What ASIC expects of directors

Monday, 01 September 2014


    Greg Medcraft recently discussed the role of directors as gatekeepers and their duties in an address at a Company Directors lunch in Sydney.

    When it comes to discussing the Australian Securities and Investments Commission’s (ASIC’s) expectations of directors, we need to focus on the role of directors as gatekeepers and director liability.

    Many aspects of our corporate, financial services and markets law are self-executing.

    It relies on gatekeepers, such as directors, to comply with their regulatory obligations.

    To maintain investor confidence and fair, orderly and transparent markets, it is important that ASIC monitors gatekeeper conduct closely.

    If gatekeepers fail in their role, it can have serious consequences for investors and our markets.

    This is why we hold gatekeepers – including directors – to account. This has been, and will continue to be, an ongoing area of focus for ASIC.

    As gatekeepers, directors should ensure that their company has strong internal audit and compliance functions.

    A compliance function is meaningless if it is not backed up by supervision and review, and is reflected in the company’s culture.

    It is this last point – culture – that I consider is most important.
    Directors should ensure that their stewardship drives the right compliance culture in their organisation.

    Both ASIC and directors have oversight roles. We must detect, understand and respond to the conduct we see.

    For ASIC, it is in the financial services and markets we regulate. For directors, it is in the companies to which they are fiduciaries.

    In 2011, ASIC won a big case in the Federal Court against former directors of the property company Centro.

    The case provided valuable principles, which I think can be applied to all public company directors. These lessons are:

    Scepticism – directors must question the information provided to them. There is no defence for wilful blindness.

    Accounting knowledge – directors are expected to have financial literacy and basic accounting knowledge.

    Accountability and control – it is up to directors to ensure the executive has systems, protocols and controls to ensure sound corporate governance.

    I would like to add a fourth principle to this list – culture. A director’s stewardship should drive a culture of compliance within the company.

    If we find a company’s culture is lacking, it is a red flag that there may be broader regulatory problems in the company. And this means we are more likely to investigate and gather intelligence on that organisation.

    Director liability

    Director liability is a topic of keen interest to the Australian Institute of Company Directors and its members.

    Directors have a range of obligations under the Corporations Act 2001 and the consequences for breaching the act are diverse. On top of this, there is the reputational damage that accompanies a finding of wrongdoing.

    Whether a director has failed in his or her duties will depend on the circumstances and this includes the economic climate at the relevant time.

    In carrying out our own responsibilities, ASIC is mindful of ensuring our approach to director liability is not affected by knee-jerk reactions to a tough economic climate. The economy is cyclical and tough economic times are often followed by a period of prosperity.

    There have been many reports into corporate governance failures and recommendations for improvements. In particular, the focus so far has been more on the implementation of good corporate governance, particularly by financial institutions.

    A key area of focus for improving the implementation of corporate governance is in the area of culture.

    Effective corporate governance relies on “hard” structural elements – such as specific legal obligations. It also relies on “soft” behavioural factors driven by directors and management faithfully performing their duty of care to the company.

    Directors should ensure that their stewardship drives the right compliance culture in their organisations. They should also go beyond what the law requires.

    As the David Jones share trading incident highlighted – perception matters. We suggest applying a “front page” test to proposed share trading.

    As directors, your actions affect more than just the companies you act for and their shareholders.

    You are integral gatekeepers in our financial system and through the proper performance of your role, you help ensure that investors are confident and informed, and that our markets are fair, orderly and transparent.

    This is important in ensuring markets work to fund the real economy and, in turn, economic growth and wellbeing.

    From your position at the apex of your company you set the direction and are key to driving a culture of compliance in your organisation.

    Such a culture is beneficial for companies, markets and the community as a whole. After all, we all benefit from economic growth.

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