Review: Directors' Duties and Shareholder Litigation in the Wake of the Financial Crisis


Joan Loughrey

Joan Loughrey

This timely book, edited by Joan Loughrey, brings together academics and practitioners to assess the efficacy of directors’ duties, or lack thereof, regarding shareholder litigation in the wake of the financial crisis. Although primarily focused on the UK and the Companies Act of 2006, the part played by the US and its regulatory scheme is not ignored. Americans reading the book will benefit from a better understanding of the UK framework and how portions may or may not apply here.

For example, the UK Code of Corporate Governance makes boards responsible for determining the nature and extent of the risks that companies should undertake. Yet, even in the wake of extreme circumstances and huge financial losses,

a claim against bank directors was not viable, either because nothing that bank boards did or failed to do amounted to an actionable breach of duty, or because the obstacles facing shareholders wishing to bring litigation with too high, or due to the very concept of shareholders as effective monitors, then this has ramifications that go well beyond the financial sector.

Joan Loughrey explores the duty of care and skill and the financial services. She reminds us the Financial Services Authority (FSA) announced that the crisis at the Royal Bank of Scotland plc (RBS) could not be attributed to a lack of integrity or dishonest activity on the part of any individual at the bank. Senior management had made a series of bad decisions, rather than no decisions. The courts are reluctant to impose liability for bad judgment even against financial experts. Although Loughrey explores a number of options, she concludes that more effective enforcement of the duty of care and skill could address many of the issues, “but only if more actions are brought and only if the courts showed greater readiness to hold directors liable.” She doesn’t see enough clear-cut cases on the horizon to make a real difference.

In chapter 2, Andrew Keay explores the recent addition of s.172, which allows directors to promote the long-term success of the company, for example, by ignoring shareholder demands for a quick dividend or buy-back.  This is explored in the context of accusations that failure to manage risk caused the crisis, while others have blamed the short-termist pressure from shareowners.  Keay concludes:

While s.172 may have an educational impact, it is not likely to make a lot of difference as far as the corporate governance issues that were problematic in the period leading up to the financial crisis.

The law provides no real guidance to directors as to how to how to regard non-shareholder issues. Shareholder and market pressures have not abated. The provision might better be seen as a “get out of jail free card” to provide nebulous excuses.

Charlotte Villiers argues the legislative reporting requirements in s. 417 of the Act fall short of their aim of assisting the goals of enlighten shareholder value (ESV). Requirements are too vague; enforcement is inadequate. A compliance mindset frequently has the opposite effect of suppressing effective communication. She recommends further clarification around the issue of materiality by the Financial Reporting Council (FRC). Then we might expect some true engagement from shareholders.

Short but enlightening, Andrew Campbell delves into behavioral sciences regarding why good leaders make bad decisions. He recommends several safeguards around better data analysis, more vigorous debate, structural changes in governance and monitoring implementation.

The chapter assessing the present state of derivative lawsuits in the UK was an eye-opener for me. I hadn’t realized the current derivative proceedings regime only became effective in October 2007 and I didn’t realize how weak the law is. The impact of the law is examined further in a debate between academics and practitioners. Readers will at least walk away from this book with a much better understanding of why bank directors are escaping accountability – UK laws allowing shareholder litigation simply aren’t job ready.

Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis (Corporations, Globalisation and the Law Series)

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