Information management and statutory duties

Ensuring the proper flow of information from management to the board is a two-way street involving important legal responsibilities on both sides, writes Professor Pamela Hanrahan. 

Boards rely on the management team to provide them with timely and balanced information about the company and its operations. Without it, a board cannot properly discharge its responsibilities.

Managing the flow of information to the board requires an ongoing and constructive dialogue between the chair and CEO, with the active buy-in of all directors and staff and careful coordination by the company secretary. Information is a Goldilocks problem — not too much or too little, and not too early or too late. Boards must send a clear and consistent message about what information they expect and when, and act on it when they have it. Management must be candid and proactive in disclosing emerging risks. This requires trust that must be earned on both sides.

Problems with the flow of information are evident in most of the important directors’ duties cases run by the Australian Securities and Investments Commission (ASIC) over the past decade, including ASIC v Flugge and Geary [2016] VSC 779 (the Australian Wheat Board case) and ASIC v Vocation Ltd [2019] FCA 807. They also emerged as a key factor in the recent royal commissions and public inquiries into serious conduct and compliance failures in the casino, financial services and human services sectors.

When the flow of information breaks down, there is usually fault — and legal liability — on all sides. The chair and the CEO have shared primary accountability for board information, but other directors, senior executives and employees have important legal duties as well. Breach of these can result in significant civil penalties under the Corporations Act 2001 (Cth) under laws that extend to all of them.

Board materials

In ASIC v Mitchell [2020] FCA 1098, Justice Jonathan Beach discussed the respective responsibilities of the chair and the CEO of Tennis Australia for the information that reached the board. His Honour said that the chair “has the power, authority and responsibility for setting the agenda items for board meetings, although these may be added to by the agreement of other directors. He can also discharge that responsibility in consultation with the CEO”. The chair “also has the power, authority and responsibility to ensure that the board has before it sufficient information, whether presented in written or oral form, such as to be able to meaningfully consider, discuss and decide on the agenda items before the board at the relevant meeting taking into account the context of the decision required or consideration necessary by the board at that meeting. Of course, he may discharge such a responsibility in consultation with the CEO”.

In the Tennis Australia case, the question was whether the board had been given sufficient and timely information about its renegotiation of domestic broadcasting rights. Justice Beach concluded that the chair “is not entitled to completely delegate his function to the CEO to determine the amount and quality of information to be put before the board to deal with any one or more agenda items. But he can and should consult with the CEO. Moreover, if he is satisfied that the CEO has exercised or made the appropriate judgment, he is entitled to rely on it”.

Directors’ responsibility to assess

Each director has a core, irreducible duty, confirmed by Justice John Middleton AM in ASIC v Healey [2011] FCA 717 (the Centro case) to “be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor”. This includes engaging actively with the information provided to them. Under the Corporations Act, a director’s reliance on information provided by other officers, or by employees the director believes on reasonable grounds to be reliable and competent, is taken to be reasonable if it is made “after making an independent assessment of the information or advice, having regard to the director’s knowledge of the corporation and the complexity of the structure and operations of the corporation”.

When legislation imposes a positive due diligence obligation on directors — as it does for financial reporting or work health and safety compliance — directors must actively seek out the information they need. This is also true if they are aware of red flags or, increasingly, in relation to known or evident “mission-critical” risks. The pleadings in ASIC’s case against the board of The Star Entertainment Group Ltd suggest that directors’ failure to drill into evident risks associated with a casino business will be at the heart of the action.

Management duties

The legal responsibilities of officers and employees who provide information to the board have steadily increased. Senior executives who are “officers” of the company — usually including the CEO, CFO and other members of the C-suite — are subject to the general statutory duty of care and diligence that applies to all aspects of their role, including briefing the board. In ASIC v Lindberg [2012] VSC 332, the former AWB CEO and MD admitted he breached his statutory duty of care by failing to inform the board of crucial matters in its unfolding oil-for-wheat scandal.

When management does provide information to the board, it must be accurate and complete. In 2019, the Corporations Act was amended by the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019 (Cth) to create new civil penalties for corporate officers or employees who mislead the board, including by omission.

The section applies to any officer or employee who “makes available or gives information, or authorises or permits the making available or giving of information” to a director that relates to the company’s affairs. It covers information provided in any form, not just in documents. If information is materially misleading — and this includes a half-truth — the section applies. If the person provides the information “without having taken reasonable steps to ensure” that the information is not misleading, they contravene s 1309 (12) of the Act. 

The officer or employee is taken to have met the reasonable steps requirement if they can prove that they made “all inquiries (if any) that were reasonable in the circumstances” and that, having done so, they believed “on reasonable grounds” that the information was not materially misleading. Documenting the sources of information that sit behind board packs is important. Officers or employees can only rely on information provided by others if it is reasonable to do so. If these duties are breached, ASIC can run civil penalty proceedings against the individuals concerned without having to show that they knew the information was materially misleading or intended to mislead.

Making sure that the board has the accurate information it needs is a two-way street. It is everyone’s legal responsibility to get it right. 

This article first appeared under the headline 'Two-way traffic’ in the August 2023 issue of Company Director magazine.