Chapman Tripp have two crisp public comments for directors. The first applauds Judge Jan Doogue's refreshingly unequivocal decision in the Feltex case, though noting some chinks that could undermine its precedent power. 

The second Chapman Tripp comment reminds directors of new risks down the line, if public enforcement of directors duties codified into the Companies Act is not confined to directors who have been bad or reckless, and not merely foolish or careless.

On the comfort to draw from the Feltex decision Chapman Tripp say:

"We consider that, on balance, the judgment should be a source of considerable reassurance for New Zealand directors.  While directors must always give appropriate consideration to material placed before them, they are entitled to trust those advising them, so long as such trust is warranted and there are no reasons to suspect that it may be misplaced."

I'm less sanguine, for two reasons:

a) the fact that the Companies Office used its powers and our money to prosecute a case where there was no evidence of impropriety should worry everyone. Many laws now stipulate for strict liability in unfairly broad terms. People have reassured each other that they should not worry. because the authorities would only use them against people who deserved it. The Feltex case (and probably the Nufarm case) say – wake up!

b) look carefully at the qualifications at the end of Chapman Tripp's assessment – "so long as such trust is warranted and there are no reasons to suspect that it may be misplaced."  

They no doubt seem reasonable to lawyers, sitting in comfortable hindsight. But most business decisions are made  under uncertainty.  One simply does not know whether "such trust is warranted". If you do know then the decision is a no brainer – indeed it justifies the challenge of the Shareholders Association Chairman cited by Chapman Tripp – "that begs the question of why directors have to be paid so well for exercising their judgement”. Instead most business decisions are necessarily judgments which balance the cost and practicality of getting better information against the costs and losses from delay, including  loss of opportunity. 

In practice there are also frequently "reasons to suspect that [the trust] may be misplaced". A director works with the material given. One often has "reason to suspect" that the people on whom one is relying are less than optimum. Some will be learning on the job, and making the mistakes that we all must make. Others will be known to be out of their depth, but retained because they are the devil we know, and in a tight labour market they are better than no one. Some may even be being "managed out" because labour law says they can not be dismissed. So the "no reason to suspect" qualification phrase  in the Chapman Tripp assessment is weasel words.

Using them is excusable – they are drawn from the sanctimonious phrasing of section 138 of the Companies Act. But they are dangerous until they are recast, or bold judges like Jan Doogue find a way to make them mean something like "no reason to conclude, after balancing the relevant risks and costs and benefits as they then appeared to the director, that it was imprudent to rely on those advising them".

It is rare that one has "no reason" to suspect possible unreliability. The usual case is that there is some reason, but it is outweighed by much more reason to rely, and to act on that reliance, knowing that sometimes it will be misplaced.  That is the risk shareholders want the directors to weigh and to take on their behalf.

To answer the question of the Chairman of the Shareholders Association – if shareholders want the upside of good faith judgment when it proves right and want the blood of directors when that same good faith judgment proves to have been unwarranted, then the shareholders will find that the directors will demand a goodly part of the return that the shareholders are expecting. If directors pick up the downside risk for shareholders they will want the return to justify it.