THE PERCEPTION held by directors that they are now subject to increased risk of being sued due to more shareholder class actions and litigation under public disclosure rules does not mean their obligations should be watered down, said a leading barrister last month.
Late last year, Neil Young QC was asked by the ASIC chairman, Tony D’Aloisio to investigate whether directors’ liability had gone too far or not far enough.
In his response, he told an ASIC conference last month: “It is difficult to see how you could expect less of our directors.”
In a submission to the Treasury Review of Sanctions in Corporations Law, the Australian Institute of Company Directors (AICD) said an increasing number of experienced and potential directors were now shying away from directorships.
“It is no coincidence that the AICD has advanced concerns about directors’ liability in the current climate of a growing incidence of shareholder class actions and a new spate of litigation concerning the disclosure obligations of publicly-listed companies,”Young told the ASIC Summer School.
“This climate may have heightened the perception by directors that the basic duties cast upon them are too exacting, and unnecessarily expose them to legal action. However, the evidence does not really support those linkages.”
Instead, he laid the blame at the feet of directors’ themselves, saying that the increase in litigation appeared to be more due to their failure meet new, more extensive disclosure obligations.
Young said there needed to be more empirical research among directors on whether they had in fact been changing their behaviour as a result of the requirements in the Corporations Act.
John Story, president of the AICD, said there may be no empirical evidence of changes in directors’ behaviour, but if we waited until there was enough evidence, we “would be in a lot of trouble”.
“There is a lot of concern out there that the balance is out of whack,” he said.
He also said it would be helpful if the “business judgement” defence introduced under corporations law reforms in 2000 were extended beyond its specific application to the duty of care and diligence.
In a speech given on his behalf by Treasury Secretary, Ken Henry, Senator Nick Sherry, the Minister for Superannuation and Corporate Law, indicated that the Government was still consulting with the industry and regulators on whether there needed to be any action taken to address directors’ concerns on liability, but it was being given a high priority by Treasury.
He acknowledged that there appeared to be common now to use legislation outside the Corporations Act to impose liability on directors for “corporate fault”.
“While it may be appropriate to use these types of provisions in exceptional cases, they now appear to be the norm. All governments should minimise these provisions and improve consistency in this area,” Henry said.
But he said it is also important the law imposes appropriate sanctions where a company or its officers fail to meet the required standards.
“Accordingly, sanctions should be credible, flexible and transparent. For example, if misconduct is addressed at an early stage through a tailored penalty, criminal sanctions may be avoided later in the piece.”