Alliance articles

Are you a director or an unlimited liability?

Post-Enron, it wasn't surprising to see the consultants and advisors in the firing line, taking the flack for, arguably, the inadequacies of the directors who hired them. Now the dust has settled, though, there's a growing realisation (amongst the new breed of senior management) that sound internal and external management and control of risk is a practice that creates a better business environment.

In other words, directors who shoulder the responsibility for what might go wrong can increase the value of their company. This is just as well. Right now, legislation is passing through Westminster (aka The Company Law Reform Bill) that will change company law big time. Simply put, it will probably make directors infinitely more sue-able by investors or other stakeholders.

Auditors, for example, will only have to admit 'proportionate liability' for their grave errors of judgement, rather than be held responsible for all the knock-on effects in their wake. The rest of the liability will be laid at the office door of directors, who could face stiff penalties for their involvement in negligence or a breach of duty. Companies will not necessarily have to indemnify their directors against third party action. Except for the court costs involved in an unsuccessful judgement, the fines may have to be paid from personal funds. Likewise, companies will not necessarily have to pay the cost of defending a director. On top of this, this director (if they lost his or her case) might have to re-pay any damages awarded to the company and re-pay defence costs in an unsuccessful trial.

Alarm bells will surely ring at this point. But we believe there is a sensible response. On the one hand, every company director needs to understand that he or she cannot hide behind corporate decisions. Homes, personal savings, personal investments and even careers are at risk in this increasingly litigious climate. On the other hand, it's our belief that taking steps now to identify the possible future causes of strategic, operational and hazard risks can result in a climate of security, rather than fear.

An audit from us can provide a framework for your organisation that enables consistency and control. It means you can make decisions, calmly, even in volatile circumstances. It contributes to a better management of capital and resources, which builds efficiency. Perhaps more importantly, though, it provides the reassurance that directors need to do their jobs to the best of their ability, without their judgement being clouded by what might happen if they make a mistake.