lot broader than finer points of law. Those directors walked into a company that was struggling to perform."

But Chapman Tripp partner Roger Wallis said the Feltex decision in relation to directors' duties was "entirely orthodox".

Wallis said Judge Doogue's decision was conventional as directors could not do "everything themselves".

The judgment didn't say "directors can sit back and let the professionals handle it".

"It in no way implies the responsibility for the accuracy of reports to shareholders can be devolved entirely to advisers.

"It says that where the board lacks the technical expertise necessary to ensure that information is accurate and is in compliance with the law, it is entitled to seek expert guidance and having sought that guidance is entitled to rely upon it.

"Those directors [Feltex] have been through a lot of grief. The Crown Solicitor would be completely insane to appeal [the case]. It doesn't say just rely on the experts. It was used as a defence in this case because they took other steps.

"Board meetings should be focused on strategic direction and monitoring management, to ensure the company makes money. Days should not be spent reading through financial statements," said Wallis.