With £4bn at stake, the courtroom was packed on 8 April as Equitable Life kicked off its claim against Ernst & Young and 15 former directors. But while the case may be nirvana to court reporters, it has potentially grave implications for non-executive directors in the UK.
Equitable’s chief executive Charles Thomson is reported as having said in a media statement: “Policyholders are baying for blood and nothing less than blood will satisfy them.” Such a need to name those personally responsible rather than letting the corporation shoulder the blame for mistakes will send shivers through directors everywhere.
All the directors stand accused of negligence and breach of fiduciary duty in failing to take legal advice before deciding on the differential terminal bonus policy that led to the GAR court case and in failing to mitigate the financial risk of losing the GAR litigation and to inform policyholders of the risk. Yet not all of the directors were appointed as directors over the full period that the case relates to; indeed, some were not in position when the original decision to adopt the bonus policy was made. In his opening submission, Peter Leaver QC, acting for Jennifer Page, a former director, said that his client was often unable to attend board meetings and was unaware of the decisions made about bonuses. At the time, Page was also a director at Railtrack and chief executive of the New Millennium Experience. Her situation will resound heavily with directors everywhere. The vast majority of non-executive directors have other business interests; their directorship is often an aside from their main business activity. As a result, the occasional board meetings do get missed and it is often difficult for non-executive directors to remain completely on top of all that is going on.
Traditionally, the non-executive director’s role has been to bring a wealth of business experience to a company to assist with larger, more strategic business decisions, keep executives in check and ensure the company remains accountable to shareholders. There is no doubt that non-executive directors take their roles seriously, but with only a part-time interest in the business, a board of directors is highly reliant on information they are provided with, both from internal staff and external advisers.
The questions that will need answering in the course of Equitable’s case will be important in defining the role of the non-executive director in the UK and the balance that must be struck between acting as a ‘corporate policeman’ and as a strategic adviser. In particular, definitions or clarifications may be given as to a non-executive director’s obligations and responsibilities, the level of due diligence a non-executive director should conduct before accepting an appointment and the extent to which directors may rely on executive management.
If the outcome suggests that non-executive directors require a deeper understanding of a company to fulfil their role with less reliance on the executive board, recruiting directors may become a tricky business. The time required to be able to fulfil their obligations would, by necessity, increase, yet almost all directors will have substantial obligations elsewhere. Indeed, it is these other business commitments that lend them the experience to be able to take the role of director. What is more, taking the directorship of a company has rarely threatened a director’s personal wealth. However, Equitable Life’s case against its former directors has the potential to be ruinous. Furthermore, as corporate governance continues its meteoric rise up the corporate agenda, becoming embroiled in a case such as this is likely to be damaging to any City career. While this may be an example of a worst-case scenario, directors and would-be directors would do well to watch this case closely.
Charles Evans, partner, Norton Rose