While aspects of the ALRC’s proposed reforms are commendable, including its attempt to draw a principled distinction between corporate criminal and civil liability, and recognition of the oversight role of the board, the AICD has material concerns about certain proposals as they relate to individuals and corporations.
Recognition of the role of the board
The AICD welcomes the ALRC's recognition of the oversight role of the board, distinct from executive management, and the importance of targeting liability for corporate conduct. Importantly, the ALRC found that the legal framework for director liability is not in need of reform.
In the AICD’s view, while non-executive directors can and should be held accountable for breaches of their core duties, they are not in a position to prevent all instances of corporate misconduct and cannot be made guarantors of corporate compliance through the imposition of personal liability.
The ALRC’s findings also align with research by Allens that the AICD commissioned against the background of the ALRC inquiry. This research confirmed that the Australian director liability landscape is already complex and, in many regards, uniquely burdensome (covering a broad range of subject matter and imposing harsh penalties) compared with other jurisdictions. A summary of the research can be found here and a link to the full research paper here.
Before we get to the key proposals, we make the following overarching observations about the ALRC’s proposals:
- Broad application of the proposals: We are concerned that the proposals seem to have been drafted with large, complex organisations in mind (e.g. those examined by the Financial Services Royal Commission). However, the proposals would apply broadly and impact all sectors of the economy including not-for-profits and SMEs. The AICD is of the view that there needs to be greater consideration of impacts on organisations other than major corporates, given this is such a wide-ranging and comprehensive review.
- Risks associated with “piecemeal” implementation: The proposals have been appropriately presented as a package of reforms and our view is that there are significant risks if the proposals were to be implemented in a fragmented way (particularly if the substantive concerns outlined in this submission and those that may be raised by other stakeholders throughout the consultation are not addressed).
Key proposals and the AICD’s position
In terms of the key proposals outlined in the discussion paper, the AICD:
- Supports in principle the proposed model to recalibrate the regulation of corporations by making the civil law the primary tool for regulating corporations and preserving the condemnatory force of the criminal law for the most serious misconduct.
- Does not support the proposed mechanism to automatically escalate a civil contravention to a criminal offence in certain circumstances. In our view, this proposal is at odds with the principled approach to criminal liability that is otherwise supported by the discussion paper and would contribute to the blurring of the line between civil and criminal liability.
- Supports in principle the formulation of a single model to attribute criminal liability to corporations. However, further consideration will need to be given to particular offences that may require bespoke approaches (e.g. continuous disclosure). We also have material concerns with aspects of the model proposed by the ALRC, particularly in relation to the proposed reversal of the onus of proof and the overly broad definition of “associate”.
- Does not support Proposal 9 in relation to individual liability for corporate criminal conduct in its current form. While the AICD acknowledges that it is critical that individuals as well as corporations are held liable for corporate misconduct and that it is appropriate in some circumstances to pierce the corporate veil, a catch-all proposal that creates individual liability for any corporate misconduct based on the ability to “influence” that conduct is not appropriate. In addition, the proposal is too broad in its application and reverses the civil onus of proof. This proposal could also deter individuals from taking on senior executive positions, further entrench a risk-averse corporate culture, and negatively impact the cost and availability of directors and officers’ insurance costs.
- Supports consideration of alternative avenues to support whistleblowers in enforcing existing rights and protections, although we have a number of comments on the specific proposals floated by the ALRC.
- In line with the AICD’s consistent position, supports the implementation of director identification numbers (currently underway as part of the Modernising Business Registers Project).
Overall, while aspects of the ALRC’s proposals that are principles-based are positive, the paper proposes broad reforms that would impact all entities regulated under the Corporations Act, large and small. Some proposals depart from fundamental principles of law without firm evidence that change is needed and the AICD urges the ALRC to consider the proposals in light of this broad application.
We will continue to engage with the ALRC as it works to finalise its report before 30 April 2020.
The AICD’s full submission can be found here.