AICD welcomes findings on director liability
In 2008, AICD invited 600 members who were directors of ASX-200 listed companies to complete an online Federal Treasury Survey of Company Directors. AICD welcomed the news of the public release of the survey results by the Minister for Superannuation and Corporate Law, Nick Sherry, on 18 December 2008.
The Government’s commitment to reviewing director liability recognises that directors make an important contribution to economic growth through the board’s oversight and monitoring role of companies. Its commitment is particularly commendable given the downturn in the economy and recent community concerns about, and media scrutiny of, the actions of some directors. We commend the complete survey results to you which can be found on the Treasury website at: www.treasury.gov.au
The Issue
There are more than 600 state and territory laws in Australia imposing personal liability on individual directors and officers for corporate misconduct. Such provisions are objectionable and unfairly discriminate against directors when compared with the way in which other people are treated under the law. AICD believes individuals should not be penalised for corporate misconduct except where it can be shown they were accessories. This was also the view taken by the Corporate and Markets Advisory Committee (CAMAC) 2006 Report on Personal Liability for Corporate Fault.
The survey results are important because, for the first time, they provide strong quantitative evidence supporting AICD’s view that director liability, and personal liability in particular, has a negative affect on board recruitment, retention and decision-making.
AICD is focused on achieving legislative reform so that directors’ roles, responsibilities and defences are clear, consistent and reasonable. We are not seeking to lower the standards required of directors. Positive regulatory change can be achieved without the increased protection of those guilty of misconduct. We believe that greater certainty through legislative reform will enable the majority of directors who carry out their duties diligently to better focus on strategic decision-making, which enhances company performance.
Survey Respondents
Thank you to our members who completed the survey. Your assistance will strengthen AICD’s advocacy and benefit our broader membership, including directors of small and medium companies and not-for-profit organisations.
The survey respondents were an experienced group of directors. Indeed, 84 per cent of them were non-executive directors and more than 70 per cent sat on four or more boards. Over 75 per cent had been a company director for more than 10 years while 69 per cent had experience as chairmen and 74 per cent as members of an audit committee.
Survey Results
Effect on board decision-making
The negative effect of personal liability on board decision-making was clear from the survey results. They showed that 78 per cent of respondents considered that there was a medium to high risk of being held personally liable for decisions they or their boards had made in good faith.
Similarly, 78 per cent believed that the risk of personal liability had caused them, or the board on which they sat, to occasionally or frequently take an overly cautious approach to business decision-making. In addition, 64 per cent suggested that such an approach had inhibited an optimal business decision to a medium to high degree.
Directors strongly highlighted derivative liability laws, such as those for occupational health and safety and environmental protection, as reasons for their overly cautious approach to decision-making. The duty to prevent insolvent trading and continuous disclosure laws were next up in tempering decision-making.
In making their assessment, respondents commented on the imbalance in the risk/reward trade-off for directors, increased regulation and that board decisions made in real time are often judged in litigation with the benefit of hindsight.
In this regard, one respondent noted: “Directors should not face the risk of being sued due to their predictions not always being fulfilled.”
Other respondents made remarks in a similar vein:
“There is no doubt that more and more board and executive time and effort is being taken up by processes and procedures designed only to avoid risk. Risk management at a board level has become more about avoidance of personal liability than about good business decisions”.
- “High integrity and achieving the best outcome for stakeholders within the laws is no longer enough. To avoid risk requires excessive corporate governance to the point of paralysis and astrological capabilities”.
- The survey revealed that concerns about personal liability had inhibited optimal business decisions by requiring more expert reports, delays in decision-making and the premature disclosure of information to the market. The major costs to the company, shareholders and other stakeholders were expert fees and the loss of investment and entrepreneurial opportunities, as well as competitive position.
Broad-based defence
Respondents noted that there were no reasonable defences for directors for derivative liability laws (67 per cent) and continuous disclosure laws (52 per cent). In contrast, 64 per cent of respondents believed there were reasonable defences for directors for the duty of good faith and 61 per cent for the duty of care and diligence.
Respondents commented that “the business judgment rule should be widened to cover continuous disclosure, mergers and acquisitions and fundraising” and that “there needs to be a consistent defence upon which directors who have acted appropriately can rely”. One observed: “Even though safe harbours ostensibly exist, this does not prevent directors being embroiled in lengthy, expensive and personally damaging litigation, especially class actions.”
The survey supports AICD’s call for a broad-based defence across Federal, state and territory laws for directors making commercial decisions in good faith, having informed themselves about the subject matter of the decision and having acted in the best interests of the company.
AICD’s position in this regard is articulated in our submission to the Federal Treasury’s Review of Sanctions in Corporate Law, which can be found in the Policy section of our website at: www.companydirectors.com.au
Impact on retention and recruitment
The survey also highlighted the negative impact of personal liability on board retention and recruitment:
- 71 per cent of respondents had declined the offer of a company directorship because of the risk of personal liability;
- 62 per cent believed their boards had lost a potential or suitable board member because of that person’s concern about the risk of personal liability;
- 87 per cent knew of other people who had declined an offer of company directorship because of the risk of personal liability; and
- 75 per cent knew of other people who had resigned from a company directorship because of the risk of personal liability.
In responding, directors commented that “the intellectual stimulus and desire to contribute are being outweighed by the risks” and “the problem is that at the time when shareholders need independent directors the most, the incentive is for independent directors to leave or not to join”.
Next Steps
The survey will now be used by the Council of Australian Government’s (COAG) in its work on harmonising director liability laws. COAG has asked the Ministerial Council for Corporations (MINCO) to report back to it on proposed reforms by mid 2009.
MINCO, however, will only examine criminal liability. This is a good start and AICD will continue to lobby for a similar review of civil liability for directors.
COAG’s reference to MINCO provides guidance in the form of three principles that parallel those in CAMAC’s Report on Personal Liability for Corporate Fault. These include that when companies contravene statutory requirements, liability should be imposed first on the company itself, that personal criminal liability should be limited to where the officer is an accessory and only automatically deemed in exceptional circumstances. AICD strongly supports these principles.
How you can assist
AICD will be seeking opportunities through the COAG process to continue lobbying for clear, consistent and reasonable directors duties and defences.
As the risks of personal liability and the burden of compliance with inconsistent state laws apply to all directors, we will also be consulting our broader membership on similar issues raised in the survey in the near future. We encourage you to participate in these activities, as they will provide input into important and timely law reform for directors.
If you have specific suggestions in the meantime, please email me at: gupton@companydirectors.com.au
Gabrielle Upton FAICD is Legal Counsel at AICD and a member of the Legal Committee of the Corporate and Markets Advisory Committee, the Federal Government’s advisory committee on corporations and securities law