
Delegation of authority The buck stops with the board
The Board of Directors can delegate power and authority but never liability. They can assign specific tasks or decision-making authority to committees, executives, or external professionals, but will still remain legally responsible for the outcome of those delegated tasks.
The Board plays a crucial role in the governance and oversight of a corporation. Their primary responsibility is to act in the best interest of the company and its shareholders, ensuring long term sustainability while considering the interests of other stakeholders such as employees, customers, suppliers and the community.
To effectively carry out their responsibilities, boards may delegate specific functions to optimise operations and ensure informed decision-making. Delegating some authority enhances board efficiency by enabling members to concentrate on other high-level strategic decisions that require boardroom discussion. For instance, delegating authority to professionals with specialised expertise helps mitigate the risk of the board making poor decisions stemming from knowledge gaps.
When evaluating the delegation of powers, the Board should be cognisant that certain powers, particularly those of a judicial nature, cannot be delegated. This principle was illustrated in Barnard v. National Dock Labour Board (1953), where the Board unlawfully delegated disciplinary powers to a port manager, who then suspended workers during a dispute. The court ruled the delegation invalid, emphasising that judicial functions, such as disciplinary actions, require explicit authorisation and cannot be transferred without proper authority.
While delegation of power enhances efficiency and enables the board to perform its duties more effectively, it does not exempt the board from its liabilities for the following reasons:
- Legal responsibility: Laws governing corporations in many jurisdictions explicitly state that Directors owe fiduciary duties and are legally obligated to act in the best interest of the company they have been charged to govern. Among these include the duty of care and loyalty to the company.
- Oversight responsibility: The board is mandated to oversee a company’s affairs. Delegation does not absolve the board of its duty to monitor the actions of those to whom authority is delegated.
- Accountability: Stakeholders including shareholders, employees and regulators hold the board accountable of the company’s performance. Any failures, including those caused by actions of a delegated party, reflect on the board.
It is important to point out that in certain jurisdictions, the business judgement rule can be applied to protect board directors from legal liability should their actions negatively impact a corporate stakeholder. The rule, however, would only apply if the action was carried out “in good faith”, meaning it must be credibly proven that the decision was based on sound reasoning. Smith v Van Gorkom (1985) is a case in point where the board was found liable even after applying the business judgement rule. The court held that the directors had made a decision on a merger without adequate information and had thus breached their fiduciary duty of care. As this clearly demonstrates, it is difficult for directors to evade their legal obligations even where rules are in place to protect them. They should therefore act responsibly at all times as the law will always take precedence over rules.
To balance effective delegation with accountability, boards can adapt the following practices:
- Clear delegation framework: Define roles, responsibilities, and authority limits for those to whom power is delegated and document the same in charters and policies.
- Regular monitoring and reporting: Establish a robust system of tracking compliance and periodic reporting to the Board. Ensure that people recruited to head compliance and Internal Audit units have the right expertise to monitor and flag any breaches in approved policies and charters.
- Board committee: Have a strong Audit and Risk Board Committee to provide oversight of compliance at Board level and present reports to the full Board. The committee should, at the very minimum, meet quarterly.
- Promote a whistleblowing culture: This can be done by creating a conducive environment that will confidentially shield the whistle blower.
- Proactive risk management: Implement enterprise-wide risk management frameworks to identify and address potential issues before they escalate.
- Board training and awareness: Keep directors informed about their duties and best practices for oversight to minimise liability risks.
- Directors’ liability insurance: Ensure directors are insured to protect them from personal losses resulting from legal claims made while performing their duties.
In conclusion, while delegation is a valuable tool for enhancing efficiency and optimising decision-making within corporate governance, it does not absolve the Board of Directors from their overarching responsibilities and liabilities. The Board remains accountable for ensuring that delegated tasks are performed in compliance with legal and fiduciary duties and must maintain oversight of those to whom authority is entrusted.
This is a guest blog and therefore does not necessarily represent the views of the Institute of Directors.
