Who’d be a company director when they’re under so much public scrutiny from hard-to-please shareholders and ASIC? Paul Stock considers whether insurance or reform might make your friendly, neighbourhood director sleep a little easier at night

There’s a moment in the first Spider-Man movie where Uncle Ben tells Peter Parker: “With great power comes great responsibility”. It’s an apt phrase and not unique to the careers of crime-fighters and superheros.

Company directors, while not well-known for swinging up the street in brightly coloured spandex, carry with them the burden of great responsibility for their corporate entities. With a global economy being spoken of in increasingly jittery terms and mum and dad investors looking to class actions when the market turns in the opposite direction of their retirement plans, directors are minding the hopes and dreams of a once confident market half-expecting the next corporate collapse.

For all the lofty salaries and bonuses that raise the ire of the shareholding public, for some commentators, directors are shouldering more and more personal risk and facing worrying levels of personal liability.

Who’d be a company director?

Australian Institute of Company Directors (AICD) president John Story told the Australian Securities and Investments Commission (ASIC) Summer School this year of “a lot of concern out there that the balance is out of whack”.

Story suggested that the levels of responsibility, scrutiny, liability and, perhaps, reward were not easily weighted against one another in the current economic and political climate, and noted that junior directors were particularly concerned with their level of personal liability.

He said that under the current disclosure regime even he felt it was difficult to determine when he might be in breach of his duties as a director. At the same event, Coca-Cola Amatil chairman David Gonski said there was “a real problem that there’re people who are turned off from going into smaller companies”.

This appears to be a prevailing concern in submissions to the Treasury’s Review of Sanctions in Corporate Law last year. The Australian Bankers’Association submitted that “excessive penalties, without adequate defences, can also discourage qualified and suitable candidates from accepting director and senior manager positions”.

Chartered Secretaries Australia (CSA) submitted that more than half of their members “believed that excessive penalties were discouraging suitably qualified people from accepting board positions”.

But concrete examples of people declining board positions have proven tough to pin down. In the same submission, CSA noted that “an overwhelming” 87 per cent of their members could not point to specific examples where a potential director had turned down a board position “due to onerous penalties and their personal exposure to risk”.

The elusiveness of examples continues beyond the bodies representing Australian directors and other senior office holders, and into the industries advising such senior management on their liability insurance needs.

“I am not able to give any first-hand examples of individuals not taking up board positions because of excessive penalties,” Michelle Dalton, director of professional liability training consultancy Professional Risks, told Risk Management.

“However, I can say that five or so years back one could not get cover under a directors and officers liability policy for fines and penalties,” she said. “Now cover is available for civil fines and penalties, which provides a counterbalance to [disincentives to accept board positions].”

Similarly, André Louw, managing director of risk management for adviser and insurance broker Jardine Lloyd Thompson, says:“We are not aware of any directors failing to take up board positions owing to their potential liability”. Louw qualified that point, suggesting that good liability insurance coverage might be going some way towards allaying the concerns of potential directors.

“We recently consulted one of Australia’s leading directors and officers lawyers on limits of indemnity for directors and officers insurance,” Louw says. ”His personal view was that he would not be comfortable as a director of a large, listed corporation with an average of less than $20 million Side A (directors and officers) cover and Side B (company reimbursement) cover per director in the corporate program.

“Whilst directors can each purchase separate personal directors and officers policies, they are generally not as effective as directors and officers programs maintained by the corporations,” he said.

Not surprisingly, for the professional liability insurance industry part of the answer to any perceived problem with attracting board members concerned about their exposure to professional liability is insurance. However, there are also calls for a broadening of the defences available to directors and officers by way of amendments to the Corporations Act.

Levelling the field

Writing in The Canberra Times in March, Macquarie University’s Professor Bryan Horrigan said Senator Nick Sherry, the Minister for Superannuation and Corporate Law, intended to investigate “how corporate governance regulation adversely affects company directors and their businesses”.

Professor Horrigan argued that Treasury needed to make an assessment of the case to reform “directors’ duties, corporate regulatory sanctions, personal liability for corporate officials, and corporate reporting” and that Treasury’s Review of Sanctions in Corporate Law last year “increases pressure to broaden business judgement defences for directors”.

Preliminary research for this review is under way. In conjunction with the AICD, Treasury is surveying 600 company directors “to establish what is happening in the boardrooms of our leading companies,” Sherry told the RiskMetrics Group’s Australia governance conference late last month.

“For corporate law this is where the rubber meets the road,” he told delegates. “In assessing the case for corporate law reform, we need to focus on what’s happening in the boardroom, as well as what’s happening in the court room.”

At the same time, Sherry noted an “emerging trend for imposing personal liability on directors for corporate fault,” and expressed concern that “while this may be appropriate in exceptional cases, it now appears to be the norm”.

A similar trend has been observed by Louw at Jardine Lloyd Thompson, who told Risk Management they had noticed an increase in claims against corporations for breaches of continuous disclosure rules. The Slater & Gordon-led class action against Telstra might be a case in point.

At the ASIC Summer School, AICD president John Story 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.

“If the business judgement rule were to be extended across the full range of directors’ duties, then it would be a great thing,” Story said. That thought is echoed by Professor Horrigan, who wrote “business judgement defences for directors should be broadened, but in a way that facilitates corporate responsibility and sustainability, too”.

Story worried that ASIC did not fully understand the unique pressures that boards faced, and that this impacted on ASIC’s approach to regulation. “There is this fundamental misalignment between the boards that exist in Australia and the perceptions of ASIC,” he told the ASIC Summer School.

Perhaps the work that Treasury and AICD are conducting together will inform the practises of ASIC as well as any law reform, and counteract whatever risk-averse tendencies directors and officers are prone to if they’re feeling vulnerable in the current environment.

Treasury was mindful of risk-aversion and its possible impact on productivity when the Review of Sanctions in Corporate Law report was tabled last year. “It is difficult to empirically determine the extent to which legal frameworks influence the appetite for risk of company officers,” the report acknowledged.

“However, if corporate law is engendering an overly conservative approach to business decision making, this could discourage investment in activities that would best advance the interests of the company. Such a distortion may have implications for longer term productivity and economic growth.”

Whether this is of genuine concern may still be determined by Treasury’s survey of directors, the results of which might make some progress towards providing the kind of empirical data required to determine whether the anecdotal evidence is worth losing any sleep over.