John H C Colvin argues that the Honest and Reasonable Director Defence, developed by Company Directors, will encourage better corporate performance and improve the regulatory environment.

    As Australia tries to increase productivity and competitiveness, we must acknowledge in our policy settings that companies are the drivers of growth. We must also look at how our regulation can support the innovators, entrepreneurs and directors who run Australia’s companies.

    If we want to drive economic growth and increase tax revenue so that it can be spent improving the well-being of Australians, we need to examine carefully the culture of how we regulate directors and question whether our approach actually encourages strong, yet responsible, corporate performance.

    Arguably, our current system does not. In fact, it does the opposite. It consistently focuses not on performance, but conformance.

    Directors are constantly reminded by regulators that they are “gatekeepers”, that their role is to create a “culture of compliance” and that there are serious penalties if they or their companies breach provisions of the Corporations Act 2001. 

    Australia’s current culture of corporate regulation also has direct economic effects. Our 2010 survey of directors found that more than 90 per cent felt that the personal liability of directors had a negative effect on optimal business decision-making or outcomes. Other surveys and our twice-yearly Director Sentiment Index also continue to show that legislation relating to director liability has a negative impact on business decision-making.

    In short, corporate regulation is not a mechanism for allowing directors and their corporations to flourish. It should be.

    Unless our regulatory environment encourages people to become directors, stay directors and create new products, services and innovations, growth will not be possible and the benefits of growth will not filter down into all aspects of society. In this regard, our system of regulation also needs to accept that, in the pursuit of opportunity, not all risks can be mitigated. Some businesses will fail, mistakes will occur and honest people acting carefully will sometimes make the wrong decision.

    Fundamentally, our regulatory culture should acknowledge that directors and companies have Australia’s levers of growth at their disposal and they should be reassured that those who act honestly and with an appropriate degree of care will be protected by the system that governs them.

    To do this, a cultural shift is necessary. Aside from placing greater emphasis on the need for efficient and effective regulation, we also need to look at how our regulation supports directors who perform their roles honestly and diligently.

    Australia must actively create an environment where directors acting with integrity and commitment are free to pursue new opportunities, drive performance and create jobs without being hamstrung by unnecessarily onerous regulation or personal liability concerns. We need to reconsider the many ways in which directors’ roles place them at risk of personal liability and the suitability of the defences available to them.

    Company Directors believes that one way to improve the current regulatory environment is to insert the Honest and Reasonable Director Defence, which we have developed, into the Corporations Act. In summary, the proposed defence would be available in circumstances where a director, acting in that capacity, conducts him or herself honestly and with an appropriate degree of care and diligence.

    It is intended to be a broad-based and overarching defence which would be available in addition to other specific defences in the Corporations Act and ASIC Act 2001. It is designed to be a simple mechanism to resolve a number of issues which we believe are hindering responsible risk-taking.

    It is critical to understand that this defence is not intended to be an extension of, or replacement for, the business judgment rule in section 180(2) of the Corporations Act. While extending the business judgment rule may have some merit, this approach may not resolve the issues created by the narrow definition of what is, and is not, considered to be a “business judgment” by our law. It will also not address the large number of other provisions in the Corporations Act which create personal liability risks for those serving as directors. Our defence, unlike other solutions, is designed to reach these so-called “compliance” provisions too. 

    In other words, the strength of the defence is that it applies to all aspects of a director’s role.

    In addition, it requires minimal legislative effort to implement. Only one amendment, the insertion of a single provision, is required. Further, by being drafted as a defence it is capable of wide application without the need to alter existing provisions in these Acts.

    The defence will also not undermine or interfere with the specific regimes set up under the Corporations Act or the ASIC Act to regulate particular areas.

    If Australia is to compete and throw off its fear of risk and failure we need to look for mechanisms which will support honest directors without lowering our high standards of governance. We believe the reforms we are proposing would underpin a system of corporate regulation that focuses on supporting honest and committed directors.

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