Just published, Richard's new book - "Guidance for the Directors of Banks"

I'm quite excited - not to say relieved - that the World Bank's Global Corporate Governance Forum (GCGF) has now published my short book, "Guidance for the Directors of Banks."

You can get your copy as a free download - from the GCGF's home page (www.gcgf.org), or here: http://bit.ly/1a36BBH.

I wrote the book mainly for three groups of readers: 

1. New directors who have experience in banking; 
2. Directors who understand governance, but with no banking background; and 
3. New directors who have no experience of either banking or being a director.

If you take a look, I hope you'll see that the principles aren't unique to banking! My aim, as I say at the start, is to generate some intelligent questions in your boardroom. If it does that, it has succeeded.

I'm only a director ... Yeah, right.

Recent focus on the role of 'trophy directors' ('Directors require skills, not a high profile') prompts me to re-publish this piece I wrote in 2010, when the matter came up before. I think it's still relevant today ...

[Then] Auckland mayor John Banks was quoted recently as dismissing his involvement in one company’s troubles with the explanation, “I’m only a director.”

How much should a director know? How responsible should he or she be for what goes on in the company?

It's quite reasonable that non-executive directors (who by definition don’t work in the company day-to-day) don’t have the detailed operational knowledge that we would expect of the chief executive and senior management.

I’m no lawyer, but the Companies Act seems quite clear: the board is responsible for management of the company. Even when the board delegates management to the chief executive, as normally happens in larger companies, the board remains responsible. So it’s understandable that, when a company runs into difficulties, all directors - including the non-executives - come under the microscope.

It may come as a surprise, but the courts won’t normally try to second-guess the commercial decisions a board makes: it’s not a crime to make poor decisions - we’ve all done that - or sometimes even to go broke. However, what the judges will consider is whether, in making those decisions - good or bad - the directors complied with their legal obligations.

In most cases, the main test for directors (section 137) is whether they have acted with “the care, diligence and skill that a reasonable director would exercise in the same circumstances.” Where I think that bar has been lifted a little in recent years is in what we expect a reasonable director to do. At the very least, the days of what we used to refer to as a “sleeping director” (the one who lends his or her respected name to the company’s letterhead and shows up for the annual general meeting, but makes little further contribution) are - or should be - past.

More positively, thanks to some recent cases, we have a few pointers about how the courts define a “reasonable director.” Among these,

• A “reasonable director” is one who turns up at board meetings - anyone who’s been around for a while will know that this is not a universal attribute of all directors. It’s no defence that you missed the meeting where the board took a bad decision. The logic here seems to be that the company has a right to the wisdom of its directors, so they in turn have a responsibility to show up. We can all applaud that one.

• A “reasonable director” is one who takes an active interest in the affairs of the company, and asks for the information he or she needs, to understand the company’s business and financial position. They have a duty of diligence and care to make sure - within reason - that the information they receive is complete and accurate. The longer I sit at board tables, the more I realise that one of the most important skills of a good director is the ability to ask good, thoughtful, questions, and to understand the issues well enough to ask the follow-up, “So, if that’s the case...”

From what I understand of directors’ duties, and of the courts’ attitude, I don’t think Mr Banks’ alleged comments would provide him much legal defence... Or even whether they’d sway that other jury, public opinion.

Risk and the Jakarta Moped

A few weeks ago, I was sitting in a taxi in rush hour Jakarta, when a motor scooter brushed past us, weaving through the almost-stationary traffic.

The rider appeared to be a young mother carrying two passengers: one a small boy, about three years old, standing on the scooter’s platform directly between her and the handlebar, wearing only shorts and a torn T-shirt; the other a baby perched on the woman’s lap, nestled in the crook of her left arm, wearing nothing but a disposable nappy. By contrast, their mother wore a safety helmet the size of a giant pumpkin.

As I’m sure most parents' response would be, my initial reaction was horror at how vulnerable her children were.

Then I thought about an article in the June 2012 Harvard Business Review – Managing Risks: A New Framework, by Robert Kaplan and Anette Mikes, in which the authors propose that we should look at our risks in three distinct categories:

• First the Preventable Risks – these are controllable and we should try to eliminate or avoid them. In a company, these risks would include things like internal fraud, health and safety hazards, and others that we can do something about. In that mother’s case, she appeared to be riding carefully and she had her children as well shielded as she could (given the real limitations of a moped with three passengers).

• Second the Strategy Risks – these we accept voluntarily in order to achieve our strategy. These are things like a bank taking credit risk by lending to its customers. If we want or expect a high return, we usually have to accept that the trade-off is a higher level of risk. The young mother obviously needed to get somewhere with her children, and she’d opted for this means of transport – I assume after some, probably unconscious, benefit/risk assessment of the alternatives.

• The third category of risk is the External Risks – these are events such as natural disasters and major political or economic changes, where we have no control over the likelihood of the event occurring. We can only mitigate its impact. She of course faced the risk, probably daily, of Jakarta’s chaotic traffic. I’m always surprised at how 4 million vehicles in one city can play ‘dodgems’ all day, with so few hitting one another, but most people seem to get to their destinations – eventually.

Thinking about this case, she’d mitigated the risk as best she could, while there was inevitably some residual risk. This is exactly how we operate in business – we’re not in the business of eliminating risk, but of understanding its various components and managing the bits we can. In her case, if the worst happened and they were hit, it would be more important for her to be in a condition to look after the children, than the other way around.

So maybe she had it about right. I doubt whether she’d read that article, but it was useful to think through its practical application. I hope that mother and her family continue to enjoy safe travels.