Non-execs should open their eyes to the risks as well as the attractions of becoming a director. One aspect to understand is the risk of insolvency litigation.
There are many reasons to become a non-executive director (or NED). It’s good for the CV, flattering to be asked, a way to support other entrepreneurs, or a useful part-time role if you’re reluctant to fully embrace retirement.
Having said all that, if you decide to become a NED, it’s important to understand the duties and liabilities you’re taking on. Many directors don’t.
There’s a common misconception that being a non-exec carries less responsibility than being an executive director. In one sense, this is true. Unlike executive directors, non-execs do not run the business day to day. However, they do have the same rights, duties, obligations and liabilities as other directors.
All directors have a statutory duty to exercise reasonable care, skill and diligence. Exactly what ‘reasonable’ means may depend on the knowledge, skill and experience of individual directors in individual cases. But it certainly doesn’t mean that NEDS are less accountable.
The same applies with other types of directorship too – ‘nominee’ directors, ‘independent’ directors, ‘de jure’ directors and the like. When it comes to liability, the law makes no distinction between them.
This all matters because we’re seeing an increase in insolvency litigation against directors.
Litigation financing firms are acquiring the debts of insolvent firms, and then pursuing the directors to recover them.
We’ve seen directors being pursued for anything from £20,000 to millions of pounds. On top of that, their reputation takes a beating.
We’re not talking about high finance or multinationals here. This could be happening to your neighbour or someone you know from your gym.
With all this in mind, there are two important lessons for anyone becoming a NED. Firstly, being a non-exec should never just be an ego-boost, a hobby, or the guarantee of a good lunch every quarter. Be terrier-like in carrying out your duties.
Secondly, it is a good idea to get directors and officers (or D & O) liability insurance but make sure you check the terms so that you understand what liabilities are covered.
None of this cancels out the attractions of being a non-exec: it’s still a fascinating way to use and develop your experience. But you need to go in there with your eyes open. And a good insurance policy too.
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