All articles in Volume 14 Issue 4

Stepping out of the shadows

John Price
Commissioner, Australian Securities and Investments Commission
Boards take advice all of the time. They take advice from internal executives and external advisors. But when does that advice cross the line into influence? The AICD asks John Price, Commissioner, Australian Securities and Investments Commission (ASIC) about what it means to be a shadow director and the risks involved for the individual, the board and the company.

The issue of shadow or de facto directors highlights the importance of transparency in corporate governance and accountability for decision-making of the company. Boards must be alive to the potential risks and those involved in management must be careful not to unwittingly be labeled as a shadow or de facto director.

The issue has gained prominence in light of the appointment of administrators to Queensland Nickel Pty Ltd (QN). The administrators have said that Clive Palmer may have been a shadow or de factor director of QN. If a court finds that he was a de facto or shadow director, Mr Palmer may face the same prosecution and penalties as though he may have been duly appointed director.

What is a shadow or de facto director?

Under the Corporations Act 2001 (the Act) a person may be considered a director if:

  • they act in the position of a director – referred to as a “de-facto director”; or
  • the directors of the company are accustomed to act in accordance with the person’s instructions or wishes – referred to as a “shadow director”.

According to John Price, whether a person is shadow or de facto director will depend on the specific business and circumstances of the company in question.

“One exception to being a shadow director is for people who are advising the board in their professional capacity, e.g. accountants and solicitors,” he said.

The indicia of shadow or de facto directors can include:

  • exercising top-level management functions;
  • undertaking tasks that would typically be expected of a director; or
  • regularly attending and/or having a vote at board meetings.

Duties of shadow and de facto directors

Both de facto and shadow directors have the same statutory duties and liabilities under the Act as the appointed directors of the company, and can be held liable for breaches of directors’ duties.

Principally, a shadow director must act in the best interests of the company and must not prefer his or her own interests to those of the company.

Liabilities of shadow and de facto directors

If a shadow or de facto director fails to fulfil their statutory duties as a director, ASIC may take regulatory action, or the de facto director may be sued by the company, its shareholders or a third party.

This was seen in Chameleon Mining’s case against Phillip Grimaldi (Grimaldi v Chameleon Mining NL [2012] FCAFC 6), where Mr Grimaldi had negotiated the acquisition of a large asset, found investors for the company, among other things without being an appointed director. He was liable to compensate Chameleon for losses incurred as a result of his actions as a de factor director.

In addition, a director may face criminal prosecution by ASIC, the imposition of civil penalties (fines), being personally liable for the debts of the company if it trades while insolvent, and being disqualified from managing a company.

It is important to note that your directors’ and officers’ insurance policy may not provide coverage for the actions of de factor or shadow directors. This is usually confined to duly appointed directors.

Risks for directors, the company and its stakeholders

While legal, the actions of shadow or de facto directors carry with it some serious risks for boards. A shadow director may compromise the ability of appointed directors to discharge their duties.

“The lack of internal or formal accountability of shadow and de facto directors may also carry with it increased risk of rogue decision-making or illegal phoenix activity by shadow or de facto directors,” Price says.

“The extension of statutory duties and liabilities to shadow and de facto directors reinforces the importance of transparency and accountability in corporate governance. Shareholders, creditors, employees and other stakeholders are entitled to know who makes, or participates in making decisions that affect the business, so that they can make fully informed decisions about their investment or relationship with the company. “

Inside government boards

Elizabeth Montano FAICD

Making the jump from a career as a corporate lawyer in the early 1990s, Elizabeth Montano FAICD has gone on to carve a long and successful career in the Australian Public Service.

Montano became CEO of AUSTRAC – and the most senior woman in Commonwealth law enforcement and regulatory agencies at that time – of Centrelink, and has sat on a n umber of other government boards and committees. She advises and consults to government departments and agencies on strategy, business planning, governance, compliance, assurance and risk.

Elizabeth Montano spoke with the AICD on lessons learnt from inside and outside the boardroom.

AICD: In your opinion, what makes a good government board?

Elizabeth Montano (EM): A good government board is one which can think commercially but still remember it’s operating within a government context. A mix of people with strong commercial, financial and public sector experience who all understand the core motivators and contexts of stakeholders will always produce a better and more innovative result.

AICD: Are there any specific skills you think need to be injected into government boards and committees?

EM: The key skill set is extensive experience in governance and risk with the ability to adapt and apply that in varying contexts. Some government boards and committees require members with specific skill sets and relevant industry expertise.

However, there is great merit in appointing fresh eyes without industry baggage. “I appreciate we’ve been doing things this way for 50 years, but can someone tell me why?” can be the most valuable question a new board or committee member asks. Often they’ll be the catalyst for innovation. You need all these skills in a collegiate group of people who respect and appreciate what each brings to the table. And when you get on a board like that, it’s the most exhilarating place to be.

A good government board is one which can think commercially but still remember it’s operating within a government context.

AICD: You have served on a number of audit and risk committees and now provide advice on public sector assurance and risk. Has the way the sector deals with audit and risk changed over the years?

EM: There is a strong emphasis on governance in the public sector. So much so, that audit committees are now mandatory and, at the federal level, have much broader functions and responsibilities than the name suggests. They have evolved to advise on assurance, risk and performance frameworks tailored to suit the organisation and to monitor and evaluate their effectiveness. This reflects the strong connection made in the public sector between governance and superior performance. Audit and risk committees are now recognised as key contributors to public sector outcomes.

Smart boards and CEOs know that active and focused audit committees are a big part of their personal risk management strategies. You can’t always ask the probing questions yourself – so you need someone with a different perspective who can.

AICD: As former chair of Centrelink, do you have any advice for managing competing political, social and community pressures for directors in similar positions?

EM: Directors on government boards have largely the same obligations as directors in the private sector- you are not appointed a director to represent any particular interest group. I’ve found that the best way to deal with competing pressures is to overtly recognise them and work to find common ground. That may sound a little “Pollyanna-ish” but it’s amazing how the elephant in the room becomes a mouse once you’ve shone the spotlight on it. Strong conflict of interest protocols support this.

Smart boards and CEOs know that active and focused audit committees are a big part of their personal risk management strategies.

AICD: What are some examples of innovation that you have seen in the public sector? How can the public sector encourage innovation?

EM: There are many examples of innovation in the public sector and I have been fortunate to contribute to a number of them.

In the mid-1990s, AUSTRAC as one of the world’s first financial intelligence agencies and anti-money laundering/ anti-terrorist financing regulators, developed innovative information technology including cheap and fast electronic data exchanges between government and industry involving leveraging off institutions’ back offices (a world first). We data mined before it became fashionable and we identified intelligence needs of front line agencies. The recently announced Fintech sandbox should provide an environment for industry and regulators to deepen their interactions.

Centrelink focussed on delivering public policy on the ground leading to a closer and more responsive relationship between the public sector and the community.

The Australian Institute of Marine Sciences is another example of a leading innovator. It has an international reputation as a collaborative creator of “public good” and industry relevant science. It has built this over decades by matching strategic direction and capabilities.

The common thread between all of these is a clear understanding of your objectives combined with an unfettered view of how to do it. Of course, when you’re delivering essential public services you can’t throw everything up in the air and wait to see how the experiment goes. You need to operate on two planes of thought - business continuity and business transformation. Boards, CEOs and audit committees who understand this will succeed.

Growing social enterprise

Lucas Ryan GAICD
NFP Policy Advisor, Australian Institute of Company Directors
The social enterprise movement is much more than a passing trend, as an increasing number of organisations are established with the purpose of providing socially responsible goods and services. Lucas Ryan GAICD explores the key factors critical to their success.

The social enterprise model is gaining momentum in (and outside of) the Australian not-for-profit (NFP) sector. Last month the AICD hosted an NFP Directors’ Briefing on establishing a social enterprise, featuring a panel of expert speakers from well-known Melbourne-based social enterprises to explore the trend and stimulate thinking about the future of this model for NFPs.

A social enterprise is a commercial activity whose primary purpose is to benefit the community and/ or the environment. They are commercially viable businesses in their own right, but their profits are directed primarily towards providing a ‘social’ benefit.

The concept behind social enterprise is hardly new; NFPs have been turning second-hand goods into profit through op shops for decades. The ‘new wave’ of social enterprises expands on this tradition, bringing purpose-driven business into diverse and exciting new markets through innovative business models. Social enterprises are active in many fields and are continuing to expand their reach.

As the landscape in government funding changes, with grant funding becoming increasingly precarious, politicised and prescriptive, many NFPs are exploring different funding models to support their ongoing operation and achieve their mission. As highlighted by the AICD’s 2015 NFP Governance and Performance Study, financial sustainability continues to be the number one concern among NFP directors. For some, social enterprise represents an attractive new way of doing business, providing a more flexible and stable financial model.

Our panellists provided their insights as operators of successful social enterprises on some of the keys to success in running a social enterprise:

1. Good work can be good business

If it furthers their purpose, there is absolutely nothing to stop an NFP from engaging in commercial activity.

For some NFPs, this might be as straightforward as leveraging existing assets to generate revenue such as through investments. However, social enterprises focus not only on generating profit that can be applied to a good purpose, but also in conducting their business in a way that provides a material benefit. For example, a social enterprise might take on employees who have experienced difficulty in entering the job market and support them to undertake training, thereby not only generating a profit, but also providing a benefit to the employees.

2. The business has to work

Although you may be running a charity, to succeed in social enterprise you must have a head for business.

Having the right mindset is crucial to succeeding. Social enterprises must be willing to be innovative, competitive, ambitious and disruptive. Culturally, many NFPs are inclined, often for good reason, to be risk adverse. However, the operators of social enterprises must be willing to bring their business nous to the board table to succeed in the market. Philanthropic support is not a sustainable way to operate a social enterprise long-term, and if the business component of the enterprise doesn’t work, it may not represent a viable social enterprise.

3. Having the right board is crucial

The board of a social enterprise is likely to look and behave differently to the board of an NFP.

Many boards will need to consider whether they have the right skills at the board table to understand and govern a social enterprise. Good social enterprise boards will have a mix of skills that ensures they have the business acumen to succeed while also delivering on the all-important social purpose for which the enterprises is established. Especially during the start-up phase, these boards will also need to exhibit agility and responsiveness to meet the governance needs of a growing business.

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Presenting to the board

Dr Judith MacCormick FAICD
Principal partner, BoardFocus
In part three of our series on effective board reporting, Dr Judith MacCormick FAICD, principal partner, BoardFocus, provides tips for executives asked to present to the board.

Congratulations, you wrote a great board paper. You have been invited to present to the board in person at the next meeting, and now have a valuable opportunity to present your personal credentials as well as effectively support your paper. A lot can go right … and wrong. The stakes are high.

Whoever invited you believes in your abilities to make a brilliant presentation. You should too. Below is a selection of essential tips that will help with both the preparation and delivery of your presentation to the board.

Effective Board Reporting


    Context and colour

    Assume Board members have read your paper thoroughly. Know why you are presenting, what outcome you want, know your audience and consider what extra context and colour they now need to know. Don’t repeat what’s in the paper.

    Recall the ‘PACKO’ principle from the first part in this series on ‘Effective board reporting’. Apply the same structure to your presentation.

    Connect to the strategy

    Boards are concerned with strategy and risk, and they expect you to work with them on that level. Speak the language of the business, and avoid using technical or operational detail. If return on equity is the major metric in your company, discuss expenditure in terms of ‘ROE’. Talk about how your proposal will help the company deliver on its strategy, how it will mitigate risk and can positively impact your organisation’s success metrics.

    Clear, concise, compelling

    Your message should be succinct, both in spoken word and in any supporting visuals. Check if you can use slides. Both content and visuals should always be clear, concise and compelling. Think simple, but not simplistic. The objective is to give the board additional insight into the paper. It is not a case of “if I put everything up there, I’m covered”. Use visuals and facts that support the board’s ability to see the whole picture, not drown in the detail.

    Don’t rely on others to prepare your visual presentations for you. You need to know your “storyboard” inside and out and back to front. Others can support with details and formatting, but you need to design the overall message.



    Remember, if you can’t make it succinct, you don’t know it well enough.

    Know your allocated time and keep presentation time to a minimum. Plan to speak for two-thirds of the allocated time. Leave time for questions. Even if there aren't many questions, meeting-weary board members will appreciate your brevity.

    Plan B elevator pitch

    Have a Plan B. Prepare what you will say if there is only 5 minutes and no time for slides – think ‘elevator pitch’.

    Practice, practice, and then practice some more

    Going over your presentation many times won’t make it stale. It will make you more confident. Practice out loud, better still with an audience, and invite critique. Use your phone or computer to record yourself - judge yourself as the board will. You are your own best critic.


    Dedicated, engaging and professional, not boring

    Be professional but not too formal; polished, but not so polished that you seem fake and slick. The goal is to be conversational. This is not a TED talk. Slow down, avoid 'ums' and hesitation.

    Be engaging. However, even if the atmosphere is casual, remember you are an invitee and not there as a friend, even if you know them.

    Dress appropriately – ask what is expected.

    It's a dialogue, not a speech

    Unlike one-way conference presentations, presenting to the board is more like a dialogue. The board’s role is to ask challenging questions and for you to respond. Presenting to the board is an opportunity for developing a shared understanding of opportunities and risks, and to discover something new together. Welcome a board that wants to know more because it means they are engaged and seeking to add value. Don’t take the questioning personally.

    On your own or with others, brainstorm various possible scenarios, even the worst. What questions do you hope they won't ask? What do you think you should know more about? What would make you nervous? Know your presentation well enough so you know exactly where slides are located. Board members might want to refer back to one and you need to know where to find those that will help you answer their questions.

    Direct and Honest

    If you don’t know the right response, acknowledge you don't have the answer. Say you'll get back to them. Trust and credibility are key.

    You have been invited to speak because you are the expert on the topic and it is an opportunity for the board to meet key talent in the organisation. You don’t need to show off all you know. Big, technical words don’t necessarily equal intelligence. Be yourself. Demonstrate the company values. End with grace, say thank you and don’t linger.

Looking for more tips on board reporting from Dr Judith MacCormick FAICD? Read Effective Board Reporting: Writing for tips on writing a paper that will meet your board’s expectations.

Opinion: The rising tide of directors’ responsibilities

John Connor
CEO, The Climate Institute
Following the landmark 2015 Paris Agreement and new research into the world’s largest investors and climate related risk, John Connor, CEO of The Climate Institute explores challenges and long-term liability risks facing directors.

Earlier this year at the Australian Institute of Company Directors’ Australian Governance Summit, David Gonski told an audience of 1000 of Australia’s senior business leaders that board directors should take a more long-term perspective on their roles. So, how and why does climate change factor in that advice? And is action already under way?

Prior to the Paris Climate Summit last December, Mark Carney, the Governor of the Bank of England, described his concept of the “Tragedy of the Horizon” - the threats that climate change poses to long-term shareholder value and, potentially, financial stability beyond the traditional horizons of the business and political cycles.

Carney outlined the physical risks already impacting property, agricultural and tourism asset classes through the increased frequency and greater intensity of storms, drought and bushfires as well as, for example, the bleaching of the Great Barrier Reef.

Then he talked about transitional risks - changes in policy, technology and physical risks that could prompt a potentially sudden reassessment - a “jump to distress” - of the value of a large range of assets.

Looking into long-term liability

Carney also described liability risks, particularly referring to carbon extractors or emitters, referring to the impacts that could arise up to decades in the future where parties who have suffered loss and damage from the (ignored) effects of climate change seek compensation from those they hold responsible. One example of such litigation is under way in some US states, where it is being investigated whether Exxon misled investors about its knowledge of climate science.

At the Paris Summit, the G20’s Financial Stability Board launched a Taskforce on Climate Related Financial Disclosures. It has just released a Phase One Report providing an even more detailed typology of physical and non-physical risks and opportunities. Last year, The Climate Institute also examined the issues of Australia’s Financial System and Climate Risk.

Overview of common climate risks and opportunities

The Paris agreement was particularly significant because it set goals to keep global warming “well below” 2°C above pre-industrial levels and to “pursue efforts” to keep warming to 1.5 degrees. With warming already around one degree above, there is mounting urgency. This highlights the importance of the now mainstream understanding that to achieve any of these goals requires economies to sit at net zero emissions or below.

The world’s largest institutional investors, like superannuation funds and sovereign wealth funds, are already moving on climate risks. The Asset Owners Disclosure Project’s fourth Global Climate 500 Index, released earlier this month, showed around half are now taking action either through assessing portfolio risks, making low-carbon investments or through more direct engagement with corporate governance. In 2016, there has been a 62 per cent jump in support of shareholder resolutions focused on climate change, with 60 investors (12 per cent) surveyed voting in favour of at least one (up from just 7 per cent in 2015).

One way companies are integrating long-term perspectives on climate is by stress testing their business models to see if they can cope in economies avoiding two degrees warming. BHP has already done it. Westpac, AGL and Origin are doing so. This will be an increasingly important approach.

Australia has had a turbulent ten years in climate and clean energy politics; this should provide directors with more, not less, reason to take both long and near-term perspectives on climate change. There is a widening gulf between community, investor and policy-maker perspectives, which is increasing the transitional risks of sudden policy movements. The Climate Institute’s A Switch in Time report highlights the looming economic “jump to distress” if we fail to begin effective action to modernise and decarbonise our electricity system now.

The point is that the heat is not just rising on our planet, but on directors to manage climate related risks now to avert worse outcomes in the future.

Click here for more information about the Task Force on Climate-Related Financial Disclosures and the Phase One submission process.

Are Courts easing the way for shareholder class action claims?

Helen Mould, Executive Counsel, Leah Watterson, Senior Associate and Damian Grave, Partner, Herbert Smith Freehills
How to prove causation in shareholder class actions has long been contentious. Herbert Smith Freehills examines how a recent case may steer the debate.

Directors of listed companies are acutely aware of class action risks posed by corporate continuous disclosure obligations.

A securities class action may commence if shareholders allege that a company’s disclosure (or failure to disclose) breached the Corporations Act or the ASIC Act. To recover damages in this type of claim, a shareholder plaintiff must prove that the contravention caused their loss – a concept known as causation.

In Australia, courts have traditionally found that where a misrepresentation has induced a transaction (including a share transaction) the plaintiff must show that they relied on the misrepresentation in order to establish causation.

The decision

On 20 April 2016, In the matter of HIH Insurance Limited (in liquidation) & Ors [2016] NSWSC 482, the NSW Supreme Court held that the plaintiffs could establish causation by showing that they purchased shares on the market at an inflated price. The Court held that the plaintiffs did not need to establish that they relied on the misrepresentation in order to recover loss (direct reliance). It was enough that the market relied on, and was misled by, the misrepresentation (indirect market based causation).

This is the first time an Australian court has applied indirect market based causation.


The plaintiffs were investors who acquired shares in HIH Insurance Limited. The investors claimed that HIH’s 1999 and 2000 financial results contained misleading or deceptive representations. HIH admitted that it had contravened the former Trade Practices Act 1974 and Corporations Law by releasing the results.

When HIH went into liquidation, the investors lodged proofs of debt stating that they had suffered loss and damage by paying more for their shares than they would have, had the market price not been inflated. The liquidators did not admit their proofs and the investors appealed to the NSW Supreme Court.


The investors did not seek to argue that they read or directly relied on the financial results. Instead, they argued that they purchased the shares in a market regulated by the ASX and the Corporations Law and that this market was distorted by the misrepresentations in the results.

In deciding that that indirect (market based) causation was enough to prove compensable loss Justice Brereton stated:

[W]hile the contravening conduct did not directly mislead the plaintiffs, it deceived the market (constituted by investors, informed by analysts and advisors) in which the shares traded and in which the plaintiffs acquired their shares. Investors who acquire shares on the share market do so at the market price. In that way, they are induced to enter the transaction…on the terms on which they do by the state of the market.

Although the decision relates to a liquidation proceeding and not a class action, the judgment will be relevant to the issues considered in securities class actions.

Plaintiffs and defendants alike will wait to see if this decision is followed by other courts. In the interim, questions remain as to whether indirect market based causation supports the objectives of the continuous disclosure regime, which include encouraging investors to read and consider corporate disclosures.

Debate will also continue as to how it is proven that the market price was in fact inflated because of the alleged contraventions.

The full text of this judgment is available here.

Opening your books to shareholders?

James Morvell
Partner, Hall & Wilcox
What should you do when a shareholder asks to review the company books? James Morvell considers the risks for company directors and the level of access they are legally required to give.

Boards may face difficult choices when a shareholder requests access to company documents, starting with questions as to what actually constitutes “company books” and how many documents (if any) need to be handed over.

In some cases, a company’s constitution or its shareholders’ agreement (if one exists) may grant rights to shareholders to inspect the company’s books. Shareholders also have a right under section 247A of the Corporations Act 2001 (Cth) (Act) to make court applications acting in good faith and for a proper purpose to inspect company books.

Company directors need to consider whether disclosure will harm the company and whether to resist when faced with such requests. They also need to discuss the issue with the appropriate executives and legal counsel.

However, if it is inappropriate to voluntarily grant access to the documents requested by a shareholder, it is important to know how a court is ultimately likely to consider an application (if made by the shareholder).

The Engel case

In the recent case of Engel v National Biodiesel Limited [2015] FCA 1114 (Engel), the Federal Court explored the “books of the company” definition, and the orders available regarding a shareholder’s section 247A application.

Mr Engel, a shareholder of National Biodiesel Limited (NBL), applied to the court to access certain documents after NBL refused his direct request for documents. Mr Engel wanted to examine what he considered to be a series of alleged related party transactions between NBL, its subsidiary National Biodiesel Distributors Australia Pty Ltd, its major shareholder National Biodiesel Group Pty Ltd and various other related parties.

Mr Engel feared these transactions had resulted in assets being moved out of NBL, thereby diluting the value of his investment.

Establishing “books of the company”

“Books of the company” is not defined (generally or in the context of section 247A). However, the Act does include a wide definition of “books”, which includes (without limitation):

  • A register
  • Any other record of information
  • Financial reports/ records
  • A document

In Engel, the Federal Court found the phrase “of the company” to mean property of the company. Notably, it also found that where a parent company receives material from its subsidiary for inclusion in board packs, ownership of the materials passes to the parent and becomes part of its records.

How many documents?

Shareholders will rarely be granted unfettered access to all of the books of the company.

In Engel, the Court was satisfied the application was in good faith and for a proper purpose, as Engel sought to investigate possible contraventions of the Corporations Act 2001.

Nevertheless, the court emphasised that applications under section 247A should only be for documents relevant to the purpose of the application. The court also confirmed its discretion to determine such matters, and held that certain documents sought by Mr Engel were not relevant to the inspection.

What of protection?

The court also explored using legal professional privilege to resist the production of certain documents. It acknowledged the importance of confidentiality in maintaining privilege and ordered Mr Engel not to disclose or copy the documents he obtained other than for analysing the related party transactions.

Who pays the costs?

Cost awards are determined by the court. In this case, NBL was ordered to pay the costs of Mr Engel’s application on the basis he had requested access to the documents directly from NBL (which was denied), and was largely successful in his section 247A application.

Engel is a timely reminder that “company books” is a broadly defined term. Companies may benefit from reviewing their contractual obligations to provide access to company books and records, which may allow them to resolve such requests quickly and without going to court – however, there will be situations where court intervention is unavoidable or even necessary to deal with a shareholder who may have malicious or improper intentions.