Recent cases have shown that courts will not hesitate in holding company directors liable for breaches of the law, so companies need to look at limiting the liability of their non-executive directors.

It is generally accepted that for most companies listed on the stock exchange, non-executive directors provide a worthwhile contribution. But at present, the law is not settled about their roles and, therefore, their potential liability is unclear.

Companies can easily limit non-executive directors’ liability by documenting their roles. This document can be published on the company’s website so that it can be continually updated – a type of live letter of appointment or an up-to-date job description. It can then be used in communications with current and potential investors, as well as regulators and shareholders. The document has to be true in practice or its value will be minimal. It should refer to the company’s circumstances and the non-executive directors’ responsibilities as required by law.

When creating the document, companies should look at what non-executive directors’ duties are, which in essence are to supervise, including guiding, monitoring and oversight. The general responsibilities may be to:

• provide an independent perspective to the overall running of the company;
• constructively challenge management and advisers;
• critically review information from management and advisers against their knowledge of the company and general business affairs;
• ask questions where required;
• fulfil non-delegable legal responsibilities such as approving financial statements;
• either avoid or minimise conflicts of interest with the company; and
• appoint, assess and, if need be, terminate the chief executive.

The special responsibilities may be to:

• review and approve the management strategy;
• review and approve the annual budget and business plan;
• review operational performance reports;
• review and oversee the risk management system; and
• undertake succession planning for non-executive directors and the chief executive, and oversee succession planning.