Originally, the standard of care that a director should exercise was far less onerous than it is today.
To better understand the duties that directors face today, Dennis Martin, Director of Snedden Hall & Gallop Lawyers, takes us on a journey through significant cases that have shaped the directors’ world. This is part 2 of a three-part blog series. Part 1: 4 key directors duties. Part 3: What if you are an officer of an incorporated association?
In 1925, the required standard of care of a director was demonstrated in the case of Re City Equitable Fire Insurance Co Ltd. A director was required to exhibit the degree of skill, that might reasonably be expected from a person of their knowledge and experience.
However, a seminal reform occurred in 1995 when directors were put directly into the crosshairs by being exposed to personal liability for bad corporate governance. The case of Daniels (formerly practicing as Deloitte Haskins & Sells) v Anderson(1995) set out the modern-day standard of care and established the core irreducible standards of directors.
Here, the Court of Appeal found that the director’s duty of care is not merely subjective, limited by the director’s knowledge, experience or ignorance and inaction. Instead, directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company.
However, the development of directors duties cannot be fully understood without turning to the James Hardie Litigation*.
This litigation tested the strength of ASIC as a prosecuting body, reinforced the standard directors are held to and further, broadened the scope of who can be held liable.
The proceedings in the James Hardie case arose out of the 2001 restructure of the James Hardie Industries Limited group of companies. Two subsidiary companies with significant asbestos-related liabilities were transferred out of the James Hardie group to the Netherlands, therefore insulating (excuse the pun) these companies from any liability under Australian domestic law.
In an attempt to obfuscate, a Medical Research Compensation Foundation was established and remained in Australia. Its purpose was to fund compensation claims made against the separated companies by people injured by their asbestos products.
Once approved by the board of directors, James Hardie sent the Australian Stock Exchange (ASX) an announcement outlining the proposal. The announcement contained misleading statements about the sufficiency of the funds available to the foundation to meet present and future claims.
The penalties at first instance in the NSW Supreme Court were significant – all 10 defendants in the civil proceedings brought by ASIC were banned from being company directors or otherwise being involved in the management of a company for periods ranging from 5 to 15 years. The monetary penalties ranged from $30,000 to $350,000. Furthermore, the reputations and career prospects of the former directors and officers of James Hardie had been significantly tarnished. This is not to mention the reputational damage to the James Hardie brand and the damage to the company’s ASX listing and market value (which, in turn, has an impact on the shareholders).
The judgments extracted and highlighted that to fulfil their duty, directors must:
- Read, understand and focus upon the contents of any reports they are required by law to approve or adopt (including financial statements) – very often board papers can be dense and run to dozens or hundreds of pages.
- Consider whether the statements are consistent with the director’s knowledge of the company’s financial position;
- Make further enquiries if necessary; and
- Have sufficient financial skills to perform these tasks and to be able to understand basic accounting conventions and proper due diligence in reading the financial statements.
It is important to remember that these principles apply to all directors, not just directors of publicly listed companies.
How can Snedden Hall & Gallop assist?
As the director of a company, understanding the evolution of the responsibilities of a company director can emphasise the significance of the role. Dennis Martin can assist you in understanding your role as a director and can provide advice on the day-to-day issues that you may face as a company director. You can contact him for any commercial matter by phone on (02) 6285 8000 or by email.
This is the second in a three-part blog series. Have a look at part 1: the 4 key duties of a director and part 3: issues facing an officer of an association.
* James Hardie litigation: ASIC v Macdonald (No 11) (2009); Morley & Ors v ASIC (2010); ASIC v Healy (2011); ASIC v Hellicar (2012); Shafron v ASIC (2012)