advocacy

Australian directors are operating in a complex environment, with increasing expectations on the role and accountability of boards. While many of these factors are particularly acute for boards of larger listed entities and those in financial services, they are relevant to directors in all sectors (see Board Pressures breakout).

These factors link to broader debate about the role of corporations in society, reflected in the recent US Business Roundtable statement on the purpose of the corporation — and the debate on directors’ duties and stakeholder considerations captured in the AICD’s Forward Governance Agenda. There is considerable risk of regulatory overreach in this environment, where a more prescriptive approach is attractive to policymakers.

Complex issues require complex responses, and the AICD cannot adopt a complacent or self-serving lens to these matters. In our recent Forward Governance Agenda consultation, members told us accountability is a concern — only a third of AICD members feel current director accountability mechanisms are “adequate”.

Directors must be held accountable for breaches of their governance duties. We must have firm laws and penalties, robustly enforced by well-resourced regulators.

The AICD was a strong voice in support of increased penalties for breaches of directors’ duties. We also supported increased resourcing and recommended improvements to regulators. But of equal importance, the role of the board must be appropriately reflected in the law and expectations made of directors. Directors, acting with due care and diligence, must have confidence the law respects their important obligations as well as providing fair defences.

Poorly conceived laws that seek to make individual directors the stand-in for all forms of corporate wrongdoing misunderstand the role of the board and the corporate structure, and expose Australian directors to unfair and excessive risks.

From building our legal research on comparative systems to the AICD’s Forward Governance Agenda, we must bring both a protective and proactive mindset to the issues. Equally, we must continue to support members on governance for performance — elevating practice with support, innovation research, and building a more compelling narrative on the risks of prescription.

Board Pressures

  • Changing community expectations on the board’s role
  • Accountability for corporate wrongdoing
  • Increasing focus on governance of culture
  • Complex, conflicting stakeholder impacts and expectation
  • Personal reputation risks
  • Increased D&O premiums and exclusions
  • Enforcement focus by regulators – for example, ASIC’s “why not litigate” model, governance focus
  • Higher penalties for breaches of duties and new layers of law

ALRC Review: corporate criminal responsibility

One priority is the Australian Law Reform Commission’s (ALRC) examination of Australia’s corporate criminal responsibility regime. Announced immediately before the last federal election, this review includes consideration of whether Part 2.5 of the Commonwealth Criminal Code — dealing with responsibility for corporate wrongdoing, including whether the corporate failed to create and maintain a corporate culture of compliance — needs further mechanisms to hold corporate officers (including directors) individually liable for corporate criminality.

Such proposals could have severe implications for directors. They risk being unfair, potentially ineffective and could have a chilling effect on decision-making and innovation.

A fundamental principle of criminal law is that a person is not criminally responsible for their actions unless the prosecution can prove both the physical element (the act or omission) and a mental or fault element (such as intent or recklessness). Corporate criminal accountability raises many complex issues (as discussed in Company Director in August) and moves to extend personal liability for corporate criminal acts even more so. The ALRC will be giving careful consideration to these complex issues.

The AICD has provided an initial submission to support the commission’s work. This emphasises the important distinction between the role of the board and management and well-established principles of governance and criminal justice. We have noted that Australian laws expose directors to a high risk of personal liability, and we are developing detailed comparisons with other common-law jurisdictions to inform the review’s work. We are engaging with the ALRC, drawing on director perspectives on the oversight of culture and relevant considerations in criminal liability, in advance of the review discussion paper due for release in November.

The ALRC will invite submissions on the ALRC paper and the AICD will update members as the review progresses.

Active regulatory agenda

The AICD is contributing to regulatory issues on a range of fronts with the support of our advisory committees. Some current topics are set out below.

WHS Model Law review The AICD is arguing against proposals to prohibit insurance cover for directors and officers for WHS breaches, and recommended more active enforcement of existing Category 1 WHS offences over proposed new industrial manslaughter offences.

Whistleblowing policies New laws that extend whistleblower protections and increase the obligation on organisations to protect disclosures commenced in July. From 1 January 2020, further obligations for entities to have detailed whistleblower policies (with strict liability offences for breaches) commence. ASIC is consulting on its regulatory guidance on mandatory whistleblower policies, issuing a lengthy draft regulatory guide to which the AICD is responding.

Anti-phoenixing laws New laws are currently before parliament. The AICD abhors phoenixing and wants to see more effective and targeted enforcement to prevent and punish those engaging in this illegal activity. However, we have concerns about the draft law, including the proposal to hold all directors potentially liable for GST payments due from their entities, especially for SME directors.

Executive remuneration APRA’s draft standard regulating the governance of executive remuneration in financial services (discussed in September’s Company Director) is a key focus.

Audit quality The spotlight on audit quality is an important issue for directors, and the AICD is closely considering parliamentary and international reviews of audit quality and conflicts.

Culture The AICD recently issued a guide on governance of culture, a key focus for regulators and law reform. Access the guide here

Minutes The AICD recently issued a practice statement on minutes, supported by a detailed legal opinion, noting the Hayne Royal Commission focus. Access the statement here

Insolvency safe harbour The statutory review of one of the most substantial reforms for directors in recent times — and one the AICD strongly argued for — will commence before the end of the year. The safe harbour provides directors with a defence to the risk of personal liability for debts incurred when a company is insolvent or at risk of insolvency, if they have or are developing a plan with reasonable prospects to deliver a better outcome than administration or liquidation. There are important conditions on the safe harbour — employee entitlements must be met and maintained, books must be up-to-date, tax records current among them. Our feedback to date shows that the safe harbour is having positive results — supporting boards in saving or restructuring companies and delivering better outcomes to shareholders, members, employees and creditors. We are keen to hear from members about their understanding of the law and experience in its application.