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For a long time, it has been widely understood that directorships
- especially directorships of public companies - are not intended
to be anything more than well-paid sinecures. Over 100
years ago, W.S. Gilbert summed it up through the lines given
in The Gondoliers to the Duke of Plaza-Toro, who explains in
verse his various money-making schemes designed to minimise
effort and maximise return:
I sit,
by selection,
Upon
the direction
Of
several companies bubble;
As
soon as they’re floated
I’m
freely bank-noted -
I’m
pretty well paid for my trouble!
Plainly, the original intention was that the presence of
"high profile" business-people on a company’s board would add
to the company’s credibility, and therefore enhance the value
of its shares to the benefit of all shareholders; it was never
intended that directors should actually do anything, let alone
accept any personal responsibility or liability, in return for
their remuneration.
A directorship is somewhat akin to "product endorsement"
- it is quite as absurd to imagine that company directors are
responsible for the financial well-being of a company, as it
is to imagine that sports stars or television personalities
are responsible for the quality of the products which they endorse.
If company directors are to be blamed for the accuracy
of the corporate accounts which they sign, it is but a small
step to blaming Ronald McDonald for the nutritional quality
of the products which he promotes.
However, this fanciful notion that directors are in some
way accountable for issues of corporate governance means that
the astute director must take prophylactic steps to protect
himself (or, very occasionally, herself) from exposure to criticism.
The effectiveness of following simple precautions has
been proved through their constant use by directors of many
of Australia’s listed public companies.
1. Protect your relationship with the
company’s management.
The relationship between company directors and executives
is symbiotic: neither of them can survive without the other.
Directors exist so that executives can claim that they
do not make decisions, but merely implement decisions coming
from the board; executives exist so that directors can claim
that their decisions are made entirely on the basis of information
supplied by executives. So long as everyone understands
some basic rules, it is possible to achieve an equilibrium in
which the "buck" does not stop anywhere.
For their part, executives must remember two things. First,
although everyone knows that the actual decisions are made by
management, nobody can afford to admit this. Management
proposals must be presented to the board as "recommendations",
with just enough supporting information to ensure that the directors
have no alternative but to do whatever management wants.
Secondly, executives need to be very careful in providing
information to directors. Disclosure must be "full and frank",
containing "all material facts", but these requirements should
never be misconstrued as justifying (let alone necessitating)
the provision of information which directors would feel more
comfortable without.
If executives have no alternative but to communicate awkward
information, obfuscation is the key. There is something
of an art form to the presentation of information in a way which
is entirely uninformative, yet with the benefit of hindsight
appears to be disarmingly meaningful. Senior corporate
managers share with senior public servants a handy supply of
"boilerplate" provisions which can be applied to almost any
recommendation, containing the clearest possible warning that
the proposal contains some inherent risks, without in any way
compromising the capacity of a director (or a minister) to claim
that they were given no appreciation of the level of the risks
involved. Thus, the adoption of new accounting policies
designed to conceal a massive capital devaluation can be recommended
to the board on the basis that:
After consulting
leading industry experts, management recommends the adoption
of accounting policies which give appropriate emphasis to the
company’s long-term investment profile, whilst subsuming cyclical
irregularities which are considered to have no significant impact
beyond the short to medium term investment horizon.
In return, directors are expected to do their part. Other
than supporting management in respect of issues of executive
remuneration, the most important thing is for directors to resist
the temptation to ask difficult questions. They should
keep reminding themselves that executives are paid to ensure
that directors are given the information which they need. Asking
questions merely involves the risk that directors will be given
information which they do not need, and therefore do not want.
Of course, you do not want to get the reputation of being
uninterested, or even lazy, at board meetings. So you
have to ask a few questions. It is best to confine your
questions to matters which border on the trivial: these will
not be seen as trivial, but rather as a demonstration of your
keen eye for even the smallest details. If you do not
feel sufficiently confident to decide what is trivial and what
isn’t, it might be a good idea to ring a few of the senior executives
prior to the board meeting, and ascertain whether there are
any "Dorothy Dix" questions which they would appreciate being
asked.
In the last resort, if you cannot think of anything else
to ask at a board meeting, the best question is one which allows
management to respond with a "motherhood statement". A
question like, "Are you able to assure the Board that this proposal
complies entirely with our corporate Mission Statement?", will
enable the executive to wax lyrical without providing any actual
information whatsoever ("Mission Statements" are discussed,
in more detail, below). But be warned - other directors,
and especially the chairman, may not be grateful if you "steal
their thunder" by asking the same platitudinous question that
they were intending to ask.
2. Make it apparent that you have read the board papers.
Note the use of the word "apparent" in its literal sense,
as distinguishing that which appears to be the case from that
which is the case.
Generally, a company’s executives will prepare a bundle of
documents for each board member to peruse prior to the board
meeting. This is a specific feature of the symbiotic relationship
between executives and directors, discussed above. It
is a demonstrable rule of corporate governance - a rule as immutable
as with Pythagoras’s theorem or Boyle’s law - that the extent
of the board papers on any issue is inversely proportional to
the degree of risk involved. Efficient and reliable executives
will appreciate that it is their function to ensure that directors
are only told what they want to know. If there are any
"time bombs" within the company’s accounts, or its affairs generally,
you can be certain that they will not appear in the board papers.
So there isn’t really any point in reading them.
Nonetheless, it is important to give the appearance of having
read the board papers. Two simple devices are very helpful
in this regard: the post-it note and the highlighter pen. Each
should be liberally applied throughout the board papers, to
give the appearance that they have been closely perused and
carefully studied. If you are too busy to do this yourself,
you should remember that one of the most important qualities
of any business-person is the ability to delegate. This
is the kind of task which can safely be delegated to a small
child.
Yet there are some circumstances where you cannot avoid personally
undertaking this time-consuming responsibility. It may
be, for example, that the directors’ meeting is scheduled to
take place at an exotic and expensive resort, and the board
papers are provided to directors only as they board the chartered
jet. The other directors may feel compelled to at least
pretend to read the board papers during the flight, and it would
be churlish not to join in the charade. In this event,
two basic rules will assist you in the appropriate application
of yellow stickers and fluorescent markings.
Stickers should be reserved for "big ticket" items - new
projects, potential closures, auditors’ notes, and especially
anything that looks like an account. To the uninitiated,
a yellow sticker says, "I have taken particular note of what
is on this page". They are therefore especially useful
for pages which you haven’t read, and which you would not understand
even if you had.
Your highlighter pen should be used more sparingly. If
you highlight everything, this may give the impression that
you do not have a sufficient understanding to sort the wheat
from the chaff. As a general guide, no more than 10 words
or figures on each page should be highlighted. Scan each
page for words that suggest a level of uncertainty - words like
"could", "might", "possibly", "perhaps" and "maybe". These
words are the directors’ friends. In due course, if there
is a favourable outcome, the directors can congratulate themselves
for taking a "courageous" decision. If (as is more often
the case) the outcome is unfavourable, the board papers will
demonstrate that the directors were conscious that they were
taking a calculated risk - which, after all, is their job.
When highlighting accounts, resist the temptation to focus
on the big numbers - this merely suggests that you are only
concerned with the "big picture", and not interested in the
"detail". By highlighting a figure of only a few dollars,
you will demonstrate that, when it comes to protecting shareholders’
funds, nothing is too small to miss your careful scrutiny.
Most importantly, when the board meeting is at an end, arrange
to leave your board papers with the company secretary. The
advantages of this are self-evident. You don’t have to
bother carrying them home after the meeting, and you don’t have
to bother storing them or maintaining their security. Nobody
can suggest that you should have been alert to an obvious inconsistency
in the board papers at a subsequent meeting. And if uncomfortable
questions are asked at a later date, the secretary will be able
to produce the board papers, which (hopefully) will clearly
demonstrate your careful consideration of the issue in contention,
by the irrefutable evidence of your contemporaneous markings.
On the other hand, if you are later accused of having
a conflict of interest, you can assure the relevant regulatory
authority that you do not hold any papers in respect of the
matter in issue. Best of all, you can justify the strategy
of leaving board papers with the company secretary as a manifestation
of your zealous commitment to information security.
3. Travel broadens the mind.
In these days of increasing
scrutiny of remuneration paid both to directors and to executives,
corporate travel remains one of the few "perks" which defies
any attempt to evaluate its worth to shareholders. It
has the unique advantage that, whilst enjoying a first class
holiday at the company’s expense, you can point to the amount
of time which you have devoted to the company’s affairs, and
make good-humoured complaints about the sacrifice involved in
having to "live out of a suitcase" for weeks on end.
There must, of course, be some plausible excuse for the trip
- a meeting, a trade fair, or a conference. Try to avoid
vague expressions like "fact-finding mission", because over-use
by politicians has created some (entirely unreasonable) cynicism
when the traveler is unable to identify any specific purpose
for a trip.
The symbiotic relationship between directors and executives
requires that, for each free trip enjoyed by a director, management
is also entitled to a free trip. Indeed, the expenditure
is often easier to justify if both management and the board
are being represented at the same foreign destination. Even
the most recalcitrant manager can hardly deny the validity of
a director’s travel expenses when he (or one of his management
colleagues) got a free trip to the same destination.
This can be uncomfortable, though, because the last person
you want to meet when you are on a paid holiday at the company’s
expense is someone else who is also enjoying a paid holiday
at the company’s expense. Unless each of you possesses
a quite extraordinary strength of character, you will both feel
compelled to at least pretend to be focusing on company business
for so long as you are within sight of each other. This
is where "corporate travel policy" becomes very important.
The basic assumption underlying "corporate travel policy"
is that the company’s senior executives and directors are very
valuable people, and the company could not possibly afford to
lose two of them at the same time: hence, although headed for
the same ultimate destination, they must travel separately.
To reach a trade fair in Frankfurt, for instance, one
of them should travel via Singapore, Rome and Paris; the other
via Los Angeles, New York and London. And, needless to
say, the company’s investment in transporting directors and
senior executives to such a trade fair will only be fully realised
if they are in peak condition when they arrive, so each of them
must travel First Class, be accommodated at luxury hotels, and
have an opportunity for rest and recreation en route to their
destination.
And don’t forget, when you return from your paid holiday,
to provide a report to the Chairman. It doesn’t have to
be very long or detailed, since the Chairman will not bother
reading it anyway. A good trick is to include business
cards of the important commercial contacts which you have made
during the trip, and brochures about their companies and products.
One of the main reasons for first class lounges at international
airports is to give business-people returning from junkets the
opportunity to exchange business cards and brochures to include
in their post-holiday reports.
4. Corporate entertainment.
Apart from corporate travel,
the concept of corporate entertainment offers directors one
of the best opportunities to enjoy a "perk" at the shareholders’
expense, whilst claiming to make a significant contribution
to the company, and even a substantial sacrifice in the company’s
interests. Corporate entertainment may take a number of
forms: lavish parties, expensive meals, and free tickets to
sporting or cultural events.
The only major problem with corporate entertaining is that
there is usually a scramble for the most attractive occasions.
If you happen to enjoy opera, symphony concerts or the
theatre, you’re in luck: usually, these forms of corporate entertainment
are reserved for directors and executives who are lowest in
the pecking order. By contrast, only the Chairman and
General Manager - and their closes allies and supporters - are
likely to score tickets to a "State of Origin" match.
What adds to the pleasure of corporate entertaining is the
fact that your guests - which is to say, the freeloaders who
also have their tickets paid for by your company - will feel
an obligation to reciprocate. Not only does this double
your enjoyment; it also enables you to boast, in your report
to the Chairman, how successful you were in consolidating your
company’s relationship with the guest’s company, as reflected
in the fact that the guest’s company has invited you to partake
of a "freebie" at his company’s expense.
5. Board committees.
The biggest challenge for any
new member of a corporate board is to be seconded to the "right"
committees of the board. In the case of prestigious public
companies, junior members may have to place their names on a
lengthy waiting-list to get on the "right" committees.
Which are the "right" committees? There are three ways
to identify which committees are "right". One way is
to find out which committees actually do something: if a committee
actually does something, then, by definition, it is not the
"right" committee to be on. The second criterion is to
identify those committees which provide an opportunity to extend
largesse to other people - that is, other people to whom one
may, in the future, be looking for a favour. The "executive
remuneration" committee is perhaps the most highly sought-after;
the "sponsorship and charitable contributions" committee is
also very popular. But the third way to identify which
are the "right" committees to join is the very easiest: just
take a look at the company’s last Annual Report, if you can
find it, and see which committees the Chairman has appointed
himself to.
Avoid, at any cost, being on the "accounts and audit" committee
or the "legal compliance" committee. This may not be easy,
because newly-appointed directors are ordinarily expected to
serve some time on these committees, before graduating to a
more desirable committee. But it is possible to leapfrog
the "wrong" committees entirely, by the skilful use and exploitation
of two phrases: "conflict of interest" and "lack of expertise".
If you are a lawyer by profession, and you are offered
a choice between the accounts and audit committee or the legal
compliance committee, you can reject the former on the basis
that you lack the necessary expertise, and the latter on the
basis that you will inevitably be exposed to conflicts of interest.
If you are an accountant by profession, and you are offered
the same choices, you can simply use the same excuses in a different
order.
6. The missionary position.
Most directors’ reaction
to the concept of a Mission Statement is summed up in a four-letter
word, not ordinarily used in polite society, although (according
to a recent decision in Victoria) not so offensive as to constitute
a contempt of court when applied to a member of the judiciary.
A word processor’s "spell check" function may suggest
such alternatives as "walk", "wink", "want", "swank" and "rank",
but none of these words explains the usual attitude to Mission
Statements quite so succinctly.
You must learn to overcome these prejudices. Most of
the functions undertaken by directors are entirely meaningless.
It follows that you can demonstrate your competence as
a director, by devoting yourself whole-heartedly to the drafting
of a corporate credo which is intended to be meaningless.
It is no easy task to assemble a mass of verbiage which is
entirely devoid of any substance. The process should take
at least two years, during which - as Chair of the Mission Statement
Drafting Committee - you will have the best possible excuse
to beg leave of absence from committees undertaking more mundane
and less relevant tasks, such as the accounts and audit committee
or the legal compliance committee.
The first step is to consult a copy of Roget’s Thesaurus,
and find as many superlative words as you can. Mission
Statements are not supposed to reflect the mediocre reality;
they are supposed to aspire to an unattainable level of perfection.
It is not enough to say that the company should do its
job well, or even that it should do its job better than it has
in the past; one needs to use words like "excellence" or, better
still, phrases like "state of the art" or "world’s best practice".
You should not feel concerned if your grammar is a bit weak.
Mission Statements only encourage perfection; they do
not attempt to demonstrate it. It is, for example, considered
de rigueur to use comparative words, such as "quality" and "value",
as if they were absolutes. It should not trouble you that
you do not know the difference between a transitive and an intransitive
verb, or even the difference between a verb and a noun: nobody
will bat an eyelid if your Mission Statement requires that you
will "grow" your corporation, or that you will "gift" something
to the community. If a word sounds impressive, there is
no need to feel any concern as to what it actually means. So
a Mission Statement may promise to fulfil the expectations of
all "stakeholders", regardless of the fact that a "stakeholder"
is an entirely disinterested person who "holds the stakes" in
a transaction to which he is not a party.
Having prepared a check-list of superlatives, you should
then scour the financial press to find the latest "buzz words"
which have received the approval of industry commentators. You
need not feel a moment’s hesitation in adopting an expression
which you do not understand, and which you suspect has no intelligible
meaning. Remember, Mission Statements are intended to
be meaningless. And if you don’t understand an expression,
the chances are that no-one else will, so nobody can challenge
your use of the expression.
Such "buzz words" tend to go in and out of fashion even more
quickly than the creations of Paris couturiers. This is
an added advantage, giving Mission Statements an evanescent
quality which requires that they be updated at regular intervals.
With some luck, by the time that your committee has finished
drafting the Mission Statement, it will already be outdated,
and you will have to start working on the revised version -
with the result that you can permanently avoid membership of
the accounts and audit committee, or the legal compliance committee.
At the time of writing, some of the more desirable "buzz
words", which are essential to any Mission Statement, include
"quality control", "due diligence", "value adding", "cost efficient",
"environmentally sustainable", "equal opportunity", "socially
responsible", "community based", "transparent" and "morally
viable". It is also very popular, just at the moment,
to include particular mention of "digital information technology",
although references to the "information superhighway" are now
considered somewhat passé. Current practice also
demands some reference to "industry benchmarks", although it
is preferable to remain rather vague as to what these "benchmarks"
might be.
No doubt all of these expressions will be outdated even before
the ink on this paper is dry. Your challenge is to find
the latest crop, and harvest them whilst they are still in full
bloom. If you cannot bring yourself to read the Australian
Financial Review or Business Review Weekly, try hanging around
the bar at a prestigious golf or gentleman’s social club, with
a discrete pencil and notebook - you will not be disappointed.
Eventually, after some two years of dedicated research and
discussion, over long and well supplied luncheons with the other
members of the committee, you will decide to adopt the draft
supplied by some back-room underling whose competence, humility
and social awkwardness guarantee that he or she will never be
promoted beyond the level of a junior clerk. Regardless
of the nature of your company’s business, it will say something
like this:
Our mission
is to add value to our shareholders’ investment, to fulfil the
aspirations of our dedicated staff, to satisfy the most demanding
requirements of our loyal customers, and to fulfil our social
compact with the wider community, by conducting our business
to a standard of excellence which exceeds industry benchmarks,
utilising cutting edge technologies, in a workplace environment
which nurtures talent, rewards innovation, fosters diversity
and protects the disadvantaged, thereby contributing to the
creation of a better world for our children and our children’s
children.
Even when a working draft has been achieved, your job is
not entirely at an end. This is where, for once, you must
use your own ingenuity. Study the draft carefully, and
ask yourself this question: Is it possible that, even on the
most generous interpretation, the draft Mission Statement could
ever be construed as actually requiring the company to do, or
to refrain from doing, anything at all? If the answer
to that question is in the affirmative, you have failed in your
mission; you should take out a clean sheet of paper, and start
all over again. Of course, Mission Statements are not
in any way legally binding - but it is potentially embarrassing
for you, as a director, to justify any arguable departure from
the Mission Statement for which you are planning to take the
credit.
What are the rewards for all this hard work? They are
manifold. A Mission Statement is like the Oracle of Apollo
at Delphi - any guidance which it offers is studiously ambiguous
and obscure, and therefore requires interpretation by a high
priest. Who better, to consult the Oracle, than the person
who created it? This confers on you an unequalled power-base
within the company. Your support for or opposition to
any project, expressed in terms of whether the project does
or does not comply with the Mission Statement, will become the
received wisdom. Your allegiance will become invaluable
to both management and your fellow directors. Nothing
can happen without your personal imprimatur, whilst your obstat
will sound the death-knell to any proposition which you, in
your entirely unfettered discretion, rule to be inconsistent with
either the letter or the spirit of the Mission Statement.
7. Executive remuneration.
This is one of the most
delicate, but also one of the easiest and most personally rewarding
tasks, that a director can be associated with. It provides
directors with an opportunity to enhance their working relationship
with management, at the expenditure of very little time and
effort, and otherwise totally at the shareholders’ expense.
The actual decision-making process is not likely to be demanding.
The Board (or the relevant committee of the Board) will
be presented with recommendations from management. To
avoid any suggestion of conflicts of interest, it is likely
that senior executives from one department or branch will be
asked to make recommendations in respect of senior executives
from another department or branch; in some cases, recommendations
may even be "out sourced" to hired consultants.
You are unlikely to be troubled by recommendations which
are less than generous, since it is in everyone’s interests
to maintain a healthy bench-mark for executive remuneration.
In some cases, recommendations may err on the side of
excessive generosity, but you should not be troubled by this
fact: it is done, quite deliberately, to give you an opportunity
to show how ruthless you can be, in cutting back the extent
of the recommended salary increase to a level which is only
slightly higher than the GDP of most third world countries.
However, for the ambitious young director, participation
on the executive remuneration committee affords a rare opportunity
to make a real and innovative contribution. A little bit
of research may be required, but this can usually be delegated
to one’s PA. The real challenge is to think up new and
even more extravagant "perks" than the executives themselves
have been able to devise.
For example, it might be your function to interview a divisional
manager who has been recommended to receive a 50% salary increase,
and it may be your unpleasant task to inform him that, due to
the company’s straitened financial circumstances, you will only
be able to recommend an increase of 49.9%. But, through
your (or your PA’s) diligence, you may have learnt that the
executive in question has 13 children, and this will give you
the privilege of mentioning your personal recommendation that
the company should introduce a system of educational scholarship
for executive offspring - a proposal which derives added attraction
from the fact that all other senior executives are either unmarried,
gay, or beyond the age of procreation.
Then again, your (or your PA’s) research may have brought
to light the fact that the executive in question is a very keen
golfer, albeit entirely lacking in talent. How better
to secure his perpetual loyalty than to unveil your plan for
the company to subsidise sporting club membership fees for executives,
and also to sponsor a major "pro-am" tournament at which executives
will be required to team up with the likes of Greg Norman and
Tiger Woods?
8. Dismissing staff.
Nobody enjoys giving someone else
the sack. That is why you should volunteer to do it. You
will enjoy the respect and affection of your Board colleagues,
for relieving them of an unpleasant duty. And, to your
initial surprise, you will find that it does not in any way
harm your relationship with management.
On the contrary, the truth of corporate life is that all
executives are in competition with one another, and therefore
hate one another. Whilst they remain on the pay-roll,
they stick together for mutual advantage; when one of them is
sacked, the others simply chorus their approval of the Board’s
decision, and your perspicacity in identifying the "weak link"
in the company’s management.
But it gets better. The more often you sack someone,
the more likely you are to get a reputation as the Board’s "hatchet
man". There is only one thing better than being liked
by management, and that is to be feared by management. You
can almost hear the subsequent discussion in the executive wash-room:
"Can you imagine that ruthless b****** sacking Smithers, after
Smithers included him in last year’s junket to Acapulco ...
we will have to do a lot better if we are going to keep our
jobs".
9. The accounts.
Aside from all the boring and time-consuming
work of being a director - free overseas holidays, free tickets
for the opera and football, and so forth - there remains one
job which is the greatest nuisance of all: signing off on the
company’s annual accounts. Whilst it is possible to avoid
much of the work and responsibility associated with this task,
by artfully escaping appointment to the accounts and audit committee,
the law unhelpfully requires that the entire Board must approve
the annual accounts.
What the law requires is that the accounts present a "true
and fair view" of the company’s financial position. What
you must bear in mind, and keep telling everyone who listens,
is that there is no such thing as a "true and fair view" of
a company’s financial position. It is all a matter of
interpretation. Directors may draw some comfort from the
fact that Parliament has specifically recognised that corporate
accounts are necessarily "rubbery", by providing that such accounts
"must give a true and fair view"; if there were only one possible
"true and fair view" of a company’s position, surely Parliament
would have required that accounts "must give the true and fair
view".
Yet, whilst there may be many different views of a company’s
financial position, each of which can be characterised as "true
and fair", there is the (at least theoretical) possibility of
directors being held liable for accounts which are demonstrably
untrue or unfair. This risk calls for special precautions.
One possible response is for a director to achieve sufficient
familiarity with the company’s financial position to form his
(or her) own conclusions as to the veracity of the accounts.
I mention this possibility only for completeness - plainly,
it is totally impracticable. And, worse than that, if
you look too closely into the company’s accounts, you expose
yourself to the risk that you can be accused of knowingly endorsing
false accounts, rather than (at worst) simple negligence.
The preferred alternative is to know as little about the
accounts as possible, and to place complete reliance on the
assurances received from management and the company’s auditors.
If you cannot resist asking any questions at all, adhere
strictly to the principles outlined above: focus your questions
entirely on matters which are utterly trivial or, better still,
simply give management the opportunity to assure you that the
accounts are in order.
If worst comes to worst, and you cannot escape a "tour of
duty" on the accounts and audit committee, there is no need
to panic. The only real risk is if you have the misfortune
to share membership of the committee with a director who is
genuinely committed to ensuring that the accounts are scrupulously
accurate. This is a most unlikely scenario, and you can
be confident that it will quickly be terminated by a summary
transfer of your co-director to another committee where he or
she can do no harm: say, the information technology committee,
or the catering committee.
As a last resort, however, you may decide that it is essential
to leave a paper trail showing the sincerity of your concern
regarding the accuracy of the company’s accounts. It is
a mistake to underestimate the dangers which present themselves
whenever you begin to scrutinise your company’s accounts, and
this suggestion should not even be attempted except in circumstances
of dire necessity. But if you absolutely cannot avoid
subjecting the company’s accounts to some measure of scrutiny,
try to focus your attention exclusively on an area of the accounts
which (a) appears likely to hold up to scrutiny, and (b) will
not significantly alter the total picture if some adjustment
needs to be made.
Often, the easiest place to start is with "provisions" -
provisions for doubtful debts, provisions in respect of legal
claims, provisions for long service and holiday pay, or whatever.
If you look up "provision" in any accounting dictionary,
you will find that it means (more or less) "a guess". Of
their nature, provisions are uncertain. So, no matter
how closely you scrutinise them, you should not find anything
which is demonstrably inaccurate or misleading.
Indeed, almost any "provision" contains some scope for adjustment.
So why not demonstrate your conscientiousness by expressing
(and recording in writing) your dissatisfaction with the figures
presented by management, and recommending a marginal increase
in the relevant provision? Such provisions typically each
represent less than 1% of the company’s annual revenue, so if
you recommend (say) a 10% increase in the provision for exchange
rate fluctuations, you will not be responsible for any significant
change to the total accounting picture. And the reality
is that no-one will be able to argue with your recommendation,
since your guess is as good as anyone else’s. But you
will have a perfect paper trail showing how rigorously you applied
yourself to your duties in ensuring that the accounts of the
company present a "true and fair view".
Still, it is much easier if - by the most fortuitous of coincidences
- it happens that you have a dental appointment on the day that
the Board is to consider the annual accounts.
10. If it's too hot in the kitchen.
The rewards of being
a company director are significant - the directors’ fees, the
free trips, the corporate entertaining, not to mention the prestige
and notoriety. But, in spite of the selfless sacrifices
which you may be willing to make in order to remain on the Board,
there are some occasions when your first duty has to be to yourself.
Usually, this occurs within days prior to the appointment
of a provisional liquidator.
Curiously, Australian law contains no restrictions at all
on the circumstances in which a person can resign a directorship.
Generally, no prior notice is required. You can
just submit your letter of resignation to the company secretary,
even as the provisional liquidator is walking through the front
door.
Unloading your shares may be more problematic, due to a little-known
and inconvenient concept called "insider trading". It is
technically illegal to take advantage of knowledge which you
have acquired as a director, when you are buying or selling
shares, unless the same information is available in the public
domain. The absurdity of this restriction is demonstrated
by the fact that the law does not prevent you from using "insider"
information in deciding not to buy shares, or not to sell shares
which you already own.
In Australia, there is no legal requirement that a director
of a public company holds shares in the company, unless the
company’s constitution contains such a requirement (very few
do). But it looks good if a director has sufficient confidence
in the company to make at least a modest investment in its shares:
an investment equal to, say, the cost of one or two nights at
the luxury hotels where directors are accommodated whilst traveling
at the company’s expense; or, where the company offers discounts
to shareholders, the minimum parcel necessary to obtain such
a discount. Details of directors’ personal shareholdings
in public companies are ordinarily recorded in the Annual Report,
so it is best to acquire a modest shareholding when you are
first appointed to the Board, and neither increase or diminish
that investment whilst you remain on the Board. This gives
the appearance that you regard the company’s shares as a sound
long-term investment.
Meanwhile, any actual trading in the company’s shares should
be conducted in a different name. Vanuatu-based trusts
are becoming increasingly popular, although many a director
still prefers to conduct share trading in the name of his wife’s
maiden aunt.
In the unlikely event that a director is challenged over
share trading conducted by relatives or related companies, two
stock answers should be sufficient to deflect all but the most
rabid investigators. In the first place, a director can
express a grave concern not to destabilise the company’s share
price, and point out that, if the director had regularly bought
or sold substantial parcels of shares in his own name, that
might have produced a quite unjustified reaction in the market.
Secondly, directors can borrow a useful strategy devised
by members of the Federal Parliament in response to pecuniary
interest disclosure requirements: the fact that share transactions
are not conducted in the director’s own name is not to conceal
the transactions from scrutiny, but rather to "quarantine" the
investment from the director’s personal influence and control.
The fact that the director’s wife’s maiden aunt sold off
her entire investment just after the director resigned from
the Board, and just prior to a public announcement of the company’s
impending liquidation, was purely coincidental.
Finally, you should not allow the fact that your company
has failed, to curb your career as a director. There are
some 1,300 public companies listed on the Australian Stock Exchange,
and many thousands of others which are publicly traded in
one form or another. Experienced company directors are
hard to find. If you have closely followed the recommended
precautions outlined above, no-one will possibly be able to
blame you for your last company’s failure - indeed, your value
will be enhanced by your "hands on" experience in dealing with
a company in crisis.
By escaping unscathed from one corporate collapse, you will
earn the admiration and respect of company directors everywhere.
They will wish to benefit from your experience, and learn
how they too can insulate themselves against potential corporate
calamities.
Welcome to The Club! Your career as a company director
is now assured!
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