IN recent times, there has been a growing trend of companies taking the legal route on past actions of not only board members, but also key management staff for a host of alleged offences committed during their tenure.

These actions typically stem from decisions that resulted in significant losses for the company.

Recent examples include SP Setia Bhd, which took legal action against its former senior management and a former director for alleged breaches of duties linked to land acquisitions and the sale of a business unit.

In another case, Sarawak Cable Bhd’s board members, group chief executive officer (CEO) and a former company secretary were also taken to court by a white knight over the wrongful termination of a memorandum of understanding to revive the loss-making company.

Earlier this year, KNM Group Bhd sued its former executive directors for €3.44mil after the company had called off the sale of Borsig GMBH.

In the case of KPJ Healthcare Bhd, it took action against 11 former directors and sought damages to the tune of RM96mil in relation to the sale of a business unit.

Breaches of duties are also common among government-link companies as seen in the case of Mara Corp’s CEO, who was ordered to pay RM3.4mil for breaches of duties during his tenure.

Outside Malaysia, cases against boards and senior management are also common as seen in the case of Australian Securities and Investments Commission against Healy & Ors.

The Australian Federal Court ruled that the CEO and six other non-executive directors, including the non-executive chairman, had contravened the statutory duty of care and diligence by approving the financial statement of Centro Group.

Similarly, in the United Kingdom, the case against two former directors of British Home Stores remains one of the most high-profile cases as they were ordered to pay £19.5mil to the liquidators of the once high-flying retail group for wrongful trading and misfeasance.

The Legal Perspective

Board members and senior management are well governed by various legislative requirements and regulatory frameworks.

These include the Companies Act 2016, the Capital Market and Services Act 2007, the Malaysian Code of Corporate Governance 2021 (MCCG), the Malaysian Anti-Corruption Commission Act 2009, the Income Tax Act 1965, and various accounting and auditing standards.

For financial institutions, legislations that are related to these institutions include the Financial Services Act 2013, the Insurance Act 1996 and the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001.

Given the extensive legal oversight, the duties of directors and senior management are no walk in the park.

First and foremost, directors are duty bound to exercise reasonable care, skill and diligence, as well as have a fiduciary duty to ensure he/she acts in good faith for the benefit of the company.

They must also ensure the financial statements presented reflect the true affairs of the company.

They are also required to exercise their powers under the various legislations for proper purpose, while at the same time avoiding any situations that are deemed as conflict of interest or even perceived conflict of interest.

Directors must also avoid self-dealing and exercise their discretionary powers properly.

Under Bursa Malaysia’s Listing Requirements, directors must ensure that they observe the timeline imposed on them for the quarterly and annual financial reporting, and ensure that the final audited financial statements do not deviate by more than 10% from the unaudited full-year annual results.

Investors’ Expectations

Investors or shareholders of companies, especially publicly listed ones, demand that board members – whether independent or otherwise, and regardless of whether they are executive or non-executive directors – take appropriate steps to ensure the affairs of the company are conducted within the ambits of the laws and relevant regulatory frameworks and guidelines.

Investors expect company directors and officers to be transparent and accountable for their actions.

They expect the directors not to be involved in any form of activities that are deemed to be fraudulent, including embezzlement, the issuance of false or misleading financial statements, or misleading investors.

Investors also expect directors to avoid any form of false representation, particularly regarding the company’s financial or business prospects, which could potentially be used to deceive or mislead the public.

Last but not least, directors and key management personnel must avoid at all costs being involved in any form of insider trading activities.

As officers of the company, they would rightly have knowledge of confidential information prior to it being made public.

Investors also expect directors to avoid any form of conflicts of interest, or even the appearance of such conflicts.

What Can Directors Do?

Directors face legal liabilities if they do not carry out their duties with utmost care.

To reduce the likelihood of being personally liable, directors must ensure that they perform their duties in accordance with statutory requirements and fulfil their fiduciary duties.

They should avoid being involved in any misuse of company funds or assets, and fraudulent activities.

It is imperative that directors uphold the highest ethical standards and in accordance with the MCCG as well as other guidelines.

They must ensure that compliance matters and internal controls are clearly defined, monitored and addressed.

Companies’ business affairs must also be carried out transparently with clear authority limit mandates, responsibilities and accountability.

This will ensure that directors do not breach their fiduciary duties and avoid any form of misappropriation of funds or fraudulent conduct.

To avoid conflict of interest situations, directors and officers are now required to declare on a timely basis or as and when a conflict or potential conflict situation arises.

Directors and board members who are not well-versed in certain corporate matters or issues are allowed to seek professional advice or opinion before making a decision.

This will help to protect directors and board members from potential legal action if the matter decided upon has caused losses to the company.

This is also known as the business judgement rule, which encourages directors and officers to take calculated risks and make decisions in the best interests of the company.

While a director’s position is seen as a plum position, especially among independent directors or nominee directors, the legal requirements and expectations are high.

All directors must exercise their powers with utmost due care and diligence, upholding strong corporate governance at all times.

The article was first published by The Star.

Photo by Tingey Injury Law Firm on Unsplash.