Being a director in ‘name only’ is not a credible option. Every director has a legal duty towards the company and cannot be excused of the responsibilities of the role. For example, if a director does not attend board meetings and their fellow directors make unwise or unlawful decisions, that director is also liable for the actions of the board and the consequences which may arise.
If a director decides to be a ‘sleeping director’ and not involve themselves in the affairs of the company, they are taking a great risk and may be in breach of their fiduciary duties to the company if they do not keep abreast of how the company is managed. It would not be possible to plead ignorance if things went wrong.
Even when playing an active role on the board, a director must take reasonable steps to overcome ignorance. For instance, there may be a disparity of knowledge on the board, especially in specialist areas. As such, some directors may understand an issue more than others. In these cases, it is easier for them to dominate discussion in that area and convince the board to follow their desired course of action, even if this is to the detriment of the company.
In Re Westmind Packing Services Ltd (CA 1998), it was held that company directors have inescapable personal responsibilities and anyone taking on the role must be aware of these statutory and fiduciary duties. Lord Woolf, the then Master of the Rolls, ruled ‘a proper degree of delegation and division of responsibility is of course permissible, and often necessary, but total abrogation of responsibility is not. A board of directors must not permit one individual to dominate them and use them…’.
A director must not unquestioningly accept the instructions or advice of their fellow directors or allow themselves to be ‘bamboozled’. A critical and enquiring mind is required for a director to reach an independent judgement. If a director is not a specialist in an area, they may be wise to conduct their own research to improve their knowledge and/or seek the independent advice of a suitably qualified professional. This includes understanding the financial position of the company and being alert to the risks that the company faces, including legal and regulatory matters.
There is greater governance and improved decision-making in firms where the directors exercise reasonable care, skill, diligence and independent judgement. Being aware on one’s own ignorance and taking steps to overcome this is vital.