Compliance Liabilities of Non-Executive Directors
In today's rapidly evolving regulatory environment, businesses are facing an increasing number of complex regulations and compliance requirements. Strong compliance culture is vital as non-compliance is not an option. It is costly with severe consequences which include economic loss, legal and reputational damage. This is where the board plays a critical role in setting the tone from the top. Non-Executive Directors (NEDs) play an indisputable role in maintaining effective corporate governance by overseeing board performance and ensuring regulatory adherence.
It is important to highlight upfront, in the United Kingdom there’s no legal distinction between non-executive directors (NEDs) and executive directors. Whilst in practice, NEDs are detached from day-to-day operations and valued for their objective insight, they also need to take appropriate steps to exercise care, skill, and diligence in the execution of their roles and responsibilities.
Reading Recommendation: Further guidance from the Chartered Institute of Personnel and Development to learn how non-executive directors (NEDs) differ from executive directors and how they operate within an organisation.
The Companies Act 2006 places statutory duties on executive and non-executive directors alike to:
Act within powers set out in the company’s memorandum of association.
Promote success of the company.
Exercise independent judgement.
Exercise reasonable care, skill, and diligence.
Avoid conflicts of interest.
Not accepting benefits from third parties.
Declare interest in proposed transactions or arrangements.
Reading Recommendation: non-executive directors' guide to avoiding court action for failure to carry out due diligence – company secretarial guidance notes and best practice guides. Chartered Governance Institute UK & Ireland
In the US, non-executive directors have liabilities under federal securities laws, including:
Directors have a legal obligation to disclose information to the public.
Directors of public companies must follow the disclosure requirements as established by the SEC
Directors are required to disclose all material information that an investor would consider important in evaluating their investment decisions.
The board should rely on internal and external auditors to ensure that information is accurate.
Similarly, investors may bring lawsuits against board directors if they feel they've been harmed by a violation of the securities laws.
Non-executive directors may be found liable in a violation of securities law if they made material misstatements or omissions of material information, and the misstatement or omission was the cause of a loss. The misstatement or omission must be intentional or the result of recklessness to be valid.
NEDs Fines and Penalties
The Financial Conduct Authority has fined Sir Christopher Gent, former non-executive Chairman of ConvaTec Group Plc, £80,000 for unlawfully disclosing inside information.
Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA said: Private disclosure of inside information, especially by the Chairman of a listed issuer, risks investor confidence and the integrity of financial markets. Sir Christopher failed to properly apply his mind to the question of what information he could properly disclose. Inside information is not a private commodity for those with privileged access to it. The law requires inside information to be disclosed properly and not to major shareholders or others in advance of announcements, as in this case. We will continue to rigorously enforce against breaches when we see them to ensure this important principle remains uppermost in the minds of issuers and their senior officers.
The Financial Conduct authority (FCA) has banned Angela Burns from acting as a non-executive director (NED) and fined her £20,000 for failing to act with integrity at two mutual societies.
Mark Steward, Executive Director of Enforcement and Market Oversight of the FCA, said:
Directors have a duty to disclose or avoid conflicts of interest so they can be addressed by the board. In this case, Ms Burns placed herself in a position where her duty as a non-executive director may have conflicted with concurrent opportunities she was pursuing. This was neither disclosed nor, as a consequence, could it be addressed by the board. This was inappropriate and inconsistent with the standards of integrity expected from senior managers.
FCA Statement of Principle 1 requires approved persons to act with integrity in carrying out their controlled functions. Ms Burns breached Statement of Principle 1 when she:
participated in discussions about Vanguard at the mutual societies, but failed to disclose to the boards that she was concurrently soliciting a NED position and consulting work from Vanguard.
solicited work from Vanguard by referring to her NED positions at the mutual societies while she was providing the mutual societies with what they believed was impartial advice.
The above evident the liability cost in fines and penalties for insider information and conflict of interest respectively. It is important to note other risks like reputational damage and its exponential effects.
The role of the board of directors is strategic planning and oversight. In regulated entities like financial institutions, they approve and oversee policies for risk, risk management and compliance. It is important that NEDs have awareness and understanding of key current and evolving compliance and regulatory risks.
The board also should have a clear understanding of trending regulatory changes, money laundering risks, Bribery and corruption, Sanction, Fraud, Climate risk, technology risk including timely, complete, and accurate information related to the risk assessment to make informed decisions. Enterprise risk management program is the most important first step for organisation to effectively manage and mitigate its risks. This also gives a clear risk picture to the board and senior management including specific analysis of jurisdictional risk exposure.
Along with senior management, the board should appoint a qualified compliance and money laundering officer with overall responsibility for the Compliance and AML function. This senior-level officer should be provided with sufficient authority, support and appropriate attention from the board, senior management, and the business lines when issues are raised.
The Compliance/Money Laundering officer becomes the board’s proxy for driving the day-to-day success of the entity’s compliance/AML efforts, and as such, the board should provide the officer with sufficient resources to execute their responsibilities to oversee compliance with the entity’s compliance/AML program.
To mitigate these risks NEDs must ensure the board sets the tone for a culture of compliance and risk management that permeates throughout organizations.
Establishing strong reporting mechanisms that monitor compliance enables clear accountability and responsibility within the organization. NEDs are instrumental in guaranteeing their company meets its compliance requirements. Not fulfilling this obligation can have devastating ramifications such as hefty monetary sanctions harm to their brand image and potential legal proceedings.
Whilst navigating this complex regulatory landscape may feel like an unwanted extra burden, non-compliance is not an option. In the current regulatory regime, it may have a catastrophic impact on the senior management, NEDs and the firm. For Maycode's further thoughts and services on compliance in the boardroom, please click the below.