In our last post Frank Lewis explained the qualities and attributes of a good company Chair and non-executive. Sadly not everyone manages to live up to these standards and the consequences for both the company and individual concerned can be significant – as vividly demonstrated in a case last year.
The case involved amendments to the service contracts of two executive directors of Newcastle Airport, in particular the addition of provisions entitling them to bonuses on a refinancing. Although the company had a remuneration committee made up of its five non-executive directors, the solicitors engaged to carry out the necessary work took their instructions from the executives themselves on the basis that the Chair of the remuneration committee had authorised them to instruct the solicitors.
The final drafts of the amended contracts were sent to the Chair for review, although it was not clear on the face of those documents exactly what amendments had in fact been made. The Chair said she reviewed the contracts and signed them on the basis that they were in accordance with the principles agreed by the remuneration committee.
It subsequently came to light that the bonuses payable to the two executives were substantially higher than expected – some £8 million, described in the Newcastle press at the time as a ‘bonanza’.
The company brought a claim against its solicitors in an attempt to recover some of its loss.
Whose fault was it?
The Court of Appeal held that the solicitors had indeed breached their duty of care to the company by failing to properly explain to the Chair the amendments that had been made to the service contracts. When the final versions were sent to her for signing they should have been accompanied by a summary explaining, in user-friendly language, the material changes to the contracts.
So, it was all the solicitors’ fault then? Not exactly…
The Chair’s failure
Crucially, the court went on to consider whether an appropriate summary provided by the solicitors would have been properly read and understood by the Chair. And here the company was badly let down by the performance of its non-executive. She was described by the court as having a “blind spot of massive proportions” when it came to her role as Chair of the remuneration committee. She either didn’t bother to read documents or read them in such a superficial manner that she failed to understand them.
Therefore, even if the solicitors had provided the required summary it was likely that the Chair would have misread it, assuming it met her own existing misconceptions about how the bonus payments worked. The company’s loss was therefore not caused by the solicitors’ breach of duty but by the failings of its own non-executive and, as a result, the company was awarded nominal damages of just £2.
Lessons for non-execs
This case is a wake-up call for anyone who believes a non-executive appointment is a meal ticket to a ‘portfolio CV’. Non-executives are subject to the same fiduciary duties as executive directors and must perform their duties with appropriate diligence and skill, acting in the best interests of the company.