Directors' Responsibilities and Corporate Governance

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Responsibilities of Directors
Peter Stewart, Principal and
Professor Michael Adams, Special Counsel

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range of opportunities for clients looking
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Upcoming Events
Breakfast Briefing
The Unfair Preference Claw Back – Are your payments safe
from the Liquidator?
Presented by Rebecca Hegarty of Coleman Greig and Suelen
McCallum of dVT Group
Wednesday, 11 October 2017
Parkroyal Hotel, Parramatta
Breakfast Briefing
Doing Business with Overseas Companies
Presented by Peter Stewart and Caroline Hutchinson
Thursday, 26 October 2017
Parkroyal, Parramatta
Evening Seminar
Aged Care & Retirement Planning
Presented by Rosemary Carreras & Dean Claughton of Coleman
Greig and Danielle Robertson of Danielle Robertson Consulting
Thursday, 16 November 2017
Parkroyal, Parramatta

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Annabel Crabb,
Political journalist and commentator
Wednesday, 29 November 2107
Oatlands House, Oatlands

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CG Training
Performance Management, Feedback and
Managing Terminations
Behaving Badly in the Workplace
Competition Law: What is acceptable,
and what to do if the ACCC calls
Consumer Law: How not to be misleading
or deceptive
A Complete Guide to Credit Management
Directors’ Duties: How to comply and
manage the risks
Protecting Intellectual Property and
Confidential Information
A series of seminars for managers and employees:

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Workshop Overview
• Resources
• Thinking of becoming a director?
• Already a director?
• Regulatory framework
• Role of the board
• Statutory duties of directors
• Personal Risk Management
• Corporate Governance and Risk Management
• Board selection and induction
• Assessing Board Performance
• Director remuneration

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Rules
• Anything you say stays in the room
• Interruptions, questions and
personal experiences are welcomed

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Resources
Training:
• Australian Institute of Company Directors ‘AICD’ Course
• MBA Course
Reading:
• AICD’s Duties and Responsibilities of Directors and Officers”
by Prof Robert Baxt
• The Book of the Board by David Fishel (for NFPs)
• Company Law Guidebook by Michael Adams and Marina Nehme
• ASX Principles of Good Corporate Governance and Best Practice
Recommendations (in your folder)
• (If all else fails) The Corporations Act

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Thinking of becoming a director…

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• Proprietary Company – at least
1 director (who must “ordinarily
reside” in Australia s201A(1))
• Public Company – at least 3 directors
(at least two of whom must
ordinarily reside in Australia
s201A(2))
Minimum legal requirements
• Individual – at least 18
• Not disqualified from managing
corporations under Part 2D.6 of
Corps Act

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Grounds for Disqualification
ASIC may disqualify a person from managing corporations for up to 5
years if:
within preceding 7 years:
• person has been an officer of 2 or more corporations; and
• whilst an officer or within 12 months of ceasing to be an
officer, each corporation was wound up on grounds of
insolvency; and
• ASIC has given appropriate notice(s)
(s206F)

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Do your homework
Constitution and Replaceable Rules
s140 Corporations Act
A company’s constitution and any Replaceable Rules have the effect
as a contract:
(a) between the company and each member; and
(b) between the company and each director and
company secretary; and
(c) between a member and each other member
under which each person agrees to observe and perform the
constitution… so far as they apply to that person.

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Do your homework
Constitution key provisions
• Minimum and maximum number
of directors
• Quorum
• Indemnities
• Requirements relating to Notices
• Electronic / circulating provisions
• Right of refusal to register share
transfers (s1072G)

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For subsidiaries
• The constitution of the subsidiary expressly authorises the
director to act in the best interests of the holding company;
• The director acts in good faith in the best interests of the
holding company; and
• the subsidiary is not insolvent at the time the director acts
and does not become insolvent because of the director’s act”.
s187 – Directors of wholly-owned subsidiaries
“A director of a corporation that is a wholly-owned subsidiary
of a body corporate is taken to act in good faith in the best
interests of the subsidiary if:

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Do your homework
• Replaceable Rules (s135 Corps Act)
• Constitution
• Shareholder Agreement (if any)
• Board Charter / Corporate
Governance Charter
• Financials including specific
questions around tax and
superannuation

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Tax Laws Amendment Act (2012 Measures No. 2) –
29 June 2012
Expanded Directors Penalty Regime
Directors face a series of new obligations
and challenges including:
• Directors may be held personally
liable for unpaid superannuation;
• Greater difficulty in wiping out
personal liabilities;
• Denial of PAYG credits in certain
circumstances

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Superannuation Guarantee Payments
Previously, directors penalty regime
extended to unpaid PAYG amounts.
Now extends to unpaid Superannuation
Guarantee payments.

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Wiping out personal liabilities
Previously directors could extinguish their personal liabilities regarding
PAYG or SG by paying the debt, appointing an administrator or winding
up the company within 21 days of receiving a director’s penalty notice.
Now an additional condition added:
If company liabilities remain unpaid and unreported three months after
they were due, directors’ penalties are not extinguished if the company
is placed in administration or wound up.

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Denial of PAYG Credits
Previously, company directors
and their associates were entitled
to PAYG credits on salaries even if
the company had not paid the
PAYG amounts to the ATO.
Now, if company owes PAYG
amounts, PAYG credits may be
denied to directors and
associates.

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Lessons
• Incoming directors must conduct due
diligence extending to company’s
compliance with PAYG and SG
obligations.
• Companies should review PAYG and SG
compliance procedures to minimise risk
of misclassifying employees or
miscalculating payment obligations.

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Directors and Officers
Who is a director?
• Appointed
• Alternate
• De facto
– they act in the position of a
director; or
– the directors of the company or
body are accustomed to act in
accordance with the person’s
instructions or wishes
a person not validly appointed as a
director if:
• Shadow

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Shadow Directors
Buzzle v Apple (NSWCA 109)
• Was Apple or its finance director a shadow director?

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Who is an Officer?
Officer of a corporation means:
• a director or secretary of the corporation; or
• a person:
– who makes, or participates in making, decisions that affect the
whole, or a substantial part, of the business of the corporation;
or
– who has the capacity to affect significantly the corporation’s
financial standing; or
– in accordance with whose instructions or wishes the directors of
the corporation are accustomed to act (excluding advice given
by the person in the proper performance of functions attaching
to the person’s professional capacity or their business
relationship with the directors or the corporation …)

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Regulatory Framework
Statute
• more than 700 Commonwealth and
state statutes imposing personal
liability on directors and officers
(Environment, Workplace safety,
Superannuation, Taxation,
increasingly Fair Work Act etc)
• Corporations Act 2001

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Common Law
• Fiduciary duty owed to the company
• company = members collectively
• Other stakeholders?
– creditors
– individual shareholders
– employees
– society at large

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Common Law
Yardstick:
“Taking account of all the circumstances, is what I propose to do in my
honest belief in the best interests of all the shareholders (present and
future) of the particular company of which I am a director?”

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Role of Director
“The job description of a director says he or she must review the strategy
and approve budgets, monitor business performance, approve large
investments and dividends, evaluate the CEO, oversee management
succession planning, approve executive compensation, ensure that major
risks are identified and managed and that there is accurate financial
reporting as well as general legal compliance.”
He described the enormity of the responsibilities as “ridiculous” and
questioned how this could all be achieved in a few weeks of the year.
(Colin Carter – Wesfarmers non exec director 2002 - 2014)

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Role of Board
Corporate Governance
• Performance
• Compliance

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Corporate Governance Charter

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And…
• Establishing and monitoring
appropriate corporate culture

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Corporate Culture
• “corporate culture” means an attitude, policy, rule, course of conduct or
practice existing within the body corporate generally or in the part of the
body corporate in which the relevant activities takes place.
• The context for this definition is the means of proving the necessary
element of fault in a criminal trial against the company.
• The prosecution can prove that the act was authorised by the company
by:
– proving that a corporate culture existed within the body
corporate that directed, encouraged, tolerated or led to
non-compliance with the relevant provision; or
– proving that the body corporate failed to create and maintain
acorporate culture that required compliance with the relevant
provision.

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Criminal liability
Criminal Code Act 1995 (Cth)
Div 12 concerns the establishing
of fault in a breach of the Code.
A corporation is liable where:
Corporate culture existed that directed, encouraged, tolerated or led to non
compliance
Body corporate failed to create and maintain a corporate culture of compliance
Board intentionally, knowingly or recklessly carried out relevant conduct or
expressly, tacitly or impliedly authorised or permitted the conduct

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Statutory Duties
Most commonly known:
588(G) Director’s duty to prevent insolvent trading by company
588(G)(3) Person commits an offence if:
(a) a company incurs a debt at a particular time;
(b) at that time a person is a director of the company;
(c) the company is insolvent at that time or becomes insolvent by incurring that debt;
and
(d) the person suspected at the time when the company incurred the debt that the
company was insolvent or would become insolvent…; and
(e) the person’s failure to prevent the company incurring the debt was dishonest.

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Statute cont.
Defences To insolvent trading
• person had reasonable grounds to believe company was solvent
• person relied on advice of a ‘competent and reliable’ person
• person did not take part in company management at that time
because of illness or for some other good reason

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Statute cont.
Safe Harbour amendments (s588 GA(1) and (2))
Seek to ‘drive cultural change amongst company directors by
encouraging them to keep control of their company, engage
early with possible insolvency and take reasonable risks to
facilitate the company’s recovery instead of simply placing the
company prematurely into voluntary administration or
liquidation’
Limiting operation of ‘Ipso Facto’ clauses
From 1 July 2018:
• Prohibition on enforcing pre-existing contractual rights
including termination rights against company;
• Stay on any self-executing clauses triggered by reason only
of company’s voluntary administration or financial position

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General Duties of Directors and Officers of a Company
180(1) …exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise… (Civil)
181(1) …in good faith in the best interests of the corporation and for a proper purpose (Civil)
182(1) …must not improperly use their position to gain an advantage for themselves or someone else or to cause detriment to the corporation (Civil)
183(1) …must not improperly use information gained as a director or other officer to gain an advantage for themselves or someone else, or cause
detriment to the corporation (Civil)
184(1) …commits an offence if they are reckless or intentionally dishonest and fail to exercise their powers and discharge their duties in good faith in
the best interests of the corporation or for a proper purpose (Criminal)
184(2) …commits an offence if they use their position dishonestly (whether deliberately or recklessly) with the intention of directly or indirectly
gaining an advantage for themselves or someone else or causing detriment to the corporation (Criminal)
184(3) …must not improperly use information gained as a director or other officer (whether deliberately or recklessly) so as to gain an advantage for
themselves or someone else or cause detriment to the corporation (Criminal)

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The Business Judgment Rule
…taken to meet requirements of 180(1) (duty to act with care and diligence) if they:
180(2) (a) make judgment in good faith and for proper purpose;
(b) do not have a material personal interest in the subject matter of the judgment;
(c) inform themselves about the subject matter of the judgment to the extent they
reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.

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Lessons from the HIH collapse - ASIC v Adler & Ors (2002)
Statute cont.
• Directors must take “reasonable steps” to
guide and monitor management of company
• familiarity with fundamentals of business
• obligation to keep informed about
company’s activities
• need to maintain familiarity with financial
status of company

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“Reasonable Steps”
Statute cont.
• The extent to which a director is put on inquiry or, given facts of a
case, should have been put on inquiry;
• Relationship between the director and senior manager must be
such that the director honestly held belief that the manager was
trustworthy, competent and someone on whom reliance could be
placed.
• The extent of steps taken by the director (inquiries made, relevant
circumstances engendering “trust”)

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ASIC v Healey & Ors [2011] The Centro Case”
ASIC asserted that Board:
• incorrectly classified $1.5 billion
in debt as non current liabilities
when it was in fact current; and
• failed to disclose US$1.57 billion
in guarantees (that had been
entered into post the balance
date for the accounts).

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Centro
Directors
• relied on the Group’s
Management; and
• relied on its external auditor PwC.
both of which had reviewed the
financial accounts and not picked up
the errors.

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Centro
Court held that each of the directors had:
• Failed to take all reasonable steps to focus and consider the
content of the financial statements;
• Failed to make enquiries of management, the board audit
committee or other directors as to the proposed statements in the
financial accounts relating to short term debt and guarantees and
failure to have apparent errors corrected; and

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• “Directors cannot substitute reliance upon the advice of management for
their own attention and examination of an important matter that falls
specifically within the Board’s responsibilities as with the reporting
obligations. The Act places upon the Board and each director the specific
task of approving the financial statements. Consequently each member of
the board was charged with the responsibility of attending to and focusing
on these accounts and, under these circumstances, could not delegate or
‘abdicate’ that responsibility to others.”
Centro

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Friedrich’s Case
• Commonwealth Bank of Australia v.
Friedrich & Ors (1991)
• Justice Tadgell
• “…the stage has been reached when
a director is expected to be capable
of understanding his company’s
affairs to the extent of actually
reaching a reasonably informed
opinion of its financial capacity.
Moreover he is under a statutory
obligation to express such an opinion
annually. I think if follows that he is
required by law to be capable of
keeping abreast of the company’s
affairs”.

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Lessons from Centro:
• Approving annual accounts is a core function of directors that
cannot be delegated;
• While directors are not expected to have detailed knowledge of all
accounting standards, they are expected to be financially literate
and to have a basic knowledge of key accounting concepts (such as
the difference between current and non current liabilities);
• While directors can rely on others to prepare the accounts, they
need to review them thoroughly and carefully in the light of the
knowledge that they each have of the company’s operations and
financial position;

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Lessons from Centro:
• Directors are expected to raise questions of management and the
auditors if there are any discrepancies or issues that become apparent
as a result of their careful and thorough review of the accounts;
• Directors need to manage the volume of information that is provided
to them, or the way in which it is presented, in order to ensure that
they can maintain an appropriate level of knowledge of the company’s
operations without being overburdened by detail.

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Other Relevant Provisions of Corporations Act
Sections 191 – 195
Disclosure of material personal interest
Financial benefits to related parties of
public companies
Financial Reporting
Section 188 “Responsibility of
secretaries etc. for certain corporate
contraventions”

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Section 188
• “A secretary of a company contravenes this subsection if the company
contravenes any of the following provisions (each of which is a corporate
responsibility provision)”… including
– Registered office (update within 28 days of any change)
– Principal place of business
– Shareholding, share structure
– Lodgement of annual reports with ASIC
– Change to proprietary company’s ultimate holding company
• “a person does not contravene… if the person shows that he or she took
reasonable steps to ensure that the company complied with the provision.”

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Fair Work Act
• Courts satisfied that the relevant director(s):
– were the controlling minds behind the offending activities;
– knew of and encouraged or condoned the offending activities; and
thus
– were not entitled to the protection of the ‘corporate veil’ generally
afforded by a corporate structure.

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So, how do you feel?
• Survey by AICD of 623 directors
• >90% believed that personal liability had an effect on optimal business
decision making
• 65% said that risk of personal liability caused them to take an overly
cautious approach
• 79% expressed concern about the resultant focus on compliance rather
than enhancing corporate performance
• 30% said they had personally declined offer(s) of directorship due to risk

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Lessons for directors
• Be prepared – require board papers to be circulated well in
advance of meeting
• Read papers in advance
• Attend all meetings
• Ask questions and seek further information if you are not
satisfied with the answers you receive
• Put in place systems to check organisation’s compliance with
relevant laws and policies

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Governance Connection Theory

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Governance connection theory
International Corporate Governance
Adams, M; “Three pillars of good governance” 2004 Risk Magazine – 2017 Updated version plus VIDEO
• Corporate governance
– Corporate social responsibility (CSR)
– Environment, Social and Governance (ESG)
• Due Diligence
– Internal system approach
– External (transactional) approach
• Compliance programmes

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Corporations Act 2001
Reasonable care
Act honestly Misuse information
Misuse position
Insider trading
Insolvent trading
Criminal offences
“Adams officers’
overlap diagram”
Harris, Hargovan
& Adams,
Australian
Corporate Law
LexisNexis 2015
SA State Bank v
Clark (1996)
Liable for all

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Judges quote of the Corporation's Act
In Ku v Song Graham J Stated:
“Whoever coined the expression 'as clear as mud’ must have been slaving
over the extraordinary and unnecessarily complex provisions of the
Corporations Act and the Corporations Regulations … Gaining an
understanding of the relevant law on this subject back in 1961 involved a 5
minute exercise … Today it requires hours of study, reference to numerous
sections and regulations … Why the law had to be expressed in such an
obscure way beggars belief” [2007] FCA 1189 @ [175]

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Three key questions
1. Who can bring the legal actions?
2. What are the types of legal actions?
3. Whare are the remedies and/or
sanctions?

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Contemporary Cases
Seven West Network v Amber
Harrison [2017] NSWSC 952 (July)
• Real legal issues
• Reputation
• Impact of social media
• What are the governance
lessons?
Contemporary cases challenge and create reputational damage

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Contemporary Cases
Commonwealth Bank of Australia
money-laundry investigation and criminal
case filed by AUSTRAC (August 2017)
• What are the governance lessons?

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What if it goes wrong
• Indemnity
• Asset Protection
• Directors and Officers Insurance
• Resign

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Indemnity
s199A Corporations Act sets out the way in which a company may
indemnify or exempt an officer from liability.
Note exclusions at s199A(2):
• Liability owed to the company or a related body corporate;
• Liability for pecuniary penalty or compensation order made
under the Act;
• Liability owed to someone other than the company that did not
arise out of conduct of the relevant officer in good faith.

70
Bankruptcy Act 1966
s120 Bankruptcy Act
• Transfer within 5 years of Bankruptcy void against Trustee unless
for full market consideration.
• But OK if:
– You can prove transferor was solvent and
– Transfer to a related party took place more than 4 years
before Bankruptcy or otherwise (ie not to a related party) at
least 2 years before Bankruptcy.

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S.121
• Transfer at any time void against Trustee in Bankruptcy if made
with main purpose of defeating or delaying creditors.
• Main purpose inferred if insolvent or about to be insolvent.
Exception:
If
– For full market value
and
– Transferee didn’t or couldn’t reasonably have inferred
purpose or insolvency.
Bankruptcy Act 1966

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Cummins Case
• Property Transferred 13 years before
Bankruptcy.
• Cummins was ‘well aware’ that he
would owe a lot of Tax.
• Main Creditor was the Tax
Department.

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It Might Work!
But:
• Stamp Duty
• GST
• CGT
• Other costs
And ………… what if you don’t go broke?

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Plan Ahead!
• Secure loans to family or associates.
• Don’t acquire assets in own name.
• Be diligent

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D & O Insurance
• Who is the insured?
• What does it cover
– Loss arising from wrongful act
– May include defence costs
• Exclusions
– Wilful breach of duty
– Improper use of position
– Improper use of information (fraud, dishonesty etc)
• Period of coverage
– Generally “claims made” or “claims made and notified”

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Resign
• Resigning as a director – s203A written
notice to company at reg. office
• Also can notify ASIC directly
• But note: won’t always get you off the
hook!

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Corporate Governance and Risk Management

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Corporate Governance and Risk Management
• The process by which organisations
are directed, controlled and held to
account.
• It encompasses authority,
accountability, stewardship,
leadership, direction and control
exercised in the organisation.

79
What is Corporate Governance
• Corporate governance is the system by which companies are directed and
managed. It influences how the objectives of the company are set and
achieved, how risk is monitored and assessed, and how performance is
optimized.
• Good corporate governance structures encourage companies to create
value (through entrepreneurism, innovation, development and
exploration) and provide accountability and control systems
commensurate with the risk involved.

80
Corporate Governance
Two important criteria:
Planning:
• Companies and management must
have systematic way of managing
compliance risk;
Monitoring outcomes:
• Successful mechanisms for
discovering and rectifying compliance
breaches.

81
Mitigation of Penalty
Competition and Consumer Act
Substantial compliance program in place
• operating management system aimed at preventing detecting and
remedying the compliance risks.
Successful Implementation
Maintain currency of program
• Constant training
• Corporate culture of compliance

82
Corporate Risk Management Practices
• Corporate Governance Practices
– ASX Corporate Governance and Best Practice Principles
– Standards Australia - Good Governance Principles
• Compliance Programs
– Australian Standard on compliance programs - AS3806-1998
• Training and corporate culture
• Monitor performance
– Audit committee
• Insurance

83
Compliance Programs
• Identify relevant issues
• Plan compliance program
– Company specific manuals
• Training and implementation
• Monitoring performance against
manuals

84
Board Selection and Induction

85
Board Selection and Induction
• Discipline Focus
• Interest Focus
• Strategic Focus

86
Board Selection - Strategic Focus
Skills required
• Strategic experience
• Accounting
• Legal and compliance
• Risk management
• People management
• Industry knowledge
• Marketing

87
Induction of new director
• All information necessary for nominee
to perform role and accept
responsibilities of a director
• Role and responsibilities of nominee
• Performance requirement of nominee
and assessment procedure
• Terms of appointment

88
Information necessary
• Background information about organisation
• Copies of relevant documents, constitution, charter
• Copies of business plan, budgets, last accounts and audit
report
• Details of other board members
• Schedule of board meetings
• Outline of major issues for organisation in last 3 years

89
Terms of appointment
• Any formal terms of appointment
• Period of appointment
• Remuneration
• Indemnities and insurance
• Procedures for conflicts of interest
• Performance requirements and review process
• Confidentiality requirements
• Right of access to information and personnel

90
Assessing Board Performance

91
Assessment of Board Performance
Criteria
• Strategic Plan
• Board Tasks

92
Board Tasks – functional approach
• Setting direction
• Financial stewardship
• HR stewardship
• Performance monitoring and accountability
• Stakeholder representation and advocacy
• Risk management
• Management of critical events or transitional phases

93
Alternative approach for board assessment
• Contextual – values, beliefs of organisation are understood
• Educational – board members well informed
• Interpersonal – board nurtures cohesiveness
• Analytical – fostering critical discussion
• Political – maintaining stakeholder commitment
• Strategic – helping organisation envision a direction

94
Evaluation Structure
• Self evaluation
• Evaluation committee
• Outsider evaluation
• Combination of above

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Action and Implementation
• Amend orientation program
• Training and development
• Reconsider board composition
• Update board role descriptions

96
Director Remuneration
Corporations Act s202A
• Company determines by resolution
• s202B
• Must be disclosed if directed by
members
• s202C
• For sole director/single shareholder
companies, director may be paid
remuneration determined by
resolution of the company.

97
ASX “Principles of Good Corporate Governance and Best
Practice Recommendations”
• Annual disclosure
• Remuneration Committee
• Exec Dir: Fixed, Incentive, Equity components
• Non Exec Dir: Fee based.
Director Remuneration

99
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