MAINZEAL DECISION – Directors to pay $36 million

The CEO/Board Relationship

The High Court’s Mainzeal decision of 26 February is already well known for the $36 million ordered to be paid by some of the directors. This includes the requirement that the former Prime Minister Dame Jenny Shipley pay $6 million. While the decision continues to be considered pending possible appeals, there are some interesting aspects for employment lawyers who often deal with issues concerning the Board and the Chief  Executive.

Governance v Management

Probably the most common complaint raised in Board/CEO issues is that the Board is interfering in management instead of sticking to its governance responsibilities. In the reckless trading claim against the Mainzeal directors one of the allegations was of poor governance standards. One aspect was whether the directors were taking legitimate business risks.

The parties called their own corporate governance experts. They were all critical of the Mainzeal governance arrangements. The directors had no formal procedures for addressing risk. Unlike many companies and other large  organisations there was  no audit  and  risk committee.

A key finding of the Court was that it accepted expert evidence that the directors’ attention was too operationally focused. It was held that the discussion at the Board meeting was too focused on how Mainzeal business operations were progressing e.g. contracts won and lost, how they were performing and resultant cashflow and profit implications. It was held such operational issues dominated the discussions. The Court held that the Board operated more like a Management Committee and failed to address governance issues. Due to this failure, the directors failed to give proper attention to the controlling interests of its parent company Richina  Pacific and the manner it was organising Mainzeal as an overall business enterprise.

Message

The message will resonate with many Chief Executives and many Board Chairs. When the Board delegates most management responsibilities to a Chief Executive it must let the Chief Executive get on with its operations subject to the Board’s oversight. If there are problems it is for the Board to address those with the Chief Executive by all means but Boards should not meddle in day to day management. The risk is that if the Board does this it may well take its eye off its own governance responsibilities as the Court found to be the situation in the Mainzeal case.

Legal Advice

The judgment is also notable for a reminder that a Board should take appropriate external and independent legal advice when appropriate. If such legal advice had been obtained it may well have ensured that any third party commitments on which the Board relied on were properly documented in a legally binding way. That was not the situation with Mainzeal.

Learnings

That a Board should:

  • Regularly check the  CEO’s  Position  Description;
  • Review the relevant delegations;
  • ‘Helicopter up’ to ensure it is not so involved in operations that it can’t see the wood for the trees; and
  • Get legal advice when
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