With the Equitable Life court case turning the spotlight on to non-executive directors, Janice Shardlow argues that their role needs clarifying

The case against the Equitable Life directors has hit numerous obstacles in recent times. Non-executives across the country are preparing to breathe huge sighs of relief, particularly the alarmingly large number who prior to the litigation appeared to be blissfully unaware of their exposure. What they fail to appreciate is that if the case does not go ahead, this will be a missed opportunity to clarify their position.


The most junior corporate lawyer knows that UK company legislation provides no definition of a non-executive director. In fact, the Companies Act 1985 makes no reference whatsoever to the concept. The common law relating to directors' duties and liabilities developed at the turn of the last century, at a time when boards were composed almost entirely of non-executive directors, and therefore not surprisingly also made no distinction.


The non-executives in Equitable found themselves in what one director has described as a 'Kafkaesque nightmare'. Claims were made against them based on negligence and breach of fiduciary duty. They applied to have the claims struck out, seeking in particular to distinguish themselves from the executive directors as regards their duty of skill and care. On the application, Mr Justice Langley pointed out that even the modern-day duty of skill and care does not differentiate between executive and non-executive directors in expression, although in application it may do so. The difficult question is: how?


The modern-day duty, currently expressed in the proposed statutory statement of directors duties set out in the Company Law Reform Bill, has two elements - one objective and one subjective. The objective element requires a director to exercise the care, skill and diligence that would be exercised by a reasonably diligent person having the knowledge, skill and experience that may reasonably be expected of a director in his position. The subjective element requires him to exercise any additional knowledge or skill that he actually has.


Mr Justice Langley stressed that the test does not help in establishing what the non-executive's functions are. The extent to which a non-executive director may reasonably rely on the executive directors and other professionals to perform their duties is one in which the law can fairly be said to be developing and is plainly 'fact sensitive'. The modern-day expression provided no easy solution to the dilemma in which the Equitable directors found themselves.


Ironically, although the changes to the combined code mooted by Sir Derek Higgs have increased the demand for non-executives, recruitment is increasingly difficult.


Sir Derek's attempt to give non-executives some comfort regarding their exposure by providing good practice guidance on the role is of questionable effect. He envisaged that courts might have regard to the guidance in litigation; however, the guidance is clearly not law and it is uncertain whether courts will actually choose to take it into account.


What is actually needed is a clear acknowledgement that 21st-century non-executives perform a completely different function to their executive counterparts, and an up-to-date statement of their legal roles and responsibilities. Failure to do so will inevitably deter suitably qualified individuals from taking up appointments, to the long-term detriment of corporate governance in the UK.


Janice Shardlow is a lawyer in the corporate team at Manchester-based law firm Halliwells