Avoiding the rising floods of criticism

Friday, 01 December 2000


    Do directors of certain companies owe a duty to the community?

    In a series of newspaper articles during the past month or so the major Australian banks, oil companies and other major companies and their directors have been exposed to the most extraordinary level of criticism I have seen in many years. Let it be said right at the start that I act for a number of major Australian companies. But neither these companies nor their directors have been charged with any breach of the law in carrying out their responsibilities. Many people believe directors of large corporations, including banks, insurance companies, telecommunications companies etc, should have regard to a broader set of community obligations. However, if that is the way society wants to regulate such companies (I do not agree this is the best way of dealing with the problems that may face the community, but it is an option that is favoured by some), then legislation governing the duties of the directors of such companies should be clarified. A director of a company, whether a bank, telecommunications company, an insurance company or whatever, must obey the law, in running that company in the best interests of its shareholders. The shareholders, however, do not include the community in the formulation of this test. It is quite unreasonable for newspapers and politicians to suggest that directors of such companies, have somehow had imposed on them a greater obligation in carrying out their duties than directors of other companies. Indeed, if directors chose to put the interests of the community (whatever those interests might be) ahead of the interests of shareholders they would run the very serious risk of being in breach of their duties.

    The NSW floods have again exposed the banks to this kind of pressure. The politicians are expecting the banks to provide flexibility and generosity in dealing with farmers who have lost hundreds of thousands of dollars. There is little doubt that farmers and others should be protected in some way in those circumstances. But should it be the obligation of the banks, the insurance companies and others in these circumstances? Is it not an obligation on the part of government? The law already makes it difficult enough for a director of a company, whether bank, insurance company, or just an ordinary trading company, to carry out his or her obligations in the context of the Corporations Law and in the context of the general law. More and more cases examine these aspects of the directors' obligations. The duty to act in good faith is owed to the shareholders. The High Court of Australia has recently indicated in Spies case that directors do not owe a duty to creditors. While the legislation does permit creditors (or rather the liquidator on behalf of creditors) to recover moneys in the case of insolvent trading, there is no positive duty owed by the directors to those persons according to the High Court. Is there now a duty owed by the directors to the community under this new perception that some newspaper editors and others are suggesting?

    If directors are expected to run the activities of their companies with the interests of the community at the forefront of their obligations, then they must have adequate protection in the law (and from the courts), that should shareholders feel they are not receiving the same level of dividends they had been accustomed to, the directors will not be in breach of those duties. The Federal Government has been proud of its record of encouraging Australians to invest in companies. Some of them, like Telstra, have community service obligations clearly spelt out in the Act of Parliament that establishes those companies. However, such organisations are few and far between. Banks, insurance companies and oil companies do not, generally speaking, have such obligations. To suddenly expose their directors and management to a wider set of obligations along the lines that are being debated in the newspapers would be an extraordinary development. If the community feels that this is the way the law should go then the law should be amended to make it clear that those duties do exist. But until the law is changed, it is both erroneous and quite mischievous for politicians, newspapers and others to suggest that the duties of these directors are wider than the traditional standard expected of them – they must act in the best interests of their shareholders.


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