Non‐executive directors in privately owned companies : is the law in need of change?

Abstract

As suggested by the title, the thesis will seek to analyse the position of NEDs in private companies in Malta and whether the law is in need of change. The Board of directors is the highest organ responsible for the management of a company, hence the author looks at developments in corporate governance, a topic of much debate mainly in public listed companies particularly due to a spate of corporate collapses and which led to the introduction of governance codes worldwide. Privately owned companies have to an extent been neglected. Both Malta and the UK do not recognise NEDs in their statutes. Consequently NEDs share equal responsibilities to those of their executive counterparts. Nonetheless limited case law in Malta shows divergent and contradicting opinions. Some judgments take a narrow approach and hold that NEDs are not recognised and hence all directors share equal responsibility, while others disagree stating that NEDs carry out a supervisory function. Similarly, authors and judgments in the UK have recognised the different role of NEDs however stated that statute does not allow them to make a distinction. Various commentators in the UK and Malta agree that the position and different role of the NED should be recognised. The result is that the situation in Malta and UK is still very unclear leaving NEDs in the dark vis-­‐à-­‐vis responsibility and potential liability, an unhappy situation from an economic and legal viewpoint. The author proposes that statute should be in-­‐line with economic realities and at least recognise the NED. The author further proposes the introduction of a governance code for privately owned Maltese companies, namely the ‘ecoda guidance’, recently adopted by the UK. A phased mixed, voluntary and comply-­‐or-­‐ explain approach is proposed. Finally the author suggests practical tips for NEDs, collected from judgments and which should support NEDs in the performance of their role and in mitigating potential exposure to liability.