Directors' liability: what keeps today's  leaders up at night?

How do you, as a director, navigate the quickly changing business landscape in 2021? How do you keep an eye on 'business as usual' when a governance crisis situation arises? John Paans (Partner Legal), Frédérique Demenint (Partner Risk Advisory) and Gerrie Lenting (Partner Forensic and Financial Crime) deal with these kinds of issues on a daily basis and give a look behind the scenes in this interview.

Anyone who follows the news cannot have failed to notice that the issues surrounding corporate and directors' liability have taken off in recent years. Think, for example, of climate cases in the (oil) industry, money laundering fraud at banks or the House of Representatives demanding that bonuses of top executives be repaid. "Of course, it is no fun to be held liable as a director," says Gerrie Lenting. "In practice, we often see executives putting on a sort of medieval armor in an attempt to evade that liability. That no longer works." What Lenting means by this: society has changed in recent years to such an extent that the tools that the average driver has at his or her disposal are now limited or old-fashioned. Other things are needed.

Much more is expected of directors than, say, ten years ago, says John Paans. "As a director, you can no longer only focus on the short-term interests of shareholders and investors, but you also have to take into account all kinds of social issues such as the chain in which a company operates, the environment, respect for human rights, social and employee matters and the fight against bribery and corruption." According to Paans, this is quite complicated for directors, Because, on one hand, they have been given the freedom to determine policy for their company, while on the other hand, there are requirements for external interests that they also have to take into account. "If you make the wrong choice, you can be held personally liable as a director," says Paans. "This development has a major impact on the functioning of directors and it can lead to unpleasant incidents when they are not sufficiently aware of them.

Account

An important factor is the extent to which administrators nowadays have to be accountable, says Frédérique Demenint. "By embedding long-term value creation in the Corporate Governance Code, directors now also have to serve the interests of stakeholders with whom you had a less direct relationship in the past. Think of members of the House of Representatives, NGOs and interest groups who, moreover, are increasingly influencing your strategic agenda due to the growing number of media channels." Recent examples include the lawsuits filed by environmental organisations. "Strategic policy choices were legally challenged here, the ultimate form of accountability." According to Demenint, it puts a lot of pressure on the organisational strategy, which has traditionally been the domain of the board. "Because if things go wrong, it's also about the personal performance and motive of directors. How you navigate in this quickly changing and increasingly complex landscape, with an impact on the company and its board, requires a different approach in stakeholder, reputation and crisis management."

Another reason why directors should look into liability is the broadening and diversification of fraud topics, says Gerrie Lenting. "Issues such as accounting fraud and money laundering are regularly in the news, but we also see more and more claims about sustainability promises or the safety of products such as medicines or cars." Lenting lives by the principle:

In other words: Prevention is better than cure. "Fortunately, we see that more and more attention is being paid to the question of how administrators can preventively ensure that they do not have to deal with these kinds of crisis issues at all. Entrepreneurship is about taking risks, including dealing well with the consequences that choices can turn out wrong."

Lawful but awful

What do these developments mean in practice for today's directors and what concrete steps can they take? According to Paans, companies need to do more due diligence, for example. "As a company, examine your value chain: where do products and raw materials come from, how are they made and what impact have they got on the climate." And then there is also the reporting obligation, says Paans. "In your annual report, you have to report on sustainability, the broader interests and on the impact of your company. If you make assertions in the annual report that turn out to be incorrect, you can be held liable for them." Demenint also advises periodically developing scenarios about the impact of certain strategic decisions in the context of public support. "Consider an organisation that receives government support and decides to award substantial bonuses to its top executives. Technically and legally, this decision could be made, but it seemed that there was no consideration for long-term support and buy-in, resulting in significant credibility issues." Lenting calls this the sliding panel of 'lawful but awful'. According to him, nothing is as legal as directors' liability, while in practise he often sees directors being held liable because of a non-legal conduct or expression. "What is legally allowed, but we do not consider appropriate, can lead to the search for legislation to still be held liable."

In practice, clients often turn to Deloitte when something has already gone wrong and a board is in a difficult position, the partners say. Paans: "At such a moment, we can give advice, for example about the legal frameworks that someone encounters or about recent developments and case law. Unlike law firms, we do not supervise proceedings in liability claims, but we are in the process of doing so." Paans, Lenting and Demenint prefer that customers sound the alarm before things go wrong. "Many organisations still have to make that transition," says Demenint. "As I said, prevention is better than cure, even if a major preventive intervention is necessary. We therefore regularly discuss with (potential) clients how they can organise their daily operations in such a way that they identify and reduce the risks associated with directors' liability much earlier in the process. And what measures are needed to reduce the chance that they will ever end up in such a crisis situation." Paans: "Think of companies that have to change their corporate structure because they are growing very fast or when a company enters a process of listing on the stock exchange and therefore has to organise itself differently due to new legislation. These are important moments to safeguard the risks associated with directors' liability."

Finally, medieval armour no longer works today. What do they think is the most important skill of a director today? "Communicating, being transparent, working on trust and on the promises you make," Lenting sums up. "Poor choices made yesterday are your problems of tomorrow. But if you want to keep everything controlled and small, then you're standing there in that heavy harness and you're not effective." "It's also about leadership; a director in this day and age will have to lead from empathy and he will have to be able to convey a message," says Paans. "And that, in turn, requires social sensitivity," Demenint adds. "That is probably the biggest challenge for directors and supervisors: developing a sharp social antenna and actually embedding it in their professional role and in practice."