1.1.3 The importance of legal sanction

In the Netherlands, the framework of directors’ liability is based highly on trust in directors. First, boards of directors are trusted with the ultimate responsibility to manage or direct the management of the business and affairs of their companies. In managing and directing the company’s business, they are trusted to govern over the company’s interests, which goes beyond self-interest.1 Second, in the exercise of decision-making power and in balancing the interests of the company and its stakeholders, it is a prerogative that decisions made are not second-guessed by judges. As a principal, discretion is recognised and substantive judicial review is replaced with marginal judicial review.2 Trust manifests in the belief that undertaking an enterprise requires a degree of autonomy of action: to act with prejudice to some stakeholders, or to the benefit of other stakeholders in a given situation, to take high risks and make erroneous decisions, sometimes with detrimental consequences. As long as these actions are within the boundaries of their discretion and involve due care considerations, directors are given the benefit of the doubt.3 Hence, directorial discretion and marginal review may be assumed to imply trust in directors. This raises the question of how legal sanction relates to trust.

In an empirical research involving a study among employees in several European countries, Weibel et al. explored whether formal control was positively or negatively related to employees’ trust in the organisation.4 The researchers did not find evidence for the hypothesis that control was negatively related to trust. Interestingly, they did find that all forms of organisational control, output, behaviour control and sanctions, were significantly positively related to employees’ assessment of the trust they have in their organisation.5 Lack of control, having double standards and not sanctioning deceitful behaviours were seen to result in organisational untrustworthiness.6 The research revealed how formal sanction was a central theme for the respondents. Respondents indicated that companies that fail to sanction deceitful behaviour or condone such behaviours, create significant problems across a business (‘a cycle of deviant behaviour’). These findings were suggested to imply a ‘sequence for organisational trust, with the behaviour of directors setting the scene for other employees and other groups.’7

I have regarded the above-mentioned research findings of considerable importance. It can be argued that in the context of directors’ liability, actively implementing legal sanction may in certain situations be of great significance.

Directors’ liability may not prevent directors from wrongdoing. It may, however, ascertain that if discovered and identified, these directors do not go scotfree. As was suggested by Weibel et al. implementing legal sanction against such directors may foster trust in business. Moreover, it may foster trust in the legal system as trust may not merely be placed in individual directors but in the functional elements of the legal system.8