The UK Has Just Raised the Risk Governance Bar for Company Directors

With the news today that the UK government intends to replace the Financial Reporting Council – a non-regulatory, voluntarily funded body – with a statutory regulator with powers that should be “feared” by the organisations that it regulates (i.e. all publicly quoted companies in the UK), together with moves by the UK Pensions Regulator to impose sanctions for company directors who put their employees’ pensions at risk, the environment for risk governance is becoming significantly harder on company directors.

Thus, it is timely to reflect on the findings of a recent research project by the Universities of Liverpool and Leeds on
“Business Judgement and the Courts”. It is a commonly held perception that business judgement is immune from judicial review. It is true that approaches to judicial accountability of directors in civil (i.e. not criminal cases) varies across the “Anglosphere”, with, for example, greater protection in the US and less in Australia. Yet the question of what exactly the courts consider “business judgement” and whether or not it is or can be subject to judicial oversight was not clearly understood.

The research project examined (mostly) UK legal precedent to try and clarify the reality, through a database of over 100 cases. The results were illuminating and of relevance to all company boards in the UK and possibly elsewhere. Firstly, the widely held perception that “business judgement” was a shield against judicial review was shown to be very wrong. The number of cases taken to law against company directors is increasing and since the UK Companies Act 2006 set out directors’ accountability in statute, it has accelerated further. The new moves mentioned above are likely to increase pressure on this trend. Moreover, when cases are taken to law, the chances of liability being found against directors is over 60%. So much for protection afforded by “business judgement”!

When cases were successfully defended, the research found, it was because directors could provide clear evidence of diligent and comprehensive decision-making
processes. These go well beyond simple documenting of procedures represented by board agenda or minutes. The cases where director liability was found were based on decision-making process failures, including failures to identity relevant factors or issues, failing to take advice or seek relevant information or failing to act due to recklessness or “blind optimism”.

It seems clear that bar is being raised in the governance environment, including and perhaps especially risk governance. Directors and boards who take comfort that they have a “risk management” procedure in place are likely to be practising false optimism on two counts – first that their procedures are a substitute for effective Strategic Risk Governance and second that if called upon to defend themselves in court, reliance on their judgement will be sufficient.

Our work frequently highlights how “Risk Blindness” builds over time through familiarity with (sometimes very) imperfect information. We help boards and directors reduce their Strategic Risk blindness with proven decision-making processes supporting thorough Anticipation and Assessment of and Adaptation to Strategic Risk. It seems that in addition to mitigating the chances of corporate extinction these processes may also improve the chances of directors successfully defending a judicial review of their decisions, if or when things do go badly wrong.