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Consideration of directors’ duties is something of a minefield at the best of times, but the financial crisis has brought into ever sharper focus the pressures that nonexecutive directors (‘NEDs’) are under, faced with challenges that few of their predecessors ever had to deal with. Amongst a raft of legislation and case law the Companies Act provides that a director must exercise independent judgement and in these challenging times, pressure can mount on NEDs to go against their better judgment. Amid such pressure, conflict can occur, and occasions may arise when a NED considers that he needs independent professional advice in the furtherance of his duties as a director. It will therefore be appropriate and reasonable to take advice from an independent advisor at the Company’s expense.

When should a NED seek independent advice?

Many difficult situations arise in the running of a company without the need for NEDs to take independent advice, but a NED that finds himself in any of the following categories is likely to be justified in taking such a step:

  • His ability to exercise independent judgment is being continually hampered by the conduct of the Board;
  • He has very real concerns that the Company’s cash flow and general financial position is so weak it may lead to insolvency and the situation is being ignored or seriously mismanaged by the executive directors;
  • He is in fundamental disagreement with existing or proposed remuneration policies; or
  • More generally, he is in a situation where he considers corporate governance best practice demands it.

How would a non-executive go about taking independent advice?

A NED appointment letter will typically acknowledge that occasions may arise when he considers he needs to take independent advice at the Company’s expense, but would normally indicate that the director should discuss this with the Chairman or Finance Director before actually obtaining such advice. If the initial discussion with the Chairman and/or Finance Director does not result in actions that allay his concerns, then the next step would be for the NED to call a trusted advisor who will run through an appropriate course of action which is likely to involve:

  • Discussing the specific issues of potential conflict amongst the Board and why the NED needs independent professional advice;
  • Advising on other steps he may be able to take to deal with his concerns prior to taking formal independent advice;
  • Checking the Company’s constitution, the NED’s appointment letter and any adopted procedures to assess what steps a director is required to take before seeking independent advice (for example, this will involve as a minimum notifying/speaking to the Chairman);
  • Confirming he is entitled to take this advice at the Company's expense; and Advising on the next steps to take, e.g. which type of advisor would be the most appropriate to instruct, how to share the advice received, or call a meeting of the Board or with the Chairman to go through this.

Willl taking independent advice help?

At an individual level, taking independent advice is likely to protect the NED falling foul of legislation that could result in personal liability. Perhaps more importantly, taking independent advice could be a catalyst for change at Board level, resulting in the Board taking better and more balanced decisions in the longer terms interests of more stakeholders. Conversely, NEDs should not be looking to run for the cover of independent advice out of an abundance of caution type approach, which is only likely to slow down the workings of the Board if NEDs seek independent advice too frequently and unnecessarily. Arguably too few NEDs have taken advantage of their ability to seek independent advice which if used appropriately may be of considerable benefit to the Company, its shareholders and creditors.

Martin Finnegan is a partner in Nabarro’s Corporate group. He specialises in corporate finance, with an emphasis on equity capital markets, particularly AIM, and mergers and acquisitions for both public and private companies. He is a member of the QCA Markets and Regulations Committee.

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