Steven Cole takes issue with the concept that the chairman is the first among equals – particularly if fellow directors take advantage of a safe harbour defence.
First among equals or first in line?
Those who contributed to Chairman of the Board – A Role in the Spotlight must be congratulated for publishing such a seminal work relating to Australian contemporary corporate governance practice. Their efforts are especially to be commended given the statements of Austin J in ASIC v Rich (Greaves’ Case) as to the lack of reference material on such an important topic.
Implicit in the publication is that the identified responsibilities (and desired competencies) of the chairman are to a large extent ‘aspirational’ rather than ‘fundamental’, although some responsibilities are obviously of greater importance, or have greater consequences of non compliance, than do others. Correctly, the publication does not seek to draw a sharp divide between fundamental and aspirational responsibilities. To do so would risk arbitrariness, and would not do justice to the unique and special attributes of the effective chairman nor to the cultural dynamics and interpersonal complexities of contemporary corporate boardrooms.
Yet, despite this inventory of responsibilities which extends well beyond the confines of the boardroom itself, and far beyond the role of a ‘mere’ director, the publication strongly asserts two important propositions:
- first, the adage of the chairman being but ‘first amongst equals’; and
- second, the board having only a ‘collective and collegial responsibility for corporate governance obligations’, although it does note as an exception to those propositions, where the chairman keeps information from the board.
The core rationale for these two assertions appears to be summarised on page seven of the publication as follows:
“The board is collectively responsible for its own effective operation. As a matter of administrative convenience and necessity the board appoints one of its group to organise and manage. The chairman is both the leader and servant of the board. The chairman’s effectiveness is the responsibility of the board as a whole. The chairman takes the lead but the board needs to be satisfied that the chairman acts adequately and appropriately.”
In general terms, this rationale is not disputed. However, in the overall context of contemporary corporate governance and societal expectations, I believe that the virtually unqualified assertion of the two foregoing propositions lacks practical robustness. The suggestion in Greaves’ case that the enhanced role and powers of chairmen may “imply specific legal duties in particular circumstances” (ASIC v Rich and Others (2003) 44 ACSR 341 at 352) gains clarity when the wattage from the spotlight is magnified in the areas of:
- director’s duties under the Corporations Act (and at common law);
- ‘safe harbour’ reliance by fellow directors, isolating the chairman found wanting in the discharge of his responsibilities.
Pregnant within the term ‘responsibility’ are notions of ‘accountability’, ‘answerability’, ‘obligation’, ‘duty’ and ‘liability’. Further, responsibility implies a relationship between the party encumbered with the burden of the responsibility, and the party to whom that party is accountable for its discharge. Responsibility coupled with accountability gives rise to a duty. With duty comes consequences, or liability, for want of discharge of the duty.
Although the board’s responsibility for the management and direction of the company and its affairs is a collective and indivisible duty, there is no doubt that each of the primary obligations of directors under the Corporations Act, ie s.180(1) – care and diligence, s.181 – good faith, proper purpose, s.182 – use of position, s.183 – use of information, s.184 – good faith/use of position/use of information (criminal offences), are individual obligations of all directors, not merely collective obligations of the board as a whole.
To paraphrase s.180(1) in the context of the responsibilities of the chairman, with emphasis and commentary highlighted and added:
“A director [which expression must include a director acting as chairman]… must exercise… the degree of
care and diligence that a reasonable person would exercise if they:
(a) were a director… in the corporation’s circumstances; and
(b) occupied the office [including the office of chairman]… and had the same responsibilities…as the director [ie chairman]”.
If we accept that directors’ (including the chairman’s) duties are owed to the company, and generally cannot be enforced by others (Spies v R (2000) CLR 603 – subject to exceptions), surely s.180(1) of the Corporations Act (‘care and diligence’) must sheet home personal accountability and liability of the chairman to the company if there was a gross and critical failure on the chairman’s part to discharge fundamental aspects within the inventory of chairman’s responsibilities identified in the publication.
Even if there may be some conjecture as to the actual responsibilities of a chairman espoused by Austin J in ASIC v Rich, the case is certainly supportive of the proposition that it is appropriate for the courts to consider contemporary custom and practice to determine whether such responsibilities do exist, and if so their scope. In addition, other courts have also suggested particular aspects of the chairman’s role arising from “additional rights and duties, and additional opportunities,”(Woolworths Ltd v Kelly) which a reasonable person would expect to include the exercise of particular skill and diligence, including “the primary responsibility of selecting matters …to be brought to the board’s attention, for formulating policy of the board and promoting the position of the company.”(AWA Ltd v Daniels t/as Deloitte Haskins and Sells (1992) 7 ASCR 759 at 867).
The AICD sets out clearly its view of contemporary expectations a ‘reasonable person’ acting as a director should, and does, have of a chairman of a public corporation. Further, I believe a reasonable person would not accept the position of chairman of a public corporation, unless they had appropriate skill and experience to meet the responsibilities of that particular office.
If it is accepted:
(a) that responsibility for the management and direction of the company and its affairs vests in the board (as a collective); and
(b) that there is nothing specific in the Corporations Act that defines the duties of a chairman (with company constitutions also offering little guidance), then where is the source of authority for the chairman to act in discharge of the identified responsibilities? (Such authority remaining subject to the board as a collective at any time withdrawing the authority for the chairman to continue to so act.)
Presumably, the source of that authority is from the board itself, in that the directors have delegated to the chairman a suite of powers and responsibilities (ie the inventory of responsibilities of chairman identified in the publication) pursuant to the mandate conferred by s.198D of the Corporations Act (“…the directors of a company may delegate any of their powers to …a director…). In the terms of S.190(1) of the Corporations Act, each director is personally “…responsible for the exercise of the power by the delegate (ie the chairman) as if the power had been exercised by the directors themselves.”
Could this be the holy grail of collective/collegial responsibility to guard against the isolation of liability of the chairman? In theory perhaps, but in practice perhaps not.
First, s.190(2) excuses a director of responsibility under s.190(1) if:
- the director believed on reasonable grounds at all times the delegate (ie chairman) would exercise the power in conformity with the duties imposed on directors; and
- the director believed on reasonable grounds, in good faith and after making proper enquiry (if the circumstances indicated the need to make enquiry) – that the delegate (ie the chairman) was reliable and competent in relation to the power delegated.
Second, s.189 will render it ‘reasonable’ for a director, unless the contrary is shown, to rely on information provided by a director or officer (ie including a chairman) if the reliance is made:
in good faith;
after making an independent assessment of the information, having regard to the director’s knowledge of the composition and complexity of structure and operations of the corporation.
Certainly in the cases of isolated or periodic critical failures of a chairman to fulfil the chairman’s responsibilities, such ‘safe harbour’ defences may well be availed of by a chairman’s fellow directors to absolve them of personal liability, and thus isolate the consequent liability to the chairman alone.
In the case of persistent or chronic failings by a chairman to discharge their responsibilities, the ‘safe harbours’ may not be as readily available to the remaining directors, who should themselves have taken action to bring that chairman to task. Where consistent failures render it unreasonable to believe that the chairman would exercise powers in line with applicable duties, the collective/collegial responsibilities (and liability) for all directors will prevail without erosion by ‘safe harbour’ defences for some.
Pending authoritative judicial or legislative clarification of the chairman’s role and responsibilities, it seems that, in many cases of dereliction in discharge of responsibilities by a chairman, ‘safe harbour’ defences available to the chairman’s fellow directors may well lead to him being legally exposed, making the chairman not ‘first amongst equals’ but rather ‘first in line’.
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