In response to business concerns that the threat of excessive penalties is deterring boards from taking commercial risks, the Federal Treasurer has announced that he will conduct a wide-ranging review of legal sanctions against corporate wrongdoing. The Shadow Minister for Corporate Governance and Responsibility claimed that 'there is no evidence that the community believes penalties for criminal activities should be reduced’.

1. Do you believe that there is a compelling case to widen the business judgement rule to protect directors and officers from personal liability where they perform their duties in a bona fide manner?

Yes 75%
No 25%

Comment

Business judgment rule is not appropriate in all cases eg duty not to misuse information, to act honestly etc It was introduced in a particular context (care and diligence) and is not a pan
Considered appropriately, the business judgement rule is sufficient.
Awfully subjective though & will increase costs of expert reports backing up decisions.
Provided directors are seen to be acting honestly and fairly they should be protected from litigation.
The balance is about right.
As long as directors are making informed decisions, even if there is an element of risk, they should not be punished, as they are paid to do the job.
Adequate at this time.
The rationale for applying penalties for the non-performance of duties should only relate to where there is a clear case to answer for. The use of the “penalties” both criminal and civil, only serve to detract the executive and non-executive members of the company from managing the risks that come as a part of their roles on the board. Take away the ability to manage the risk by applying the harsh penalties and the appetite for risk diminishes. With risk comes reward an the executives’ ability to manage the risk today has been enhanced significantly in recent years through the extensive use of tried and tested computer-based risk models. Hence the need for penalties should be reassessed and reduced rather that widened.
Yes, provided diligence and other standards of care are also present, not just acting in a bona fide manner.

2. Do you agree that the concept of limited liability has been eroded as personal legal liability for directors and officers has increased?

Yes 75%
No 25%

Comment

The law and recent cases have only confirmed there is no place for “sleeping” directors and confirmed that in order to discharge their duty to shareholders directors must be active and engaged in monitoring the performance of the company.
Concept of limited liability is for the protection of the shareholders.
Look at all the One-Tel litigation.
Limited liability refers more to the shareholders than directors. Provided directors have acted fairly and honestly their legal liability should not increase. This may be a simplistic view but the onus is on them to prove otherwise.
For example, personal liability for workplace injuries/fatalities in NSW — a great concern for directors and officers.
To some extent, but I don't think directors have ever had real limited liability anyway. They now have more responsibility and have to act accordingly.
Limited liability always applied to shareholder liability so I don't believe this has changed.
There is now a clear mentality from investors that if things go wrong they should sue the Directors and/or auditors. This should only be the case where there is clear evidence of deliberate wrongdoing or illegal activity.
The very doctrine of limited liability has been subrogated for personal liability of the directors and executives of the business. Of course the likes of Enron and HIH provide justification in pursuing directors for wrongdoing. But one needs to consider and compare the nature of and impact of wrongdoing versus the outcomes that can be attributed to risk taking. Risk taking is and will continue to be a part of the corporate ethos and as such investors and stakeholders need to reconsider the very reasons for investing or taking a stake in the business — namely to secure a satisfactory return for the risks they are taking and in turn enable the executive and directors to manage this risk — and limit the liability of the executive and the business.
Yes, to some extent.
This is evident from the relatively recent changes to NSW Environmental laws and the 2001 changes to the NSW OHS laws.

3. Do you believe that the current levels of personal legal liability are smothering corporate Australia's appetite for risk?

Yes 58%
No 42%

Comment

Perhaps, but corporate Australia has itself to blame for much of the odium
This may only be a short term issue until the risk/reward balance is adjusted by increased directors fees.
You will always get cowboys and the way the market is at present some think they are bullet proof.
It is not the level of personal legal liability itself as the problem but what directors see could be their potential liability if they act in a certain ways. To protect themselves they take out more D & O insurance.
Partly — 'smothering' is probably too strong a word, 'impacting' would be better.
Smothering is too harsh a word. Restraining is a better word.
‘Smothering’ is too extreme — I could buy 'inhibiting'.
If one considers the continuing rise in liability insurance, one can gain an appreciation of where liability insurance, based on the risk profile of the business or the executives, is dictating the optimum levels of risks that the business is prepared to take on without incurring the penalties, in the form of higher premiums. Higher premiums can also send a signal to investors and investment advisers that a business carries a high-risk profile which may be unwarranted and lead to a risk premium being built into market expectations of the business.
They certainly make it harder to attract quality directors for smaller companies where the risks of failure are higher.
OHS Laws in particular are very concerning given there is essentially no defence.

4. Do you believe that excessive penalties have discouraged suitably qualified people from accepting a board position?

Yes 56%
No 44%

Comment

The fees directors vote themselves make sure there are plenty of candidates.
But I think it is more the media over-hype that discourages people, and the lack of focus of what protections are available if directors properly exercise their powers.
It is becoming increasingly harder to find suitably qualified directors.
Still jobs for the boys in my experience.
There are always qualified people available to be appointed to boards. The problem today is that boards restrict their selection to known people who are directors of other companies.
Also the corporate governance crusade, plus the 100% hindsight benefit employed by class action lawyers (and their funding backers) has significantly increased the scope of risk and the consequences of getting it wrong, even if the decision seemed like a good idea at the time. No wonder management positions in private equity businesses are becoming so attractive.
The risk/reward equation is becoming such that potential directors are rejecting board appointments.
Certain high risk companies that could benefit from high profile and component directors are no longer attractive to them.
I believe that the substantial increase in reputational risk is the culprit — size of penalites is not the issue.
This is most evident in the falling numbers of suitably qualified and experienced directors now sitting on the boards of our major corporations. It also demonstrates the need to provide further protection to directors to encourage and to promote new blood in to the thinning ranks of the board room.
I’m not in a position to say. I would merely be speculating. My impression is that it is harder for smaller boards to attract quality directors as the risks can be seen to be greater, for an insufficient reward.

5. As far as you know, has a suitably qualified director or potential director declined to be appointed a director of your company because of onerous penalties and their personal exposure to risk?

Yes 13%
No 87%

Comment

Not yet.
However, I have heard such comments from the type of people who would have considered such appointments some years ago. They now are not interested in taking such a risk at a late stage in their life when they are looking at retirement in some years.
Our company is performing well, so has not been a real problem to date. If things turn, then it may become a problem.

6. Do you think the insider trading laws need to be further enhanced from civil penalties to purely civil law to be effective?

Yes 18%
No 82%

Comment

Do not have informed opinion on this.
Gaol is a very effective deterrent with a big social downside!
Need to know the detail of the proposal; are we talking class action on behalf of shareholders, by whom?
Don’t understand this question — what about criminal liability?
Both should be used.
The most difficult part of pursuing insider traders is proving it.
Need to give this a lot of thought.
Insider trading is difficult to detect and prosecute and the laws need to be strengthened in this area.
Insider trading laws need to be strengthened to catch the real culprits. Potential criminal sanctions under the Corps Act are appropriate.
Insider trading will always remain a difficult area to prove.
It is a very hard area to prove. Civil law may open up more actions against insider trading.
This is a difficult question to answer when one considers that even under existing laws there have been very few successful prosecutions for insider trading and those that have been successful are for small or trivial amounts — more to do with the regulators luck that good corporate governance and regulatory controls!
Purely civil law would be less effective.
The issue with insider trading laws is the difficulties in detecting the offences, not whether they are a civil penalty. Insider trading laws are covered generally under the duty to act in the best interests of the company and not to derive a personal gain or a gain for someone else.

8. Do you believe that, as the economy continues to do well and memories of HIH and the like fade into the distance, good governance practices, including those that hold directors and officers more accountable, become less of a priority for the board and senior management?

Yes 35%
No 65%

Comment

These things are always cyclical
To a limited extent
Ideally procedures to ensure on going compliance with ASX Guidelines and Accounting Standards should be embedded in all levels of the business and for ASX listed entities are subject to half year external audit.
Because there are constant reminders in the from of shareholders, corporate governance bodies who rate company practices and bodies such as ISS Australia who advise institutional shareholders and ASA who advise small shareholders.
ASX 10 Principles are a tick-a-box thing already. In my view it’s the personalities of people rising to these positions that is the determining factor.
There must be ways to ensure corporate governance is practised and not just lip service.
As long as boards and senior management do not perceive such practices to be overburdensome and as long as the need for such practices is continually reinforced.
Only to a limited extent, the issues in 4 above are still front of mind.
Good governance practices, certainly for larger publicly listed companies, are here for good.
Although there has been an excessive focus on good governance in recent years, memories fade and the focus on governance will need to be reinforced and renewed.
Good governance is a product of the individual boards. Good boards will always have an eye on their own governance to protect their own company's assets and reputation.
The need to report 'if not/why' not keeps governance being considered in the boardroom.
I don't think that good governance practices will be less of a priority for boards and senior managements in the future, but governance practices will be more enshrined so will be business as usual, taking up less Board time, allowing directors and senior management to concentrate on more strategic issues.
Hopefully they will require a lot less attention though as they will become second nature.
The likes of HIH, Enron, WorldCom and other major corporate collapses have provided us with the types of risk management systems that should make the role of executives and directors more predicable and less dependent on the “gut feel” or good experience. Risk management models also provide us with an insight in to good governance practices that were not readily accessible in the pre-HIH days. Sarbanes Oxley and CLERP 9 have also helped us to introduce the types of practices that will, over time, evolve into models that can be shown to add value to the board’s role and ultimately to the way the business operates – even taking on increased risk with the knowledge that the risk models are more capable of predicting outcomes than they were in the past. Armed with these models, managers can become more accountable with the knowledge they have the results of the risk engines to hand to support their assessments and judgements on the expected outcomes of their recommendations and decisions.
The lobby groups will always find an aspect of governance to keep governance on the agenda.
Corporate governance tends to by cyclical.

9. Do you believe that, if personal legal liabilities are reduced, this will result in a heightened appetite for risk, leading to a more effective and prosperous corporate Australia?

Yes 59%
No 41%

Comment

Don’t know. It might lead to more grief and trauma.
The health of the economy is more relevant to the performance of companies.
NOT NECESSARILY. There is considered risk and foolhardy risk isn’t there! The market is going to get more cautious anyway if the economy slows.
In some ways this could be good for the county if some risks are taken rather than sit on our hands.
All depends on how it is done — a careful balance is required.
Yes, but only somewhat.
Not sure exactly what sort of "risk" is being referred to here. If the reference is to "commercial risk" - reduction of personal legal liability should have no impact. The reference to reduction in personal legal liabilities suggests that directors and managers may not feel the need to be as diligent as they should be.
This is happening already, its called private equity.
Personal legal liabilities have gone too far. A balance is needed so that personal liability issues do not distort behaviour of directors and indeed participation by potential directors.
Reduced liabilities might lead to increased risk, but this will not necessarily lead to a more prosperous economy due to reduced confidence.
Risk should increase if directors have lesser legal liabiities, especially from class actions, but there still needs to be adequate protection for shareholders and creditors against directors not acting in company's best interersts. The proposed business judgement rule still leaves enough protection to cover this.
It will lead to heightened appetite for risk. Not sure if all the risk taking will lead to more effective and prosperous corporate Australia!
Yes, but only as a knock-on effect — the biggest issue is the risk of a director's reputation being damaged.
I believe my comments in the preceding sections suggest that an appetite for risk is being constrained by the lack of understanding on how to leverage the risk model and risk engines that have developed over recent years. The leads being taken by the credit rating agencies such as Moody’s showing that the risk engines are evolving and should continue to evolve. This evolution and the results that can be attributed to the risk engines should be cause to reconsider the application of penalties where the underlying assumptions built in to the risk models can provide the supporting evidence to justify the reduction in such penalties. In other words, make the corporations laws provide further protection where the business applies risk engines to their business operations. A good example of this being the risk engines being developed and implemented at the banks in complying with the Basel II accord. The better the risk profile, the better the risk grading and the lower the capital required by he business. Take a leaf out of the Basel II accord and apply this across corporate Australia and there will be little or no reason to believe that the regulators cannot spot a problem and work with the business to remedy the problem before it manifests itself in to another HIH. The end result should be lower corporate failures, reduced losses and one off write off’s or revaluations of assets. It could also encourage the retention of key executives who are the key focus of the business’ riskier operations!
I think corporate Australia needs to be encouraged to take reasonable business risks and a widening of the business judgement defence will send the right message.
The corporation was created as a means of mobilising capital at a scale that would not be possible for individuals - in terms of capital requirements and assumption of risk. To erode the concept of limited liability is to defeat the purpose of the corporation and will be ultimately detrimental to our economic prosperity.
Not necessarily.