In the light of the recent NZ Steigrad decision, where the NZ Supreme Court held that damages claims have priority over defence costs under a director’s liability insurance policy (a summary can be found here http://www.bellgully.co.nz/resources/resource.03650.asp), the Madoff saga provides an interesting backdrop.
Bernard Madoff has been labelled as the most spectacular fraudster of our times, In June 2009 he was sentenced in New York to 150 years in prison, and ordered to pay US$170 billion, in connection with his New York business. Madoff Securities International Limited had also collapsed and its liquidators issued proceedings against its former directors. At the heart of that litigation was the question of director responsibilties and to what degree each of them could be held personally responsible. Although the NY Companies Act is different to the NZ companies, its core duties are similar. In regards to the fiduciary duty of the directors, aka the duty to act in the company’s best interest, the judge said:
part of the duty is to listen to the views of fellow directors and take account of them. Corporate management often requires the exercise of judgement on which opinions may legitimately differ, and requires some give and take. A director may legitimately defer to his fellow directors’ views if he thinks they believe they are acting in the best interests of the company, even if he is not himself persuaded.
board decision-making is by majority. A director is not in breach of the duty merely because, if left to himself, he would do things differently. He doesn’t have to resign or refuse to implement the board’s decision.
Even more interesting are the judge’s comments on the directors’ duty to exercise independent judgment. Successful companies are often lead by powerful, influential leaders. Although a board is technically democratic and decisions have to be made by majority, these leaders more often than not dominate the board to a degree that it simply approves everything the leader suggests. However, this does not necessarily mean director’s are in breach:
The judge said that to take the view that Madoff knew best was not a dereliction of the duty. It was a legitimate recognition that his high standing in the financial world reflected a level of skill and experience which equipped him to know what was best for the company, and put him in a much better position to make that judgement than any other director.
This is an interesting point to take for a commercial court and I wonder whether a NZ Court would be as forgiving in a simialr context.