AICD's head of Advocacy Louise Petschler outlines regulatory changes that will affect directors, from WHS to ASIC's new Office of Enforcement.
Laws must be robust and enforced, but fairly framed
The heightened community and regulatory focus on accountability for corporate wrongdoing continues in the post-banking Royal Commission environment — raising important issues for directors and boards. During April and May, the AICD consulted with members on governance issues from the Royal Commission, including ways to support boards in demonstrating accountability. Future editions of this column will update members on our forward agenda on these issues.
The AICD has also been vocal on policy and law reform targeting director liability, including supporting substantial increases to potential maximum penalties for breaches of directors’ duties. The community must have confidence that poor corporate behaviour is addressed swiftly and proportionally, with robust laws that are clear and enforced. Directors and boards must have confidence laws are fair, proportionate and reflect important principles of justice and good governance.
The AICD supports strong penalties and robust enforcement of the obligations on directors and boards acting in their governance roles. Being a director is a serious and important role. Rightly, directors face serious and significant liability risks if they fail to perform their legal and fiduciary duties, including acting in good faith, in the interests of the corporation and with care and diligence.
At the same time, any proposals to extend the reach of personal liability for directors and officers to broader or criminal conduct by corporations — especially where directors have not contributed to or influenced these outcomes — raise serious concerns. The temptation in the current environment for policymakers to blur the lines of accountability between directors, management and companies themselves is high, and overreach must be resisted.
This is especially important in criminal liability. On this front, a new Australian Law Reform Commission (ALRC) review will be a major focus for the AICD in the year ahead. The ALRC has been tasked with reviewing whether reform is needed to enable senior corporate officers, including directors, to be held criminally liable for misconduct by corporations. This is a critically important issue for directors and the AICD. We will continue to advocate for evidence-based policy that is consistent with principles of good corporate governance, and a regulatory environment that supports growth and innovation. We must also make a strong case for clear delineation of the serious responsibilities and accountabilities of directors in their governance roles, and conduct by companies and management more generally.
All directors should keep current on emerging regulatory positions and law changes on these issues, with some highlights noted below. The AICD will continue to keep members up to date on the issue.
The community must have confidence that poor corporate behaviour is addressed swiftly and proportionally, with robust laws that are clear and enforced.
ASIC enforcement approach
ASIC’s new “why not litigate” enforcement approach will see a higher focus on court-based outcomes. One of the principles behind ASIC’s new Office of Enforcement is a focus on “both corporate accountability and individual accountability particularly at executive and board level”. ASIC’s most recent enforcement update, issued in early April, reaffirms the regulator’s focus on “gatekeeper conduct” in its oversight, including company directors.
See asic.gov.au to learn more.
New accounting standards
Major new accounting standards have come into force in Australia and directors are primarily responsible for the quality of financial reports to the end of this financial year, according to ASIC.
Full-year reports at 30 June 2019 must comply with new accounting standards on revenue recognition and financial instrument values (including hedge accounting and loan loss provisioning).
ASIC says it will review more than 200 full year financial reports at 30 June 2019 to promote quality financial reporting, and useful and meaningful information for investors. Announcing its focus areas for 30 June 2019 for financial reports of listed entities and other entities of public interest with many stakeholders, ASIC has called on companies to focus on new requirements that can materially affect reported assets, liabilities and profits.
ASIC Commissioner John Price said, ‘New accounting standards can significantly affect results reported to the market by companies, require changes to systems and processes, and affect businesses.’
The reports must also disclose the future impact of new lease accounting requirements. There are also new standards covering: accounting by insurers; and the definition and recognition criteria for assets, liabilities, income and expenses.
It is important that directors and management ensure that companies inform investors and other financial report users of the impact on reported results. Required disclosure on the effect of the new standards is more extensive than that made by many companies for the 31 December 2018 half year.
Directors must ensure that management produces quality financial information on a timely basis, says ASIC. Companies must have appropriate processes, records and analysis to support information in the financial report.
Companies should apply appropriate experience and expertise, particularly in more difficult and complex areas such as accounting estimates (including impairment of non-financial assets), accounting policies (such as revenue recognition) and taxation. Learn more here.
Stronger corporate and financial sector penalties
Recent law changes have substantially strengthened the maximum penalties for breaches of corporations law, including directors’ duties. The maximum civil penalties for individuals have increased from $200,000 to over $1m, and possible maximum prison terms from five years to 15 years. Learn more here.
Another change is that the “dishonesty” test applying in the Corporations Act 2001 (Cth) is now defined as “dishonest according to the standards of ordinary people”. This impacts potential criminal offences for breaches of the duty on directors to act in good faith in the best interests of the corporations and for a proper purpose (in section 184(1) of the Corporations Act) where previously directors had to be “intentionally” dishonest. This means the prosecution will not be required to prove the defendant’s state of mind — the test will be whether the conduct was dishonest by the standards of ordinary people. Importantly, criminal prosecution under s 184(1) would still need to meet a very high bar — proving beyond reasonable doubt that the defendant had failed to act in good faith in the best interests of the company or for a proper purpose, and was either reckless or dishonest.
We will continue to advocate for evidence-based policy that is consistent with principles of good corporate governance, and a regulatory environment that supports growth and innovation.
Work health and safety
There is likely to be an increased focus on accountability for WHS breaches as the recommendations of the recent Boland review are considered. These include new industrial manslaughter offences, adding “gross negligence” as grounds for proving Category 1 criminal offences against duty holders (including directors) rather than the harder-to-prove test of “recklessness” and a proposal to ban directors and officers liability insurance (D&O) cover for WHS fines (a proposal the AICD does not support).
Superannuation penalties for directors
New laws passed this year impose penalties against superannuation trustees and their directors who fail to act in the best interests of members for the first time. Legal experts have suggested that the new penalties are already influencing trustees in seeking more comfort and advice. Directors of superannuation trustees should clarify the extent of their D&O insurance cover and consider the implications for personal liability.
ALRC review into Australia’s corporate criminal responsibility regime
As noted, the ALRC was asked in April to undertake a comprehensive review of the corporate criminal responsibility regime, reporting in 2020. The ALRC will consider how well the Criminal Code attributes corporate criminal liability, explore other jurisdictions for insights, and recommend ways to strengthen the Criminal Code — including how it holds individuals liable for corporate misconduct. This review will be a priority for the AICD. We will work with stakeholders to seek outcomes that accord with standards of good corporate governance and criminal justice. The Council of Australian Government’s 2012 principles and guidelines on personal criminal liability for corporate fault provide a model that should guide review. We will update members as the review progresses.
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