from the ceo

Prime Minister Scott Morrison has been elected with a majority government and the clear support of his party. A period of stable government is an opportunity for reform that must not be wasted.

The Australian economy is softening. In May, the Reserve Bank of Australia noted in its Statement on Monetary Policy that “growth in the Australian economy has slowed” and on the back of its forecast, lowered interest rates in June for the first time in nearly three years.

While the global economy may be stabilising, G20 finance ministers called out in June that the risks are largely downside as “trade and geopolitical tensions have intensified”. In April, the AICD Director Sentiment Index (DSI) fell to its lowest point in more than two years due to a fall in confidence in the global economy. Arguably, the alarms have been ringing for some time.

Risk and director liability

So the government must pursue policies that promote growth and encourage businesses to take risk. The pre-election DSI highlighted the need for policymakers to encourage, not dissuade, business from taking risks. Seven of 10 respondents agreed that a risk-averse decision-making culture prevails on Australian boards. Reversing that risk-averse posture to navigate global tides will be challenging while the director liability environment is undergoing significant change.

Rebalancing the regulatory environment to achieve deterrence and better promote adherence to the law was clearly needed and the AICD supported the bulk of these reforms. The need for board accountability is clear. Demonstrating accountability is one of the four priority areas for the AICD forward governance agenda. There must be consequences for behaviour that is inappropriate, unethical or unlawful. But policymakers need to be mindful of the pendulum does not swing too far and that a compelling evidence base supports further reform. Honest directors acting carefully and diligently should not experience the same imposition of liability.

Following the Australian Securities and Investments Commission (ASIC) adoption of a “why not litigate” approach, directors are more likely to have actions brought against them for alleged breaches of the law. The penalties, should they be found at fault, have risen significantly following legislation passed earlier this year. AICD members have said that the increased personal risks associated with being a director have negatively affected their business decision-making and their willingness to take on new board appointments. Premiums for directors and officers’ (D&O) insurance have increased sharply, particularly for listed entities.

To boost productivity and trigger the next phase of economic growth, we need to strike the right balance between regulatory and compliance obligations, and growth and innovation as core goals essential to our national prosperity.

This challenge is not isolated to any one sector of the economy or society. Hospitals, schools, mining companies, SMEs, religious charities, superannuation funds and startups all need to take appropriate risks. A director liability regime that hinders directors and boards from investing or innovating to better serve their stakeholders will lead to lower productivity growth, lower job growth and lower wages across the economy.

There needs to be clear delineation between board and management responsibility to have a fit-for-purpose accountability framework for organisations to run effectively. Our legal frameworks must have the appropriate safeguards to prevent honest directors who have appropriately discharged their duties from being held personally liable for corporate fault.

The AICD is engaging with policymakers on this challenge. In our submission to the Australian Law Reform Commission (ALRC) review of the corporate criminal responsibility regime, we emphasised a distinction must be drawn between a director’s criminal liability for their own misconduct and their liability arising out of misconduct by their company.

The ALRC will need to critically examine the ways in which directors can currently be held liable to determine whether there are any significant gaps. Separately, we will continue to push for a measured review of the legal and economic impact of continuous disclosure laws, picking up on the ALRC’s recommendation earlier this year, and in the context of a spike in securities class actions.

In considering areas for reform, the ALRC — as well as other policymakers, regulators and the government — will need to ask whether the regulatory environment is driving the desired outcomes. If the balance is not right, we risk undermining the growth agenda Australia needs.