They who must be obeyed

Getting a seat on the board is not easy - for many it's all down to networking and meeting the right people. DITA DE BONI reports.

If you were to look through a photo archive from the annual meetings of listed companies in the past 12 months, you'd perhaps wonder why anyone would want the hassle of being a company director.

After all, grim-faced board members wincing under the might of shareholder fury seem to be the modern business photographer's stock-in-trade.

In return for a rise in fees or granting of share options, a roasting from Mr Percy Smallholder, of Takapuna, is par for the course for modern directors: expected - even quietly welcomed - in a typical self-flagellating, Kiwi kind of way.

But putting aside the theatrics of an average annual general meeting, the question of what directors actually do in those closed-door meetings throughout the year remains.

Before they descend in an elevator to the stage as the Fletcher Challenge crew prefer at their AGMs, or through the crowd like a rather decrepit version of Backstreet Boys to pick up their Grammies like the Montana fellows, who accords them this honour and why?

More importantly: what exactly are a director's responsibilities to a company and where, in the case of declining shareholder wealth, does the buck grind to a halt?

The question of what directors do is perhaps best put to one of New Zealand's pre-eminent directors, Sir Dryden Spring, who has sat on the boards of 40 companies in his corporate career.

Sir Dryden, who now sits on eight boards, including Goodman Fielder and Fletcher Forests, sees the responsibilities he carries as being to ensure the company is competently managed, to set objectives, targets and standards, to define the scope of the business and to approve strategy, monitor performance and allocate capital.

"The job is enjoyable as one has the opportunity to shape the destiny of a company and to make a difference," he says.

He sees no absolute limit to the number of directorships a person can have as long as there is no conflict of interest and the person has sufficient time to deal with each company.

These aims are achieved (or not, as the case may be) in meetings held three or four times a year - more frequently during times of turbulence.

New Zealand boards usually have seven members. Around three are executive directors (members of a company's management - generally the chief executive and occasionally the chief financial and operating officers).

The rest, the non-executive or independent directors, are either asked on to the board or, increasingly, appointed to a position after a lengthy headhunting and recruitment process.

Paul Clark, a partner in PricewaterhouseCoopers, which is often called in to troubleshoot problems within boards, says there are a couple of fundamental qualities a good director must have, including industry knowledge and experience, and an understanding of the difference between the role of the board and management.

"[A board] needs people with a degree of scepticism, who will probe beneath the surface of what they are being told," he says.

"And a director must be more risk-averse than management, be more aware of the bigger risk picture. Where managers can get up and go from their posts, directors have legal and reputational responsibilities ... they should focus on governance issues, and leave the day-to-day operational issues to management."

Mr Clark says directors now have to be much better educated on wider issues such as the environment, privacy and employment law - "they face an increasing amount of regulatory review."

Susan Watson, a senior lecturer in commercial law at the University of Auckland, says that while directors have to act in good faith and represent the interests of shareholders and the company, they are not responsible for its financial performance unless a court decides that they have failed to meet the standards required of them in a handful of legal acts.

If it can be shown that they failed to comply with their duties, they may face penalties or even personal liability for the debts of the company.

"[Sections] of the Companies Act relating to directors engaging in 'reckless trading' or entering into legal obligations which objectively the company can not perform, are likely to become increasingly important," she says.

Directors started asking for better remuneration in 1993 when the Companies Act was enacted, citing an increased workload, despite the fact that the law simply codified existing common law that had been around for 150 years.

But they did have to take an increasingly global outlook after the free market swung into force and in the aftermath of cataclysmic times for shareholders around the 1987 sharemarket crash.

New Zealand's participation in the global economy and a growing awareness of best practice in other countries has not always worked in favour of the New Zealand shareholder, however.

"The approach of the courts so far has been not to question business decisions made by directors with the benefit of hindsight, but rather to impose liability on directors when they continue to ignore the blindingly obvious," says Ms Watson.

Frequently, small shareholders think they are the only ones who can see the "blindingly obvious."

As the value of their stock sinks into the mire, they are reduced to a state of apoplexy as some directors continue with their Oliver Twist routines. But only the most forceful displays of public outcry tend to rein in some boards' demands.

Contact Energy, for example, had a proposal to increase payments for directors stymied at the final hour after relentless media and shareholder scrutiny.

Ms Watson says the shift towards growing numbers of institutional directors might mean shareholders will enact their right to monitor and control the actions of directors more than they do now.

Directors' Institute chief executive David Newman sees it somewhat differently.

He says that "closed-room deals" are increasingly disappearing and transparency at management and board level is increasing.

"Look at the 70s and 80s - we had real problems with governance in this country leaving many shareholders battered and bruised."

But he says boards are now considering a wider range of candidates for board membership, in line with shareholder calls that boards better reflect "society at large."

Asked why a business reporter could commonly see the same director at many different annual meetings within in a short space of time, he says meritocracies are the way of the future and the common reputation of New Zealand boards as "old boys' networks" is moving.

While Susan Watson says it is difficult to escape the conclusion that the old boys' network still exists, Sir Dryden differs.

"Today, boards are generally smaller than in the past and business much more competitive.

"There is no room for passengers any more."