Directors told to play safe to stay at liberty

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THERE is a good deal more to being a modern company director than prestige and the commonly perceived inflation- busting pay rises. The recession has hit job security, and the Cadbury Code has brought further responsibilities. New regulations have also brought the spectre of jail for matters far removed from fraud and insider dealing.

Late last year, a director of a waste company was sentenced to six months' imprisonment in what is thought to be the first custodial sentence given to a UK company director for an environmental offence. Although his example is not believed to have been followed yet, the case is unlikely to be the last of its kind. Lawyers and other observers detect an increasing willingness on the part of pollution andhealth and safety regulators to take action against individuals to encourage companies to take the regulations seriously.

But the point is not really whether or not a director goes to jail, according to Robin Williams, head of the insurance group at the City law firm, McKenna & Co. Even if he or she is not jailed, a convicted director picks up a criminal record - which can mean disqualification from directorship, visa problems for certain countries and difficulties with membership of professional bodies.

The subject has not received much coverage, but its importance has clearly not been lost on many corporations. A conference run by McKenna & Co during the summer proved so popular that it had to be repeated several weeks later.

That so many corporate executives are feeling nervous and vulnerable is a tribute to the power of public opinion. The authorities have been driven to this approach by the popular desire for individuals be held accountable for oil spills and other disasters. Indeed, in the case of the jailed waste company director, the prosecutor did not proceed under the directors' liability provisions of the relevant legislation. Instead, there was a direct charge against the director.

Now that the law is increasingly recognising this demand for accountability, it is developing the principle further to make not just directors but managers responsible for accidents that happen on their patch.

As a result, earlier this year a manager of a subsidiary of a leading building products group was convicted with his managing director, because it was decided that he should have ensured that the company complied with all the conditions of its licence to deal with hospital waste.

In the same way, non-executive directors cannot claim any lower duty than their executive colleagues. The two groups have precisely the same responsibilities, as the judgment on an Australian case makes clear. It found that a non-executive director could not escape liability to a third party who incurred a loss as a result of the company's fraudulent trading by claiming that he was not as responsible as the executives.

So how can a company and its executives avoid convictions in the developing areas of pollution and health and safety? The short answer is 'with difficulty'. But risk management can go a long way to helping them, Mr Williams says.

If a company has some sort of risk management process in place, it will have 'some sort of defence' if something goes wrong. The legal journal Practical Law for Companies said in a recent issue that 'prudent directors should be considering introducing compliance systems', because the Health and Safety Executive would probably test its standards in the courts as evidence of senior managers' duty of care.

(Photograph omitted)