Collective independence

Dec 03, 2019
Claire Lord explains how the outcome of a recent court decision clearly articulates the meaning of a director’s “independence of mind”.

It is a fundamental and long-standing principal of common law, and more recently a principal enshrined in statute, that directors owe their duties to the company of which they are a director and to the company alone.

Directors may come to owe particular duties to others in particular circumstances, such as to shareholders where there are negotiations for a takeover and the directors should act to promote the interests of the shareholders in agreeing a deal that best reflects the value of the company, or to creditors where the directors are aware that the company is insolvent and its assets should be preserved to the extent possible to settle its liabilities.

There is also a statutory duty placed on directors to have regard to the interests of members and employees when performing their functions. There is, however, no mechanism for members or employees themselves to enforce this statutory duty unless, in the case of members, they can muster sufficient voting power to compel the directors to have regard to them or, in the case of employees, where a liquidator does so on their behalf.

The result of these principles in practice is that, on a day-to-day basis and when the business of a company is running in the ordinary course, the directors need, at all times, to be making decisions on business strategy that are in the best interests of the company. While a company’s shareholders and employees will have an interest in the outcome of a company’s strategy, they have no direct responsibility for the impact on the company of a course of action taken. It follows, therefore, that where directors of an Irish company act in breach of their duties to the detriment of the company, the proper plaintiff to seek recourse is the company itself.

Collective independence

In performance of their duties owed to a company, the directors act as a collective in the interests of the company. In doing so, directors must exercise independent judgement. These concepts of togetherness and independence are not contradictory; the requirement is simply for each individual director to bring their own independence of mind to the deliberations of the collective.

Behaviours that demonstrate independence of mind include having conviction and strength to effectively assess and challenge decisions of other directors; the ability to ask questions of those closer to the executive function of the company or to certain aspects of that executive function; and, very importantly, the ability to resist group-think, all with a view to ensuring that decisions made by the board are in the best interests of the company.

Exercising independent judgement does not mean forming a view independent to that of the board as a whole and then acting independently to achieve a particular outcome in support of that view.

A court’s view

The High Court of England and Wales recently considered the scope of directors’ duties, and more particularly the duty of a director to exercise independent judgement, in proceedings that arose out of a boardroom battle within Stobart Group Limited, the publicly quoted logistics group. The proceedings concerned a dissenting director who formed an independent view on a company matter and sought to involve shareholders and employees in matters of corporate strategy that fell outside their purview.

The specific actions taken by this director included criticising the board’s management to the company’s majority shareholders, agitating these shareholders for the removal of the company’s chair and improperly sharing confidential company information with a non-board member. All of these actions were taken independent of the board of the company.

The judgment delivered noted that the duty to exercise independent judgement is one that must be performed by a director in the context of the board of directors acting as a collective. The judgment also noted that this obligation does not carry with it some kind of entitlement for an individual director to act independently of the board in relation to matters that fall within the sphere of management of the company’s business.

The judgment correctly concluded that an individual director should raise, debate, reflect upon and then decide on their own position on a matter at the level of the board, either as part of the majority or as a dissenting voice. Only by doing so will they be able to comply with their duties to exercise an independent judgement and to act in the best interests of the company.
Claire Lord is a Corporate Partner and Head of Governance and Compliance at Mason Hayes & Curran.