Relying on others - where does the buck stop?

IN performing their corporate and fiduciary duties, directors are expected to exercise the same standard of care and diligence that a reasonable director, in the same position, would. The thing is, as businesses get more sophisticated and directors more educated, this standard has also risen in tandem. So much so that it has become increasingly unlikely that individual directors or even entire boards now have the necessary inherent expertise to ensure that the decisions they make are, indeed, the best ones for the company and that they do not inadvertently result in harm.

In other words, directors are now expected to pay attention to, and make decisions on, corporate matters which may actually be outside their personal or professional expertise. In a much discussed case in 2011 from Australia (commonly referred to as the "Centro" case), for example, the Australian court held that non-executive directors were liable for failing to note errors in their company's reported financial statements relating to the categorisation of certain short-term debts and guarantees. That decision means that, in Australia at least, directors are now expected to be familiar with the relevant Accounting Standards and to have a working knowledge of how these apply regardless of whether or not they have formal accounting training.

Seeking independent advice