On 1 November the AICD released the results of its survey on the impact of legislation on company directors.
The survey reveals that the burden of laws imposing personal liability on directors is stifling business decision-making and having a serious detrimental impact on key aspects of corporate performance. Key findings of the survey include:
· More than 90% of those surveyed said that personal liability of directors had an impact on optimal business decision-making or outcomes
· 65% said this risk of personal liability caused them or their board to take an overly cautious approach to business decision-making, either frequently or occasionally
· 79% said they are concerned that the time their board devotes to compliance with regulations detracts from them focusing on issues like enhancing corporate performance and productivity
· More than 90% said they are concerned about lost time and opportunity costs for companies defending actions brought as a result of automatic liability for directors under a wide range of legislation.
The observations of individual directors quoted in the report echo many of the discussions Guerdon Associates have had with directors in recent years. For example:
“Derivative liability has the potential to be unreasonable in areas such as environmental and OHS laws where non executive directors have no direct involvement.”
Yet little progress is being made at COAG and elsewhere to make the laws effective, and better reflect the actual influence directors have on some outcomes. The Commonwealth and States have conducted audits of their legislation, but are yet to complete their legislative reviews to reform and harmonise laws imposing director liability.
And the national harmonisation of OHS legislation (excluding WA) is threatened by the decision of the NSW Premier, Ms Kristina Keneally, not to support the planned uniform approach.
Even under the Model Work Health and Safety Bill 2009, directors would have a positive duty to exercise due diligence to ensure the company meets its safety obligation, with significant penalties, including imprisonment, for officers (including directors) who fail to discharge this duty, even if an employee is not injured. Substantial monetary penalties may also apply, above and beyond the penalties that currently exist in any Australian jurisdiction (up to $600,000), as well as imprisonment for up to five years for the most serious breaches. There is also a range of remedial orders available, including adverse publicity orders and community service orders.
Another response from the AICD survey that strikes a chord with us:
“Personal liability for independent non-executive directors of limited liability companies who have not committed a criminal office is anathema to the principle of a limited liability company and equity capital and its importance in the creation of wealth and enterprise. It is also anathema to the ancient golden thread woven throughout common law since the Magna Carta of being innocent until proved guilty and represents a disturbing trajectory towards authoritarian government exploiting populism. Finally it suggests a gross lack of understanding of the role of the independent non-executive director and the protection of shareholder rights relative to that of executive directors and management and seriously threatens the existence of the independent role and the very desirable differentiation between independent and executive directors and officers. This is not to suggest in any way that penalties for companies should not exist for breaches of the law or for individuals for criminal offences. The dead hand of the law however does have a demonstrable significant negative impact on the economic and social well-being of the nation.”
The result is a more limited supply of experienced people willing to be directors. As remuneration advisers, this is a supply and demand issue that current director fee levels cannot overcome and that the relatively modest rate of director fee increases (compared to executive remuneration increases) is unlikely to resolve.
The AICD survey report can be found HERE© Guerdon Associates 2023 Back to all articles