The Regulator

Directors must ensure they are fully informed about a company’s operations and fiscal position, even when assets are located overseas, or when a business is especially innovative, writes John Price.

Know your company

Directors are important gatekeepers in our financial system. The thorough and diligent performance of their role is critical to market integrity. The effective performance of a director’s role requires that they know their company and employ an inquiring mind.

While directors may not be involved in the day-to-day management of a company, they need to have a deep understanding and knowledge of the company to discharge their obligations. For example, many aspects of the Corporations Act 2001 are predicated on directors understanding the business, financial position and affairs of the companies they govern.

These include provisions of the Corporations Act that relate to directors’ sign-off on accounts, the operating and financial review of directors’ reports, prospectuses and other disclosures like target statements in a takeover bid. Employment of an inquiring mind also ensures that those to whom functions have been delegated have discharged them effectively and for the purpose they were intended.

Directors also need to have a strategy for how they will inform themselves about the company before they join it. Knowing what a company does, how it does it, its culture, its prospects and future ambitions is information directors need to know in determining whether to join a board. It is information directors need to keep abreast of to discharge their duties, particularly in forming strategy and oversight of risk.

Similarly, where a company proposes to change its direction, directors need to ensure they have sufficient knowledge about what that would involve before pursuing it.

The challenges currently faced by directors, particularly as a result of globalisation, innovation, technology and emerging risks, heighten the relevance of these attributes.

Globalisation

Globalisation presents challenges in understanding:

• The business of the company – for example, where some or all of the company’s operations are overseas and the assets and relevant markets are not well known locally or visible.
• How the company does business – for example, where the business is subject to foreign regulations and business norms.
• The culture of the company – for example, where the majority of the board or employees of the company are based overseas and there are language barriers.
• The prospects and future ambitions of the company – for example, where the business is operating in a totally foreign market.

Directors may need to do further research and engage additional expert advice to ensure they have the same level of understanding of the operations of any offshore business that they are on the board of as they would a local company. Without this knowledge and insight, directors are compromised as to the effectiveness of the oversight they are able to provide.

Innovation and technology

Directors in particularly innovative or technology-centric businesses need to understand both the technology and business, to ensure not only that the company is sufficiently agile to respond to rapid change, but also to provide effective risk oversight.

Emerging risks

Emerging risks such as cyber risk, geopolitical instability, climate risk and sustainability also require a more proactive approach to strategy and risk management by all directors. Directors need to understand and continually reassess the emerging risks that may be applicable to their business and ask the relevant questions of management.

Having a deep understanding of the company and employing an inquiring mind are two fundamental attributes of a successful director, and his or her effective oversight of the company.