At long last, directors may be liable for actions

Precedents set from WorldCom and Enron cases

by Diane Francis
National Post
Tuesday, January 11, 2005

Shareholders scored important victories last week after individuals on two boards of directors were held personally responsible for wrongdoing at companies even though directors' insurance existed.

Directors at WorldCom agreed to pay US$18-million out of their own pockets and a confidential deal struck in October cost Enron Corp.'s directors US$13-million personally.

This development is long overdue and will help eradicate the practice of allowing directors to hide behind directors' insurance paid for by shareholders.

Such insurance is unjustifiable -- unless the directors wish to pay for coverage out of their own pockets. Under past practice, shareholders have paid directors to run their companies properly, then had to pay to have them indemnified in case they acted improperly. It's been a game rigged for directors. Heads they always won and tails, the shareholders lost.

But the new developments herald change.

Firstly, the precedents will influence the outcome of countless other litigation settlements around the world, making directors liable for their incompetence.

The settlements will also result in the rewriting of directors' insurance policies. In the past, directors' errors and omissions insurance has covered all legal fees during investigations and court actions plus the final settlements. The only exemptions were cases involving fraud or other criminality.

But the WorldCom and Enron payouts involve directors who haven't been convicted, or charged, with fraud or other criminal acts. Clearly, many are guilty of malfeasance or incompetence, which means that insurers can put pressure on directors facing lawsuits to personally fork out compensation.

In other words, this marks the de facto shifting of liability. Directors will, at long last, be personally liable for their performance.

Naturally, the usual suspects are already bleating that this new, extended definition of directorship responsibility will make it impossible to recruit qualified candidates.

But the former system has perpetuated the appointment of unqualified candidates.

Hopefully, this news may help jurisdictions such as Canada's where securities regulators, stock exchanges and brokerage organizations have sometimes slept at the switch.

In Canada, regulatory regimes are often run by people who are politically appointed and may be socially cozy with those they must police.

The Royal Canadian Mounted Police's under-funded commercial crime corps cannot keep up with the volume of cases. Not only are they stretched to the limit, but the RCMP brass requires its white-collar cops to babysit visiting VIPs. This means they must routinely leave complicated cases in order to guard some other country's prime minister.

This is equivalent to asking New York's Eliott Spitzer and his team to pause for a few days from pursuing Wall Street's crooks in order to guard Robert Mugabe's entourage while he visits the Big Apple.

Even those guilty in Canada of poor corporate governance receive mere wrist slaps -- they are forced to resign from a bank board, removed from the Toronto Club membership roster or from the invitation list at 24 Sussex Road.

Sometimes there are no consequences.

Still lurking on bank boards are a few whose business track records would have earned any middle manager a pink slip years ago .

Then there are the directors who sat on the boards of Hollinger, Livent, YBM, Bre-X and others. They had lots of fun along the way and made lots of money, but have yet to personally help defray the damage to shareholders for their decisions.

Reforms are overdue but, in the meantime, insurers and investors should go after directors personally in settlements.

And in the absence of good regulation, investors of all companies that have tanked, disappeared or gotten into serious trouble should demand the directors resign and return to shareholders their trading profits, fees and expenses plus interest.