DUTIES OF THE CHAIRMAN
31/03/2005 12:00:00 AM
Duties of the Chairman
Policy & Advocacy: Policy
Australian Institute of Company Directors - Law Committee
DUTIES OF THE COMPANY CHAIRMAN
Bruce Cowley
Partner, Minter Ellison
In recent times, the role of the chairman has again been given prominence by the case brought against Mr John Greaves, the chairman of One.Tel, by the Australian Securities and Investments Commission (ASIC) and the terms of settlement of those proceedings.
One of the important issues which arose for consideration in that case was whether the responsibilities of a non-executive Chairman are greater than those of other non-executive directors. While it has not always been so, a fairly uniform view now seems to be emerging that the chairman may have additional responsibilities.
In the HIH Report Justice Owen noted that 'commentary and case law make it clear that the chair's role and responsibilities are different from, and often greater than, those of other directors' because the role of Chairman 'brings with it additional rights and duties and additional opportunities which may affect the content of the role and warrant the imposition of higher standards and duties'. Report of the Royal Commission into the Failure of HIH Insurance 2003: Justice Neville Owen at 6.2.1.
The legislative foundation for imposing differing standards is section 180 of the Corporations Act which provides:
A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of the corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
It is paragraph (b), which has given rise to a raft of judicial comments suggesting different levels of liability attach to different corporate officers depending on what their 'responsibilities' are within the company. The office that they hold will often dictate what type of responsibilities they carry.
Following the hearing of the initial application by Mr Greaves to have ASIC's proceedings against him dismissed Australian Securities and Investments Commission v Rich (2003) 174 FLR 128; [2003] NSWSC 85., Justice Austin of the New South Wales Supreme Court found that it was appropriate for ASIC to lead evidence seeking to establish Mr Greaves' responsibilities by reference to usual practice. Justice Austin concluded that contemporary literature on corporate governance was relevant in ascertaining the duties of Mr Greaves, even though much of it is in the form of exhortations and voluntary codes of conduct, not suitable to constitute legal duties.
That being the case, in determining the scope of a chairman's responsibilities, it is appropriate to look, not only at the case law but also at contemporary writings on the subject. Based on such a review, we can probably draw the following conclusions:
1. Given the current attitude of the courts, the responsibilities of the non-executive chairman will, in most cases, extend beyond those of other non-executive directors.
2. Perhaps the best place to start in detailing the duties of a company chairman is the Higgs Report Review of the Role and Effectiveness of Non-Executive Directors, Derek Higgs, January 2003 in the UK in which it reported on the role and effectiveness of non-executive directors. While there are some structural differences between company boards in the UK and in Australia, what he said about the role of the chairman resonates in this country as well.
Higgs observed that the role of chairman 'differs significantly from that of other non-executive and executive directors'. Ibid at 5.1. The report lists what the author believes to be some of the specific responsibilities of a chairman. These include:
promoting the highest standards of corporate governance;
providing coherent leadership by representing the company and understanding the views of shareholders;
establishing an induction and continuing development program for directors, and utilising change to build an effective and complementary board;
promoting effective relationships and open communication between the non-executive and executive teams;
establishing a close relationship of trust with the chief executive, providing support and advice while respecting executive responsibility;
ensuring effective communication with shareholders and promoting board understanding of the views of major shareholders;
ensuring a clear structure for and the effective running of board committees;
encouraging active engagement by all board members;
ensuring effective time management for the board (and especially non-executive directors) to consider complex or contentious issues;
running the board and setting its agenda, style and tone to promote effective decision-making and constructive debate;
ensuring the board receives accurate, timely and clear information to enable effective monitoring of company performance;
ensuring effective implementation of board decisions;
ensuring twice yearly performance reviews of the board, its committees and its individuals.
3. These responsibilities should probably be regarded as 'best practice' in Australia, and something to be aspired to rather than as setting a benchmark for satisfying the legal standard. 4. The legal standard required by the duty of care and diligence in section 180 of the Corporations Act is probably somewhat lower, but a substantial failure to meet the Higgs Report standards is likely to be viewed poorly by the courts.
5. In the Australian context, the case law and other contemporary 'literature on corporate governance' indicate that a chairman should:
ensure that the information flow to the board is Board is comprehensive;
ensure that the board is kept properly informed about the company's financial affairs, including its cash flows, most especially in a potential insolvency situation;
manage the board and create an appropriate environment for robust board discussion;
commit sufficient time to the job and not overburden him or her self with other directorial roles;
create a constructive relationship with management and acting as a conduit between management and the board;
act as a mentor and sounding board for the CEO, while monitoring his or her performance, and being fearless in bringing him or her to account, if necessary;
respond promptly and comprehensively to concerns raised by other directors;
take leadership on corporate governance issues, including making him or her self aware of directors' and executives' conflicts of interest and managing any such conflicts.6. As noted, the law already places on many company chairmen a number of duties and responsibilities over and above those placed on other non-executive directors. Largely the 'additional' duties of chairmen are a matter of common sense and should not give rise to serious concerns by those who are committed to doing a professional job as chairman. Greater risks will lie for those who are not prepared to give appropriate commitment to the job and allocate sufficient time to doing it well.
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