The recent sentencing of former South Canterbury Finance director, Ed Sullivan, has raised an interesting issue for directors. Most professional development providers, the Institute of Directors included, teach that the board is a collective of directors and, therefore, the collective responsibility applies. However, the Sullivan case suggests otherwise. Sullivan was found guilty of making false statements (including failure to disclose a related party transaction) and deception. Another director and the CEO were acquitted. The collective responsibility—that the decisions of the board are the decisions of the whole board—has been trumped in this case. Or has it? Whereas other cases against directors have resulted in guilty verdicts across the board (albeit with variations in sentencing), fault is apportioned to one director only in this case. An approachable summary of the verdicts and basis for each judgement, has been published here.
Mr Sullivan appears to have overstepped the mark on several occasions, by making false statements or by withholding information. Justice Heath determined that Mr Sullivan acted alone, and that decisions to make statements or withhold the information were his decisions. It seems that they were not decisions of the board, and therein lies the important distinction. All directors are culpable for decisions made (or not made) by the board—whether every director was present when the decision was made or not—whereas individual responsibility applies when individuals act outside the board. This is because the board is a collective of directors and, therefore, binding decisions of the board can only be made by the board (ie. during meetings of the board).
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.