INDEPENDENT directors (IDs) need to be aware of the potential liabilities they may face, participants at last week's BT-NUS roundtable discussion said.
'We teach that IDs should be more intensely involved in deciding strategy, cooperating and working with management to guide the company,' said Gunter Dufey, professor emeritus at the University of Michigan.
'The problem is that from being an observer, you become a perpetrator,' the professor said.
He noted that it would be very difficult for IDs to disassociate themselves from something they had a hand in, even if they realised later that it had been a mistake.
The importance of IDs protecting themselves - such as recording their dissenting views in the minutes of meetings - cannot be overstated, said Lee Suet Fern, managing partner of Stamford Law Corporation.
Ms Lee referred to the recent James Hardie case in Australia, in which the Australian Securities and Investments Commission took the industrial building materials company's current and previous boards of directors to court for breach of directors' duties.
'In terms of the process of board resolutions, what happened at the James Hardie board is what I see happening in a lot of our boards,' said Ms Lee.
'There is some level of debate, and then the chairman summarises and a few supportive directors will murmur a concurrence and that's it. There isn't a formal resolution tabled and in that case, the judge found there was a resolution passed. I think the advice that lawyers would now give is that if you want to protect yourself, you do need to record at the very least, a clear abstention, because if you have strategic or other important differences, sometimes these come back to haunt you.'
Should a company face governance issues, there may not be distinctions made between the liabilities of different IDs, said Shasi Gangadharan, Chubb's speciality insurance manager for Asia-Pacific.
'Liabilities are joint and several, which means that if one of them goofs up, the rest are in for it. I don't think we've reached a situation where the courts would want to make distinctions between the liabilities of one and another,' Mr Gangadharan said.
'In Satyam's case for example, the half a dozen or so IDs were totally unaware of what happened, but today they have to fund their entire liabilities themselves because they don't have the company to indemnify them at all and they have to be on their own.'
Ms Lee added: 'There's a huge asymmetry of information because you have in our code of governance a requirement that to be independent, you need to be independent of the company, its management and so on. By that very nature of being independent and being an outsider, you really don't have the same access to the information.'
But Lan Luh Luh, co-director of the Corporate Governance & Financial Reporting Centre at the National University of Singapore, said that the courts will consider the type of duties being breached, and noted that there is a difference between the duty of care and the duty of skill.
'Duty of care is a standard duty so everybody will have the same standard. But if it's a duty of skill, you are questioned on whether you applied different kinds of skills,' she said.
'For involvement, you can say it's a matter of skill rather than duty of care. You can say, I've applied my duty of care but I couldn't discharge my duty of skill because I didn't have enough information,' she added.
