Fiduciary Duty and Corporate Sustainability

In mid-2020, Wirecard, a leading German fin tech firm that once enjoyed rapid growth, entered bankruptcy because EUR1.9bn (Bt66bn) went missing from its account. 

This case reflects modern day vulnerability of the financial system, failure of auditing unit, and ineffective performance of the Board in protecting investors’ interests. 

In an article “Wirecard Scandal Puts German Boards on the Spot”, Bloomberg Columnist Chris Hughes said German firms are usually run by the Management Board while Non-Management Directors will sit on Supervisory Board, only responsible for appointing, supervising, and advising the Management.  In the initial stage, Wirecard’s Supervisory Board comprised of just three directors and the number eventually rose to five in 2016.  The company had no supporting committee like audit committee and risk management committee until early 2019, when Financial Times started to feel suspicious and dug up information about potential accounting malpractices at Wirecard. 

Applying corporate governance concept to analyze Wirecard’s Board structure, we found its structure was not appropriate for company of its size with such rapid growth.  Moreover, the Board performed its role by merely monitoring and complying with duties required by laws.  The Board’s performance clearly reflected its tick-the-box mentality.

The question is how should the current Board performs its duties, especially under changing business environment, emerging disruptions from new technologies, domestic and international political instability, pandemic, and environmental issues.  These are challenges that the Board needs to tackle and respond to growing expectations of shareholders and stakeholders.  The Board must equip themselves with relevant knowledge, skills, and capability to proactively govern the organization.  The Board needs to understand the nature of business, take parts in setting operational direction, and have information to monitor the Management effectively.  This means the Board must assume even bigger roles than those required by the law.

How should the Board respond to such challenges and demanding expectations? Are there any guidelines for practical implementation the Board can adhere to?

As a group of people entrusted by shareholders, the Board must adhere to Fiduciary Duty principle or the principle of trust.  This is the fundamental principles to ensure the Board performs its duty with care and loyalty.  According to the Director Fiduciary Duty Check List developed by the Thai Institute of Directors Association (Thai IOD), all directors have duties and responsibilities in governing the organization to ensure utmost benefit of shareholders. Directors must perform the Duty of Care, the Duty of Loyalty, the Duty of Obedience, and the Duty of Disclosure.  These principles are consistent with substances of the Public Limited Companies Act, B.E.2535, the Civil and Commercial Code, and Securities and Exchange Act B.E.2535.

Given growing expectations from investors, shareholders, stakeholders, and regulators as well as pressures to sustain operational performance, the current Board needs to pay extra attention on these matters.  The four duties must be expanded to maintain a fine balance between the Board’s Compliance Roles and Performance Roles to ensure corporate sustainability.

       

Duty of Care – Making decision with complete and accurate information is fundamental practice of the Board.  However, such decision may be incomplete if the Board did not appropriately weigh interests of stakeholders.  Moreover, the Board should also discuss regularly with the Management on issues concerning strategies and business operations toward sustainability. 
     
Duty of Loyalty – The Board previously performed its duty primarily to protect interests of the company and shareholders while preventing conflict of interest and insider trading.  However, the Board nowadays also has a role to promote any actions that would maximize benefits of stakeholders while they should treat all stakeholders fairly and equally.

Duty of Obedience – The Board should govern the organization to ensure it operates transparently and ethically.  It may establish Code of Conduct, Best Practice, or Professional Standard within the organization and ensure appropriate compliances while creating corporate culture that emphasizes on business ethics.

Duty of Disclosure – Besides disclosure of information to shareholders, the Board should aim to disclose information to other stakeholders as well.  Disclosure involves both monetary and non-monetary information including those regarding ESG (Environment, Social and Governance).  However, decent disclosure practices must also adhere to the principles of accuracy, completeness, transparent, timely, and easy access.

The expanding scope of Fiduciary Duty in the four areas reflects the significance of the Board, a group of key persons driving the organization toward sustainability.  The Board needs to juggle both the Compliance Roles and Performance Roles.  The modern Board needs to assume more proactive roles to ensure long-term sustainability of the organization under highly uncertain business environment.

Should Wirecard’s Board fully perform its duties with care and work more closely with the Management while adhering to the Fiduciary Duty principles mentioned above, such scandal may not occur or the magnitude of the impact will be mitigated because the Board would sense the problem and step in to tackle the issue in time.  This incident is yet another reminder for directors to review their duties and adjust their roles along with ever-changing surrounding contexts.

 

Ratanapat Yaowabut
Senior CG Specialist
Thai Institute of Directors (IOD)

Source:
Director Fiduciary Duty Check List, Thai Institute of Directors Association
Wirecard Scandal Puts German Boards on the Spot, Chris Hughes, 30 June 2020, Bloomberg
https://www.bloomberg.com/opinion/articles/2020-06-30/wirecard-scandal-puts-german-boards-on-the-spot