Non-Executive Directors Must Challenge Boards

Article excerpt

Byline: Anthony Evans

NON-executive directors are called upon by management teams in a number of different ways; to add an experienced independent voice to the board, to supervise the capability and performance of management, to weigh strategic goals against short-term decisions and at times simply to act as a sounding board to executive directors.

The role of a non-executive director depends on his or her experience and abilities. Critically, however, it also depends on the executive members of the board allowing the non-executive director to fulfil the role properly. Dangers can arise for non-executive directors where they do not, or are not permitted, to do this.

A recent case decided by the Court of Appeal should act as a timely reminder to non-executive directors of the responsibility which goes with the job.

The case involved a property holding company, Lexi Holdings plc.

The court found that two of the non-executive directors were liable, because of their inactivity, for the dishonest misuse of company funds by an executive director.

In this case, two of the non-executive directors were aware that the managing director had previously been convicted and imprisoned for rental advance and deposit fraud practised on students during the 1990s. Despite this knowledge, between 2002 and 2006 nearly pounds 60m was dishonestly misappropriated by the managing director of Lexi Holdings by pretending that the payments were made against directors' loan accounts.

In hearing the case, the Court of Appeal stated that the non-executive directors in question ought to have known that the directors' loan accounts required a convincing explanation and that they had a duty to direct "searching questions" to the managing director. …