Catch a falling Star

What does the ASIC court action against directors and executives of the Star Entertainment Group mean for boards? The AICD breaks down what you need to know. 

The Australian Securities and Investments Commission (ASIC) has launched civil penalty proceedings against 11 current or former Star Entertainment Group directors and executives for alleged breaches of their statutory duty of care and diligence (section 180 of the Corporations Act 2001). This is the first time ASIC has pursued an entire board for an alleged s180 breach since the landmark Centro litigation, and is a novel claim in that it relates to non-financial risk management.

The case follows public criticism of the regulator for failing to take legal action against the board of Crown Group, and the lack of cases against directors following the banking Royal Commission. ASIC chair Joe Longo has publicly acknowledged there was disappointment with the decision not to pursue the Crown directors and officers, but that ASIC’s potential case lacked reasonable prospects of success and suffered from time limitations.

The Star legal action reinforces ASIC’s focus on directors taking an active oversight role, especially in relation to non-financial risk management, and is a timely reminder of the regulator’s expectations.

Overview

ASIC alleges Star’s board and executives failed to give sufficient focus to the risk of money laundering and criminal associations, and has sought declarations that the defendants breached their duty and that the court impose pecuniary penalties and disqualification orders. “Directors and officers are a critical part of the conduct of business in Australia," said Longo, announcing the case. “Their duty is to understand the operations of the company over which they preside, and the particular risks faced by the business. They are required to bring an inquiring mind to business operations. It is not ‘set and forget’”.

He emphasised the regulator had brought the case to reinforce the board’s collective responsibility and that part of a non-executive director’s role is to “address foreseeable, observable risks”.

Specific allegations

ASIC’s action is against the directors as individuals, not the corporation. Star is facing multiple actions from AUSTRAC and state regulators via separate enforcement channels. In its statement of claim, ASIC alleges that Star board members:

• Approved the expansion of Star’s relationship with certain individuals with reported criminal links, rather than addressing money laundering risk by inquiring into whether Star should be dealing with them; and
• When provided with information about money laundering risks affecting Star, did not take steps to make further enquiries of management about those critical risks — this was a breach of their director’s duty obligations.

ASIC further alleges that the former MD and CEO and key executives breached their duties by:

• Not adequately addressing the money laundering risks that arose from dealing with Asian gambling junket promoter Suncity and its funder, as well as continuing to deal with them, despite becoming aware of reports of criminal links; and
• Not appropriately escalating money laundering issues to the board.
  

According to media reports at the time of printing, at least two defendants will deny the allegations against them.

What is the duty under s180(1)?

Directors must exercise their powers and discharge their duties with the degree of care and diligence a reasonable person would exercise if they were a director in the company’s circumstances and had the same responsibilities of that director. Whether a director has exercised a reasonable degree of care and diligence is determined by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to flow to the company.

The business judgement (best interests duty) rule is of relatively limited scope in Australia. Detailed analysis from Allens, commissioned by AICD, is available at bit.ly/3VSSrel. 

Implications for directors

It represents the first time that ASIC has sought to pursue an entire board for alleged breaches of their director’s duties tied to non-financial risk management. In contrast to Star, ASIC proceedings over recent times have focused on only a subset of directors. For example, in ASIC v Cassimatis [2020] FCAFC 52, just the executive directors were pursued, while in ASIC v Vocation Limited [2019] FCA 807, the action was against the former chair, CEO and CFO.

ASIC’s pursuit of the Star directors and executives is also significant in examining the scope of the statutory duty of care and diligence. In particular, previous ASIC actions have related to financial reporting (eg Centro) or market disclosure (eg James Hardie) whereas in Star, the alleged breach of director’s duties relates to compliance with specific regulatory obligations of the corporation.

The case serves as a reminder for all directors, especially those of large, listed entities and companies with a high public profile, that ASIC expects boards to adopt an active oversight role, especially with respect to risk management. Notably, since the banking Royal Commission, ASIC has adopted a stronger focus on non-financial risk management, including publishing a detailed report on the role of directors and officers.

Directors of entities facing complex non-financial risks in particular should continue to constructively test and probe management on the adequacy of controls and seeking external assurance. Where significant problems are identified, the board should play an important role in requiring that management resolves those issues to the directors’ satisfaction, as quickly as practicable. Similarly, directors should be scanning the external environment, including media reporting, to help inform their perspective.

Directors comment

A number of leading senior directors Company Director magazine approached regarding the issues for directors from the case, said it was too early in proceedings to comment publicly on what will be a landmark case. But many noted the significance will likely be recognised among their peers, whatever the result, noting of course that ASIC's case against the Star directors are presently just allegations. Nothing has been proven.

“I’m sure that management and directors of ASX-listed companies, just as they did post-Hayne [Royal Commission], are now reflecting on the Star experience, in order to uplift their own oversight of non-financial risks,” says Prospa and Eclipx chair Gail Pemberton AO FAICD.

While there are varying resource capabilities and complexity issues to consider for organisations of different sizes in terms of investing in risk management infrastructure, Pemberton emphasises that, “All boards need to ensure that their risk management and governance frameworks for both non-financial and financial risks are fit for purpose and enable the successful execution of the company’s strategy.”

Governance Institute of Australia chair and Chief Executive Women non-executive director Pauline Vamos GAICD says that while it is too early to fully understand the possible impact on governance practices, she would be surprised if boardrooms were not already viewing how they operate in light of the action.

Another experienced director notes that while directors can’t comment on the specific issues, they will be considering whether the action is adding to the burden on directors to actively manage known risks or whether it is an appropriate course correction to make sure that flagrant violations of an organisation must have accountability.

“Directors took the learnings of the [banking] Royal Commission and subsequent reviews such as Respect@Work very seriously,” he says. “And they have reviewed and revamped board processes to address non-financial risks, which are much more difficult to keep a finger on the pulse than this case seems, on the face of it.”

Reevaluating risk

“Directors should be aware of key risks, including non-financial risks, in their sector and continually probe how those risks are being managed” says AICD CEO and MD Mark Rigotti MAICD. “Compliance issues need to be front of mind for boards, especially in high-risk, highly regulated sectors. Boards of any organisation must continue to seek assurances from management and equally constructively challenge those assurances.”

Vamos anticipates that how directors discharge their obligations around risk oversight will be under scrutiny as part of ASIC’s action, as risk is recognised as a whole-of-business governance issue and not solely the domain of the risk and compliance area.

“Culture is everything,” says Pemberton. “Having a highly accountable corporate culture facilitates effective risk management because there is no ambiguity about risk ownership.”

She notes a seminal ASIC report — Director and officer oversight of non-financial risk (2019) — which contrasts the generally strong state of board governance of financial risk in a sample of ASX 100 companies, with much less developed governance and oversight of non-financial risks in those same companies, and sets out related recommendations for the operations of risk committees and the development of risk appetite statements.

Pemberton says it is unsurprising that financial risk is a more mature discipline, given its link to results. “Management of non-financial risk has a less direct, but potentially disproportionately negative impact on shareholder value, company brand and reputation if things go wrong.”

According to Pemberton, the role of the board risk committee chair — in curating what can be a deluge of risk information from management — is critical in order to provide the board with a clear sense of materiality.

Sharpening the senses

One listed company chair says, “Stepping back after all the Crown material over this period, directors should be asking more questions and demanding more detail in answers from management.”

She says that with familiarity over time, there can be a risk for directors to get into a routine and to not look at things as closely. “Directors should always have in mind: What is the board not getting in terms of information and reports that it should be getting around risk issues?”

Pemberton maintains that it is unacceptable for key risks to remain out of appetite for long periods. “If this is the case, then possibly the risk appetite metrics need to be recalibrated or business decisions need to be made to pull back from certain markets, products or product parameters until risk has returned to within appetite,” she says.

Circular resolutions

Directors also note that ASIC has raised one specific risk issue in relation to board circular resolutions, which should require directors to reflect closely on processes and the need to question management on probity.

“For example, circular resolutions should generally only be used to finalise a matter that has already been before the board,” says Vamos.

“As we limit the use of circulars, there will be a need for more ad hoc, single-issue board meetings. It is not unusual for the role of company secretary and legal counsel to be combined, as company secretaries provide governance advice that often needs to encompass legal analysis. Any broadening of in-house counsel’s ongoing duties to advise boards in relation to legal risk could have significant ramifications for the role.”