There’s no denying that the role of a Non-Executive Director can be incredibly rewarding, but it doesn’t come without its risks. In this blog, we explore the legal pitfalls of being a NED.
Even with the best risk management, the reality is that NEDs are only human and mistakes do happen. When things go wrong, Non-Execs in the UK generally have limited liability, meaning that their personal assets are protected from a company’s financial obligations. In many cases, they are covered by their company’s Articles of Incorporation, Indemnity Insurance, Directors and Officers (D&O) Insurance and statutory protections.
However, these safeguards may not extend to cases of gross negligence, fraud or illegal activities, which can lead to disqualification and even prison in the most serious of cases. In these scenarios, NEDs can also find themselves facing unlimited liability where they can be held personally responsible for a company’s debts or legal obligations without a cap on the amount they may be required to pay. “You can lose everything,” warns Jo Haigh, a lawyer by training, with experience on over 40+ boards in NED/ Chair roles, who spoke to our Dynamic Boards NED Community on the legal risks of being a Non-Executive. You can watch the full video here:
So, in what circumstances could NEDs face personal liability like this?
- Breaching fiduciary duties: Failing to act in the company’s best interests, or acting in bad faith and neglecting their responsibilities and statutory duties under the Companies Act 2006.
- Negligence or mismanagement: Being found to have been negligent in overseeing the company’s affairs or not exercising reasonable care
- Fraud or misconduct: Engaging in fraudulent or illegal activities, knowingly making false statements, or failing to act on knowledge of wrongdoing within the company e.g. if it is evading taxes or trading while insolvent for example
- Failing to ensure compliance: Neglecting their duty to make sure the company complies with relevant laws and regulations e.g. if the company fails to comply with health and safety laws, which leads to a serious accident or injury
Disqualification, a potentially career-destroying experience, is the most common penalty for NEDs found guilty of failing to uphold their legal responsibilities. Approximately 900-1,200 directors are disqualified a year, it’s not clear how many of these were NEDs versus Executive Directors.
There are no well-documented cases in the UK of Non-Executive Directors being jailed purely for their roles as NEDs in overseeing companies. With that being said, let’s look at some real-life case studies of companies where things went terribly wrong and what the outcome was for the Non-Execs involved.
The Rangers Football Club
After years of poor governance and bad financial decisions, Scottish football club, Rangers, entered administration in 2012. This prompted an investigation into the NEDs and Directors of the club’s holding company, resulting in some being disqualified for their role in the financial collapse.
Carillion
Carillion was a UK construction and outsourcing company that collapsed into liquidation in January 2018 with a £1.5 billion debt. The NEDs were heavily scrutinised for their role in the collapse, which led to significant financial losses and affected approximately 43,000 employees, 30,000 suppliers and subcontractors and stakeholders too. None of the Carillion Non-Executive Directors or Philip Green, who was Chairman at the time, were criminally prosecuted for their role. There were several organisations, politicians and public figures calling for their disqualification. Despite no disqualification orders being issued, the whole debacle did spark a wider discussion for the need of stronger corporate governance in the boardroom and accountability for NEDS in the UK.
Thomas Cook
In September 2019, Thomas Cook went into liquidation after failing to secure a £200 million bailout. The collapse of one of the UK’s oldest and largest travel companies left hundreds of thousands of customers stranded and impacted thousands of employees and suppliers. Similar to the Carillion case, the Non-Executive Directors faced intense criticism for failing to act on the company’s growing financial troubles but no NEDs were prosecuted or disqualified.
The Post Office Horizon Scandal
This scandal primarily involved the wrongful prosecution of hundreds of subpostmasters who were falsely accused of theft, fraud, and false accounting due to errors in the Horizon computer system used by the Post Office. The scandal, which began in the late 1990s and continued for decades, was a major miscarriage of justice that severely impacted the lives of the individuals involved. The NEDs who served on the Post Office board over this period have not as yet been specifically targeted or held criminally accountable for their part in governance over the period of this scandal. Much of the focus has been on the senior management and executives at the Post Office and, to some extent, the government officials overseeing it.
Whilst we have focused on the legal liability of your NED appointments, it is important to also consider the reputational liability of being involved in an organisation whose governance may be called into question. Your career prospects can be damaged even without a prosecution or disqualification.
As a NED, it is essential for you to understand your legal responsibilities and duties under the Companies Act 2006 (as we explored in the first blog of this series). The risks are great and unfortunately it isn’t enough to just practice good governance, act in good faith in your board tenure and meet your obligations. You must also ensure that you are properly protected through insurance and effective risk management safeguards too, which we’ll dive into in our final blog here.
Read More
Part 1 – The Legal Role of a Non-Executive Director: Requirements and Duties
Part 3 – The Legal Role of a Non-Executive Director: Mitigating Exposure to Risk
—
Join our free NED Community
Are you on a UK board in a Non-Exec capacity and want to learn more about topics like this? If so, join our free NED Community! We host monthly online meetups where we hear from experts (like Jo Haigh in this article) and allow time for peer-to-peer support between Non-Execs. If you want to become a more thoughtful and effective board member, register here.
View our roles
Whether you are a first-time Non-Exec or a seasoned NED looking for your next board role, you are welcome to sign up and view our roles for free here. We list c.100 paid Non-Executive Director board roles each month from all over the UK.
Advertise your role with us
Are you/ your board recruiting a Non-Executive Director, Trustee or Chair? We can help you advertise your role to candidates who will bring the skills, experience and perspectives you need on your board. We have helped companies and search firms advertise over 1000 Non-Exec board roles a year from across the UK. You can see information on our advertising options here and you can get in touch with the Dynamic Boards team at hello@dynamicboards.co.uk
