Risk allocation in the Australian Corporate Governance Framework – an introduction

In this upcoming series of posts, I’ll look at corporate governance in Australia and what recent events and changes mean for regulatory frameworks, decisions made by the courts, and the attention companies receive.

In the wake of corporate scandals, regulators worldwide have responded with new mandates and reforms in an effort to strengthen corporate governance measures and restore trust and certainty in the marketplace.

In Australia, it has been directors and officers that have become the focal point of these changes as they now face an increasingly onerous regulatory framework[1], greater shareholder activism[2] and a series of court decisions that have exposed them to higher levels of personal liability.

Middleton J[3] summarised this shifting mood by noting that directors are in a position of great authority and responsibility and are:

“…an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of the company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as his or her actions may have a profound effect on the community, and not just shareholders, employees and creditors…”[4]

What is troubling about this statement, and broader theme that underpins the current legislative and judicial trend is the belief that by increasing the liability of directors and officers will somehow translate into an improved corporate governance framework.

What is missing from this debate is consideration of how increasing the personal liability of directors and officers flow will through to other corporate governance stakeholders and whether this reallocation of risk may, in fact, have adverse and unintended consequences.

For example, one consequence of placing increasingly onerous obligations on directors and officers is that it limits the entrepreneurial flair required to fuel the growth of companies and new industries. This could lead to directors and officers becoming excessively cautious and stifle some of the bold decisions that are often crucial to corporate success.

Similarly few commentators would advocate for a system where the fear of personal liability results in counterproductive efforts by directors and officers to slavishly adhere to formalised governance regime or an unhealthy reliance on external advice (as was seen in Centro).

In this respect, the corporate governance debate may be improved by focusing on how risk can most efficiently be allocated among the various corporate stakeholders, rather than targeting and increasing the culpability of one particular group.

The purpose of this paper is to consider this issue by analysing the effect increasing risk and liability of directors will have on other corporate stakeholders, and whether this is having any unintended or adverse effects. To explore the issue, this blog series will provide a brief overview of the Australian corporate governance regime and consider some of the potential consequences associated with increasing the personal liability of directors and officers.

The next section will consider the ways in which risk is allocated among the corporate governance stakeholders, and in particular how directors and officers seek to mitigate the risk of performing their role.

Finally, this blog series will consider the role D&O insurance plays in the corporate governance framework and how D&O insurers may react to an increasingly onerous regulatory framework,[5] greater shareholder activism[6]and a series of adverse court decisions.

However, before we begin the more specific analysis, we must first set the scene by considering exactly what we mean by corporate governance. In the next post, I’ll look at what corporate governance is and how it can be defined

[1] Amendment of the ASX Listing Rules requiring listed companies to disclose their corporate governance practices and the introduction in 2003 of the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations; (the second edition was published in 2007 as the Corporate Governance Principles and Recommendations); and Investigations and prosecutions in the wake of the collapse of a number of major companies have disclosed failures in orthodox mechanisms for accountability.  See Austin R & Ramsay I, “Ford’s Principles of Corporations Law, online edition, LexisNexis Butterworths”, Sydney, current to December 2011

[2] Institutional shareholder activism both in Australia (for example, the formation of the Australian Investment Managers’ Association — now part of the Investment and Financial Services Association — representing institutional investors) and elsewhere; See Austin R & Ramsay I, “Ford’s Principles of Corporations Law, online edition, LexisNexis Butterworths”, Sydney, current to December 2011.

[3] Australian Securities & Investments Commission v Healey [2011] FCA 717

[4] Doepel M & Gale C, “When the Burden outweighs the benefit: a general overview of recent developments in directors and officers duties”. Australian Civil Liability. May 2012.

[5] Amendment of the ASX Listing Rules requiring listed companies to disclose their corporate governance practices and the introduction in 2003 of the ASX Corporate Governance Council’s Principles of Good Corporate Governance and Best Practice Recommendations; (the second edition was published in 2007 as the Corporate Governance Principles and Recommendations); and Investigations and prosecutions in the wake of the collapse of a number of major companies have disclosed failures in orthodox mechanisms for accountability.  See Austin R & Ramsay I, “Ford’s Principles of Corporations Law, online edition, LexisNexis Butterworths”, Sydney, current to December 2011.

[6] Institutional shareholder activism both in Australia (for example, the formation of the Australian Investment Managers’ Association — now part of the Investment and Financial Services Association — representing institutional investors) and elsewhere; See Austin R & Ramsay I, “Ford’s Principles of Corporations Law, online edition, LexisNexis Butterworths”, Sydney, current to December 2011.

Jason Maywald is a highly experienced legal and transactional advisor in the insurance and medical assistance sectors. He holds a Bachelor of Laws from the Queensland University of Technology, and has significant experience in competitive corporate acquisitions, IPOs, commercial property acquisitions and disposals, corporate restructures, and hostile and friendly takeovers.