On the afternoon of Wednesday 22nd February, the Madrid Campus of EAE Business School was the venue for a new session of the Focused Programs, with this being a special edition as it is the first that dealt with legal matters. Cristina Paredes, PhD in Commercial Law from the UCM, Harvard Law School, and currently a research professor at the School, ran the session entitled “Board of Directors: liability and challenges”.
Lasting approximately 2 hours, the ‘ambitious’ conference, as described by the speaker herself, dealt with an issue as broad as director liability, covering everything from basic legal concepts to the special circumstances with current significance.
She also spoke about the relationship between the liability of directors and managers, and ended the sessions with a set of general conclusions and future challenges.
After giving us a definition of the concept of a director, as a person ‘responsible for acting in the name of the Company that they manage and supervise”, we went on to analyse the legal texts that we have to be familiar with in order to have a clear overview of the legal framework of director liability. As Cristina acknowledged and anticipated, “the panorama is not easy, as there are many legal modifications”.
In terms of the obligations that can de demanded of directors, the students learned to differentiate between the duty of diligence and the duty of loyalty. “The duty of diligence is a broad and vaguely defined concept that states that being a good director is to behave like a proper businessperson”, explained the legal professional, then clarifying that, to do so, the director has to comply with the provisions of the law, the company by-laws, and the internal operating regulations. Moreover, the duty of diligence encompasses the duty to exercise the position effectively, the duty of vigilance or supervision, the duty to keep informed and the duty to protect company discretion.
With respect to these last four duties, Cristina Paredes particularly highlighted the “legal-duty duality” that exists in relation to the duty to keep informed: “the duty to demand and the duty to receive the information required”. She also emphasized the fourth duty, as the law shows that business decisions “are not an exact science and, as such, the director cannot be blamed a priori for a bad decision insofar as a successful result was not achieved”.
In relation to the duty of loyalty, we gained an insight into the obligations inherent in this duty (including the duty to be a good representative, act in good faith, not disclose data or information, etc.), with a special reference to the duty of preventing conflict of interest (defined as any situation in which the director can gain or benefit at the cost of the company), and the regime of waiver and authorization.
Cristina Paredes also explained the legal framework of civil liability, covering the nature, circumstances, responsible subjects and effects, and presented a number of High Court Rulings to the students. The next point that Cristina Paredes turned to was liability actions, distinguishing between company and individual actions. Company liability actions are brought by agreement of the Board, while the latter type are independent compensation or indemnity proceedings for damages incurred”.
Once the participants had a clear idea of the first, more intensive, part related to the general legal concepts involved in director liability, Cristina Paredes moved on to explain special liability circumstances, particularly the legal framework of liability in situations of company liquidation or bankruptcy proceedings, introducing the topic of her thesis: the most relevant case law in this respect.
We then explored director liability in comparison to manager liability (known as ‘hybrid subjects’), and the measures for prevented liability, as well as defence in response to liability actions.
The conference drew to a close with a set of future challenges, that amounted to “generating codes of conduct and good corporate governance”. To this end, as Cristina Paredes explained, the National Stock Market Commission (CNMV) has drafted and issued the new Code of Good Governance for Listed Companies, developed with the support of the Commission of Experts in corporate governance matters and approved by agreement of the Board of Directors of the CNMV.
Lastly, it is a plausible reality that we are “heading towards an indisputable globalization, in which we need uniform regulations capable of resolving conflicts across the length and breadth of the globe”, added Cristina Paredes as her final conclusion. “Uniformity in the structure and application of the regulations, predictability of the applicable law and judicial or arbitration boards of this application are the greatest requirements at the current time with respect to global commercial traffic” in relation to the challenges faced.
She drew the conference to a close with a reflection containing a quote from Professor Bauman “globalization is the word on everyone’s lips; the word of the moment quickly transforms into a fetish, a magic spell, a key designed to open all the doors to all mysteries, present and past.
Some people consider ‘globalization’ to be indispensable for happiness; others believe it is the cause of unhappiness. They all understand that it is the unavoidable destination of the world, an irreversible process that affects everybody in the same way and to the same extent.
They are ‘globalizing’ us all, and being ‘globalized means more or less the same for everyone subject to this process”.