With their responsibilities and potential liability increasing, the job of the non-executive director is getting harder. Exactly how hard is a matter of debate. The Weekend Financial Review recently questioned whether we are witnessing the “Death of the NED”, following the judgment of Justice Ian Gzell in the recent James Hardie case.

This April this year, Gzell found that nine James Hardie non-executive directors breached their duty of care and diligence by approving a press release which stated that an asbestos compensation fund was “fully funded”. Critically, Gzell stated that the directors were not able to rely on statements made by Hardie executives and expert advice, noting that directors ought to have known that the claims were misleading.

The judgment added to the weight of arguments submitted by the directors’ club, and its lobby group, the Australian Institute of Company directors, regarding the excessive personal risk being borne by non-executive directors. In its submission to the Productivity Commission’s review of executive remuneration, the AICD claimed that “to the extent existing harsh liability provisions remain, we believe there will be an adverse impact on the supply of high calibre directors.”

However, it remains difficult to determine whether the rumours of a shortage of non-executive directors is due to increasing regulation and liability, or the apparent unwillingness to appoint suitable candidates from outside current ranks, often referred to as the “directors’ club”. According to a study by ISS Australia (now RiskMetrics) in 2006 “123 directors collectively held more than 45% of all board seats in ASX 100 companies.” This is largely caused by directors being nominated by other directors. By virtue of Australia’s system of director appointment, it is inevitable once a director has been submitted for election that they will be duly appointed.

As to the increasing risk of liability, the actual number of cases in which directors are held liable are incredibly small. The James Hardie case represented the exception, rather than the rule. Of the catastrophic corporate collapses witnessed since the onset of the global financial crisis, including Babcock & Brown, ABC, Allco Finance Group and Centro, no non-executive director faced personal civil liability. In addition, as Martin Lawrence of RiskMetrics told the Financial Review, “apart from the handful of directors intimately involved with major failures, it is almost impossible for shareholders to determine whether or not an individual will be capable of safeguarding their interests as a director.”

Lawrence’s comments were borne out last year, when the former Chairman of ABC Learning Centres audit committee, David Ryan, was appointed chairman of Transurban, despite ABC collapsing amid allegations of misleading financial statements over several years. Similarly, former Oxiana chairman, Barry Cusack, who led the company’s ill-fated merger with Zinifex, and paid former CEO Owen Hegarty a golden parachute of $8.35 million against shareholders’ wishes was re-elected to the board of struggling contractor, Macmahon Holdings.

Moreover, while still a part-time role, non-executive directors are receiving increasingly large compensation for their expertise and time. Elizabeth Nosworthy served as a director of Babcock & Brown, Venerator, Commander Communications and GPT. Despite BNB, Ventracor and Commander collapsing last year and GPT shares falling by more than 90%, Nosworthy collected more than $640,000 in directors’ fees in 2007 — equivalent to more than 11 times the average Australian weekly wage. Successful board members are also being handsomely paid for their role — one of Australia’s most respected directors, John Schubert, last year received more than $1.1 million for his three “part-time” roles on the BHP, CBA and Qantas boards.

Are we witnessing the death of the NED? With minimal real accountability, and salaries that can be as much as twenty times average earnings for a part-time role, the answer is most likely not.