May’s suggested reforms on directors’ responsibilities are a sham

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The Observer reports this morning that:

Irresponsible company bosses who “line their own pockets” while failing to protect workers’ pension schemes are to be hit with huge fines, under plans to be announced by Theresa May’s government within weeks.

Writing in the Observer after a week which saw the collapse of Carillion, the construction and outsourcing giant, with a deficit in its pension scheme of up to £900m, the prime minister says her government will act urgently to stamp out “abuse”.

A total of 28,000 members of Carillion’s 13 pension schemes are facing a cut to their retirement funds.

I have absolutely no confidence at all in this proposal.

First, it will involve a prosecution. That will require someone to decide to prosecute. They won’t. They just don’t when it comes to the top echelons of business. Look at banking post-2008.

Second, it would require evidence of intent. Given the complexity of modern business that is very hard to prove. Indifference, even for gain, is not enough to prove intent.

Third, the remoteness of risk means directors would simply ignore this threat, and nothing would change.

In other words, May is offering a sham reform that will not change anything.

I have already made clear what will achieve change.this is the removal of automatic limited liability from directors of companies and a change in the direction of the required burden of proof if they want to claim protection from liability in the event of corporate failure. As I argued recently:

Is it time to ask whether limited liability should be denied to the directors of limited companies? Shareholders need it: they are given remarkably little information to decide upon with regards to the affairs of the corporation in which they have invested, and so it is appropriate that their risk is limited. This is, however, not true of the directors: they are meant to know what is going on, and in that situation to limit their liability simply encourages recklessness. And it cannot be argued that it would be unfair that they carry such risk. As evidence look at what is happening in Carillion: most of the directors will walk away without a penny of personal loss. Many of their employees, most of their pensioners, many of their small suppliers, and many of those small suppliers own employees, will walk away with considerable personal loss arising as a consequence of the recklessness of the action of this Board of Directors.

The directors of Carillion will no doubt think that they did not have liability to these people: caveat emptor when dealing with a limited liability company, they will say. But I do not agree. The primary duty of the directors of a limited liability company is not, whatever most people think, to the shareholders. That primary duty is, instead, to the creditors: it is the duty of the directors to make sure that everyone who deals with the company can be paid. This has failed in the case of Carillion. From the pensioners onwards the creditors of this company have been treated with contempt: in my opinion the directors should be personally responsible for that, to the limit of their own financial assets.

Now, I am aware that insolvency can happen through no fault of a director: Carillion can go bust in you, for example. So I would retain the right to ‘no fault’ limited liability but this would have to be the exception, and not the rule, and be deemed appropriate, on application by the director seeking it,  by a liquidator.

This change would put all directors on notice of risk: act appropriately or pay up. The message is clear, unambiguous, fair and proportionate to the risks others are taking with much less information to assess their situations, and so commensurate with consequences. In other words such a reform would not be the sham May is suggesting but would instead get to the heart of the issue.

But she has no intention of doing that, I am sure.