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The Star Entertainment judgment is a stark reminder that directors must take reasonable steps to place themselves in a position to guide and monitor the management of the company, without stepping into management's role.
The judgment highlights the central importance of proactive board oversight of the business and its specific risks, board reporting and information flows and challenges of management.
In a landmark decision for governance in Australia, on 5 March, the Federal Court handed down its judgment in ASIC’s civil penalty proceedings against certain former board members and senior executives of The Star Entertainment Group Limited for alleged breaches of the duty of care and diligence. The AICD is hosting a free webinar on 18 March to unpack the judgment and implications for directors.
While ASIC’s case against The Star’s non-executive directors was unsuccessful, the court found its former Managing Director & CEO and Chief Legal & Risk Officer & Company Secretary breached their duties in relation to their handling of the risks associated with money laundering and criminal activity arising out of Star’s dealings with gambling junkets and its interactions with its major lender regarding UnionPay cards.
This article explores stakeholder perspectives on the judgment and their views on what it means for governance practice. See AICD’s article on key implications for directors.
With the judgment now public, the long-running legal action brought by the Australian Securities and Investments Commission (ASIC) against eight former directors of Star Entertainment Group and certain senior executives in December 2022 marks a significant moment in the ongoing scrutiny of boardroom accountability.
At the time proceedings were launched, then ASIC deputy chair Sarah Court said, “ASIC alleges that Star’s board and executives failed to give sufficient focus to the risk of money laundering and criminal associations, which are inherent in the operation of a large casino with an international customer base.”
ASIC alleged that certain board members approved the expansion of Star’s relationship with individuals said to have reported criminal links, rather than addressing whether the company should have been dealing with them. It also alleged that when board members were provided with information about money laundering risks, they did not take further steps to make enquiries of management about those risks, amounting to breaches of their director duties.
The scope of directors’ duties
For governance advisers, the proceedings have centred on the practical meaning of directors’ statutory duty of care and diligence in complex, risk-exposed businesses.
Clayton Utz partner Kimberley Bruce, who advises boards, major shareholders and senior executives on directors’ duties and corporate governance, says the action underscores the need for directors to go beyond passive receipt of information and take reasonable steps to place themselves in a position to guide and monitor the company's management.
“The case makes clear that directors need to actively interrogate, not just receive information, particularly around high-risk areas such as anti-money laundering,” she says. However, she highlights that Justice Michael Lee drew an important distinction between executive officers — who are required to be involved in the affairs of a company at the operational level — and non-executive directors, who are entitled to rely on management to bring material operational issues to their attention to a greater extent than executive directors, absent facts that should have awoken their suspicion.
Boards routinely receive risk reports, compliance updates and management briefings. The question, says Bruce, is what directors do in response — whether they probe assumptions, seek clarification and follow up where concerns arise, thereby applying an enquiring mind.
“They also need to actively monitor non-financial risks — regulatory compliance and culture — with the same level of diligence as they have with financial risk.”
The regulator’s decision to pursue individual directors, rather than only the company, sharpened the focus on personal accountability. Bruce says actions of that kind reinforce that directors may face personal liability, even absent intentional misconduct, if they fail to take reasonable steps to discharge their duties in light of the surrounding circumstances.
Bruce also notes that aspects of ASIC’s case concerned alleged breaches of directors' duties that were independent of any contravention by the company itself — a reminder that a company's contravention is only one factor relevant to determining whether a director has met the statutory standard, not a prerequisite. A necessary element of the statutory standard of care and diligence, she states, is that it must be reasonably foreseeable that harm to the company's interests might be caused by a director's act or omission — though the ultimate assessment requires balancing that foreseeable risk against the potential benefits of the director's course of action.
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Process and proof
Bruce highlights another clear lesson from the litigation — the critical importance of board documentation. She says board minutes should record key points of discussion and the broad reasons for decisions, including significant issues or questions raised with management and the responses received or action promised.
“It is really the best protection they’re going to get when the courts later infer how minds were applied,” she says.
In corporate governance practice, contemporaneous records such as board minutes are often central in disputes over directors’ conduct and can help demonstrate active oversight and scrutiny.
Regardless of the specific facts of the case and evidence adduced, the case highlights the importance of contemporaneous records being maintained to evidence board oversight and engagement with key risks, including compliance systems, culture and risk management frameworks.
Watching the regulator
Julie Garland McLellan FAICD, an experienced director across public, private and government boards, says directors should also pay attention to regulatory signals beyond their own organisations.
“If ASIC is spending money to take legal action against somebody, it tells you ASIC takes it seriously,” she says.
Court cases, enforcement actions and public reporting, she says, can signal emerging areas of regulatory focus and directors may wish to test their own organisations against those risks.
“If my company was likely to get into trouble, how would I know? What are the policies, what are the processes, what are the controls, what are the reporting systems and processes? How could I be assured that if it did happen, I would know about it quickly and be able to control, prevent and mitigate the damage?”
Governance between meetings
Kala Philip MAICD GAICD, an executive in the education sector and independent director, says the proceedings reinforce that governance requires ongoing engagement.
“For me, governance is not a hands-off exercise. You’ve got to interrogate, you’ve got to challenge management and you’ve got to look at what kind of mitigation steps are actually being implemented after the decisions are made,” she says.
“It’s continued engagement; not just attendance at board meetings, but what happens in between and how do you have your finger on the pulse in between board meetings, as well?”
That includes ensuring reporting frameworks provide clear visibility of emerging risks and that directors have sufficient line of sight into how things are done in an organisation.
“You have to have your pulse on the organisation culture,” says Philip. “You’ve got to have transparent reporting frameworks where you get a summary of what’s happening in the business.”
The judgment may be subject to appeal. ASIC has said that it will carefully consider the implications of the judgment as the proceedings move to the penalty phase. However, for boards more broadly, the focus remains on meeting high expectations of oversight, including in relation to risk management.
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