There is no denying the fact that Ghana’s banking sector is currently reeling under liquidity and corporate governance challenges, at least in the last few years; resulting in the liquidation of some notable ones. Recent information attributable to the Bank of Ghana (BoG) also suggests that a few more Banks are expected to go down. Indeed, many industry experts have singled out Corporate Governance failures, particularly the role of directors, as the bane of the recent happenings in the banking sector. Most recently, some directors were implicated in questionable shareholding, mergers, acquisitions, transfers and related deals, to the amazement of many, especially members of the business community.
The Role of Directors
‘Where were the directors and managers of these institutions and what possible actions might be taken against them by shareholders?’ This is the key question that continues to itch on the lips and stir up the minds of the corporate world regarding the extent of personal liabilities of the directors, thus giving credence to the need for a specialised form of insurance called the Directors & Officers (D&O) Insurance.
What does it do?
The D&O Insurance policy is a liability insurance which has the aim of providing protection for directors and officers of an organisation against their personal liability for financial loss suffered by third parties, especially their shareholders.
The History of the D&O Insurance policy
The D&O Insurance policy is relatively new and was introduced to the UK market some 30 years ago. Its introduction was also motivated by the Companies Act (1985), which does not permit companies to indemnify their directors for their personal liabilities except for costs and expenses incurred by them in the defence of claims.
The D&O Insurance policy grew rapidly as a result of a dramatic rise in claims by shareholders against directors, as was in the case of Enron and Northern Rock, thus giving fame to the extent of liabilities of directors and the benefits associated with D&O Insurance. For jurisdictions such as the UK, it is a requirement for a director to have proof of a personal D&O insurance policy before he or she is admitted on to a board.
What led to the expansion of the D&O insurance policy
Indeed, the rapid expansion of the D&O insurance policy was also triggered by the need for strict adherence to corporate governance practices in the UK, globalisation, wide-spread corporate scandals such as the recent executive pay issue in the UK, Governments control and regulation on the conduct of directors for purposes of transparency, and civil justice reforms in the UK, which makes it possible for directors to be fined or jailed for contempt of court, as there is now a requirement that they are made to sign a statement of truth verifying the facts in a claim or a defence document.
A D&O insurance policy taken out by an organisation covers the liability of all directors and officers of such an organisation. In acting as the organisation’s ‘mind and will’, the directors may incur a common law personal liability for a wrongful act by the organisation.
Individual director policies
It is also possible to arrange cover on an 'individual' basis for a particular director that will cover all directorships held by him or her in distinct companies. Such a scheme can be arranged by the Institute of Directors for its members. Such an individual cover is a contract between the director and the insurer and does not involve any company in which he or she holds office.
A Director Defined
A company is a legal entity and is separate and distinct from the shareholders as well as its management. The management falls in the hands of its directors. The directors, company secretary and other executives with general managerial responsibilities, are collectively called the officers of the company.
The law deems such persons as directors and can hold them liable for their actions and / or inactions. Such people include a de jure director who is validly appointed to the office; a ‘de facto’ director who claims to act and purports to act as a director although he is not officially appointed as such and having general managerial responsibilities. A shadow director is defined as ‘a person in accordance with whose direction or instruction the directors are accustomed to act’.
The law draws no distinction between directors. It makes no difference whether they have executive or non-executive duties, are full-time or part-time or are highly paid or unpaid. A director has specific duties and responsibilities and, if they fail to discharge them properly, they may incur unlimited personal liability.
In keeping with his oversight functions, a director, together with others, has the responsibility of preparing and communicating to all stakeholders of the company a copy each of the financial statements and audited reports, as well as, their own reports on the state of organisation affairs. The primary requirement the Law places on directors is to be ‘diligent, careful, faithful and skilful’ in all their actions.
Statutory Requirements
The statutory requirement for directors especially in the UK to have regard to a list of factors in exercising a duty to promote the success of a company are codified general duties highlighted in the Companies Act (2006) as duty:
An important recent legislation is the Corporate Manslaughter and Corporate Homicide Act (2007) which clarifies the criminal liabilities of companies where serious failures in the management of health and safety results in fatality. Other legislations that also have an impact on the liability of a director in the UK includes the:
Liabilities
Under the Companies Act (2006), directors now have responsibilities to their company, its shareholders, employees and to the general public.
It is important to note that a liability may arise, though without any dishonest intent, out of a director’s lack of care and skill in the performance of his or her duties.
These liabilities may arise mainly from:
Claims Payment
The most likely sources of claims are:
Controversial transactions, business reversals or poor quality results may lead to lawsuits. Liability may arise at common law, by statute or by accusation to the director of personal liability for the wrongful act.
Related Developments
The following cases involving directors’ complicity and the consequences thereafter should keep us wide awake to consider D&O Insurance policies before admitting candidates on to boards:
The Way Forward
While D&O insurance policy may be new in the Ghanaian insurance space, its value and relevance need no overemphasis! Practitioners in the insurance space should extend public education on D&O, since the policy is aimed at protecting the directors and officers of corporate organizations, in relation to their personal liability for financial loss suffered by third parties, as they perform their governance duties. It must also be reiterated that whilst a company’s liability may be limited, the personal liabilities of its individual directors for their wrongful acts is not!
Until Next Week, ‘This is insurance from the eyes of my mind’
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