Wondering where the rubber meets the road for company directors?
So you’re a newly-minted director. Congratulations—what are your responsibilities? You’ve been a director of your business for a while, and are struggling to keep up with changes in compliance—where can you start?
Becoming a company director does not come with a handbook. This is a dilemma faced by many other groups of people including, notably, new parents; in both situations, you’re being thrown into the deep end without explicit instruction.
People often talk about doing your “due diligence” as a director. What does it mean, exactly? That’s what we’re hoping to answer in this post.
Merriam Webster says that under the law, due diligence is the care that a reasonable person takes to avoid harm to another person or property. In another context, it is the research and analysis of a company done in preparation for a business transaction such as a merger or purchase.
For a company director, due diligence essentially means taking care (including researching and equipping yourself with the requisite knowledge) to ensure that the business is complying to all relevant laws. They should be part of forming the vision for the company and ensuring that its operations are legal, ethical, and safe. They should be leaders and vision holders, providing high-level governance beyond the day-to-day running of the company.
What am I risking as a director?
If you are a company director, you are responsible for protecting the company’s assets, acting honestly and ethically, and ensuring compliance with all laws and regulations. And there are consequences should you fail to meet these responsibilities.
Legal risk
You may be held personally liable for any losses or damages the company suffers due to omissions or negligence. It’s not enough to not be involved in an incident—you must be actively and diligently working to ensure they don’t happen.
Reputational risk
Being the director of a company is a public position, and your reputation is something you should consider before agreeing to take on this role. Action taken under some acts such as the Employment Relations Act, or by entities like WorkSafe, become a matter of public record.
Financial risk
As outlined above, you may be liable for fines, debts, and legal costs if it is demonstrated that you have not been sufficiently diligent in your role. You may also face charges for conduct in breach of the law such as theft or fraud, so it’s important to take precautions against these happening under your watch. The Anti-Money Laundering and Countering Financing of Terrorism (Requirements and Compliance) Amendment Regulations 2021 sets out due diligence standards for shareholders and directors.
Operational risk
A PCBU is a “person conducting a business undertaking”. Your company is, collectively, a PCBU—and has a duty of care under health and safety laws. As an employer, the PCBU must act in good faith and ensure that employment arrangements are fair and reasonable. As a director, you are a representative of the PCBU and have responsibility for its activities and outcomes.
WorkSafe specifies that “under HSWA, a business or undertaking (PCBU) must look after the health and safety of its workers and any other workers it influences or directs.” Employment New Zealand lays out the obligations that any employer (PCBU) has towards any employee: good faith, good reason, fair process. You can read about this more in depth on their website.
The benefits of due diligence
“Doing your due” as a company director is about more than just avoiding the consequences mentioned in the last section.
A company that’s compliant, ethical, and has a great safety record is a valuable asset. It is much more likely to have a positive culture that attracts great employees, and the link between good safety management and profitability has been written about and proven time and time again.
We like to say that “know=flow”, which means that having the right knowledge helps operations to run smoothly. Uncontrolled risks lead to incidents or getting caught off guard, which costs time and money. Accidents are costly. Turnover is costly. If you are preparing for a possible sale, these things can also adversely impact the book value.
A positive company culture filters down from the top! When employees are happy and engaged, the bottom line benefits.
You might have heard about the hunter and farmer sales model, in which hunters track down leads and farmers nurture the fields of existing relationships. To continue in that vein, good directorship is about building fences. Hunting or farming is fairly pointless without fences to keep the herds (profit) secure.
How you can do your due diligence as a director
Wanting to equip yourself with the knowledge required to be an effective company director is the first step—so you’re certainly on the right track! At Emendas, we have a wealth of resources and experience to help companies with the operational aspect of director due diligence, and a little black book full of great people who can help with the other aspects. Here are three action points you should keep in mind to help you continue down the right path and fulfill your obligations.
- You should be ACTIVELY monitoring and evaluating compliance management within the company. Come up with a schedule or checklist which will remind and prompt you to regularly carry out reviews on various business functions and ensure they are compliant. Consider what your policies are promising and whether those promises are being kept in implementation. Are they actively and currently being followed?
- You should be intentionally and diligently keeping up to date with the relevant laws as they change. When changes are made to legislation, your responsibilities can change—and it’s your responsibility to keep ahead of that. Brainstorm or do some research to create a list of laws or regulations that apply in your industry. The Employment Act, Companies Act, and anything related to safety or privacy will be at the top of the list. Your individual list might include the Land Transport Act, the Electronic Transactions Act, and a variety of other pieces of legislation—you can peruse these here. Set alerts, sign up for newsletters, and do all you can to remain knowledgeable and current on what’s happening.
- One of your major responsibilities is ensuring the safety of all employees. Risk identification is a big part of this and you should be making it a priority to see that this is done and appropriate controls are in place.
- The role of a company director is to lead. While you may not be doing things like risk identification and implementation of controls, or directly taking part in HR activities, it’s on you to ensure that they happen and happen correctly.
TL;DR: How to do your due diligence as a director
Stay up to date with all relevant legislation. Actively monitor and evaluate compliance in all aspects of the business. Set the tone for company culture.
Honestly, for this one you should probably just be diligent and read the whole thing.
Need help?
Empowering and equipping directors and senior leadership teams is our specialty! With our advisory board services and partnership plans in particular, we can come alongside you to ensure that your safety and people processes are up to scratch—and that you as a director aren’t at risk.
Get in touch with the team to talk about what you need.