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Duty of Care



Category: Corporate Governance

The duty of care, as the name implies, involves the concern, attention and diligence that members of Council are expected to exercise in performing their duties.

Bearing in mind the fact specific nature of duty of care and understanding that high risk transactions require special attention, individual members of Supervisory Council can be reasonable assured of meeting the duty of care by observing the following guidelines:

Each member of Council should have working knowledge of bank’s business, its services, its human resources, and particular problems effecting the bank. For the new members of Council this means committing a considerable amount of time to acquiring information about bank. Management Board can play a key role in helping Council members meet their duty of care by assembling packages of information that include analysts’ reports, articles, relevant information concerning the bank and its competitors, shows advantages and disadvantages of each proposal.

Being nominated to serve as a member of Council is an honor but it requires a continuing commitment of time. No one should assume this responsibility unless he or she is confident of having sufficient time to do the best job possible. Thus, members of Council should attend all meetings; should attend these meetings fully prepared. This involves study, reflection and formulation of any questions concerning the reports, proposals or other documents to be considered at the meeting.

Each member of Council should actively participate in the work and resolve relevant questions before voting            participant on an issue. If members genuinely feel that something has not been resolved to their satisfaction, they should not hesitate to press the point and insist on a satisfactory answer or delay until they get the information.

Members of Council must always be conscious of the fact       Honor the office that they have been chosen for a position of special trust and confidence. Council is a cooperative and collegial body in which the ultimate goal is to advance the collective interest. Individual egos and interests must be subordinated to the interests of the Council, the shareholders, and interests of other stakeholders. Accordingly, members of Council should approach all matters with an open mind and be receptive to the opinions and ideas of others, in the end they must rely on their own sense of what is fair, equitable and in the best interests of the bank.

Example:

This is example illustrates an extremely bad negligence of the duty of care by the Supervisory Council member.

Mr. Ivan Petrenko is a member of the Supervisory Council of a large bank. He was appointed to this position 3 months ago. He is the general director of textile factory and his financial and banking experience is very limited. He is to attend his first meeting of the Supervisory Council. Because of his work load at the plant he was able to devote only half a day to read the materials provided to him for the Council meeting. While quickly reading the materials, he skipped the parts that appeared complex or too technical.

At the Supervisory Council meeting the back of his mind was constantly thinking about the negotiations with the key customer of the textile plant that had to be conducted in his absence. He often had to step out of the Meeting room to answer the call on his mobile phone and as a result, missed parts of the discussion. He preferred to listen rather to speak at the Meeting and therefore, was not actively involved in discussions. He thought that he will vote on decisions in the same way as his fellow member that he met during the lunch.

Here is another real life example how the breach of duty of reasonable care resulted in holding the Chairman of Supervisory council liable for many millions of dollars.

This was a legal action brought in 1991 by the Commonwealth Bank to recover moneys advanced to the National Safety Council of Australia (NSCA).

The Chief Executive Officer (CEO) of the NSCA built an empire upon lies and deceit.

In the course of the action, the role of the Chairman of the Board of NSCA came under scrutiny. The Chairman, who was not a young man, was found by the Court to have failed to have exercised acceptable standards of care and diligence with respect to the Council’s interests. It appeared that he had been a mere ‘rubber stamp’ for CEO’s activities and had taken no steps to seek verification of equipment purchases and no, or insufficient interest in proposals that CEO brought to the Council.

It was held that the Chairman was personally liable for a part of the moneys owed to the bank.

Duty of Care Guidelines for the Council as a whole

No individual Council member can fulfill the duty of care all alone. The Council’s effectiveness is determined by the aggregate performance of its individual members. To ensure the adequacy of this performance, Council should establish and preserve certain processes and prerogatives. These include the following:

Complete and timely information — The Council has a right to expect that it will be kept fully advised of all material corporate developments and that such information will be provided as promptly as possible. The Council should expect that full documentation on all proposals submitted for its consideration.

Adequate time for deliberation — The Council should expect the Management Board to give as much advance notice as possible of any significant transaction submitted for its consideration. The Council can and should decline to decide any matter that it has not had the opportunity to consider thoroughly. The time required for consideration can be shortened significantly if the Council members are routinely kept informed of pending developments.

Maintain adequate records of Council discussions — Some banks record in their minutes provide only the actual resolutions adopted by the Council. However, for all significant transactions it is better to summarize fully the actual deliberations of the Council, including questions asked and answers given, the vote taken by each member and the well reasoned basis for his vote. The corporate secretary (or other individual taking notes) should file with the minutes copies of all reports, memos, financial records and other considered by the Council. A complete record is the best evidence that the Council acted with due care.

Example:

This is example illustrates a good practice of the duty of care by the Supervisory Council.

The Supervisory Council of the «Uniqum Bank» consist of 10 individuals. Meeting of the full Council is held every month. The Management Board of the Bank assigned one of its members to ensure that Supervisory Council receives all information needed for the meeting on time. His duty is to ensure that all Supervisory Council members obtain detailed agenda and information packages at least 15 days in advance of the next meeting.

Reports requested by the Council are very specific and detailed. The information package for the Council were always of high quality and reliable. The Council has never set the deadline for the end of the meeting in its belief that the meeting will not be closed until all issues are thoroughly discussed and agreed. It is a usual practice of the Council that every member should provide his opinion or comment on every issue of the agenda. All discussions and deliberations are documented in the form of tape records and detailed notes. The final minutes of Council meetings are signed by its members shortly after the end of the meeting.


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