Warde, John; Byrne, Andrew --- "Special Responsibility of the Chairman: ASIC v Rich & Ors" [2003] DeakinLawRw 9; (2003) 8(1) Deakin Law Review 193
Special Responsibilities of the Chairman: ASIC v Rich & Ors
John Warde[*] and Andrew Byrne[**]
I. INTRODUCTION
The New South Wales Supreme Court has handed down a significant decision which recognises that, in particular circumstances, the chairman of the board of directors may have special responsibilities above and beyond those of other non-executive directors. In ASIC v Rich & Ors,[1] Justice Austin held that the Corporations Act 2001 (Cth) ('the Act') imposed a duty of care and diligence on the chairman of a listed public company which could lead to the imposition of a series of more specific duties which reflect contemporary community expectations.
Historically, the role of the company chairman was viewed as being procedural and ceremonial in nature. Until recently, it was often assumed that the chairman's statutory duties, in his capacity as a director of the company, were no more onerous than the duties imposed on directors generally. ASIC v Rich serves as a warning to chairmen that they need to ensure that they are fulfilling additional responsibilities (and accordingly enhanced legal duties) which the law may place on them, above and beyond the duties owed by the other directors, having regard to their experience, their expertise and the circumstances of their company.
This decision arose from an application by the chairman (Mr Greaves) of the failed telecommunications company One.Tel Limited (in liquidation) for an order striking out before trial the Australian Securities and Investment Commission's ('ASIC') claim against him for an alleged breach of s180(1) of the Act.
II. THE DUTY OF CARE AND DILIGENCE
Section 180(1) of the Act states that:
A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
| (a) | were a director or officer of a corporation in the corporation's circumstances; and |
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
III. MEANING OF 'RESPONSIBILITIES'
ASIC argued that the reference to 'same responsibilities' in s180(1) should be interpreted to mean that Mr Greaves had special responsibilities by virtue of his various positions within the company, particularly his position as chairman of One.Tel's Board of Directors and chairman of its Finance and Audit Committee. ASIC also argued that the special responsibilities arose by reason of Mr Greaves' high qualifications, experience and expertise relative to the other directors.
Mr Greaves argued that the word 'responsibilities' in s180(1) refers to the specific tasks delegated to the relevant director (including the chairman) as part of the distribution of functions of the corporation, as identified in the articles of the company, through resolution or otherwise. Mr Greaves argued that, notwithstanding his roles as chairman of the board and of a committee, he was in essentially the same position as three other non-executive directors of One.Tel who were not sued by ASIC.
The Court accepted ASIC's argument and concluded that the word 'responsibilities' refers to:
the acquisition of responsibilities not only through specific delegation but also through the way in which work is distributed within the corporation in fact, and the expectations placed by those arrangements on the shoulders of the individual director.[2]
In reaching this conclusion, the Court examined the legislative history of s180(1) and paid particular attention to the explanatory memorandum of the Corporate Law Reform Bill 1992 and the proposal paper that preceded the Bill, Paper No. 3 of the Corporate Law Economic Reform Program entitled 'Directors' Duties and Corporate Governance'.
Section 180(1) of the Act replaced s232(4) of the Corporations Law in March 2000 as part of the Corporate Law Economics Reform Program Act 1999. The primary difference between the two provisions was that s180(1):
| • | removed reference to "in a like position in a corporation"; |
| • | inserted a reference to "the office held by"; and |
| • | inserted a reference to "the same responsibilities as .. the director". |
The Court found that the proposal paper and the explanatory memorandum, in addressing these changes and exploring the case law context, suggest that:
the word "responsibilities" was intended to direct attention to the factual arrangements operating within the company and affecting the director in question - as opposed to the legal duty of care, implying specific legal duties in particular circumstances. The content of those specific duties would be affected by the factual matters specified by the section, relating to the corporation's circumstances, the nature of the director's office, and the director's responsibilities. The director's responsibilities would include arrangements flowing from the experience and skills that the director brought to his or her office, and also any arrangements within the board or between the director and executive management affecting the work that the director would be expected to carry out.[3]
IV. WHAT ARE THESE 'RESPONSIBILITIES'?
The evidence submitted by ASIC, accepted by the Court as disclosing a reasonable cause of action against Mr Greaves, provides an insight into the possible obligations in particular circumstances of the chairman of a board in light of s180(1). ASIC tendered affidavits from two prominent chairmen of listed public companies as expert opinion evidence, describing the role of a reasonably careful and diligent chairman of a listed company as follows:
| • | the chairman must adopt a leadership role in the conduct of the board's responsibilities and lead and manage the board in the discharge of its duties; |
| • | this role includes setting the agenda for the performance of the board's responsibilities, taking steps to ensure board meetings take place with sufficient frequency, for a sufficient length of time and with adequate information and ensuring that the board is kept properly informed of the financial position and performance of the company; |
| • | the chairman leads the board in the monitoring of management, the assessment of the company's financial position and performance and the detection and assessment of any material adverse developments; |
| • | this involves directing, if so advised by the audit committee, and requiring, the provision of material financial information to enable the board to discharge its responsibilities; |
| • | it also involves taking steps to ensure that he or she and the board are informed as to the adequacy of the cash reserves of the company, including, especially where debtors outstanding are very substantial, an analysis of debtors including an aged listing; |
| • | if the chairman has an experienced financial background, the chairman should ensure that the person appointed as finance director has appropriate qualifications, expertise and experience; |
| • | the chairman will be concerned to be personally satisfied about the accuracy of public statements made on a company's behalf, and the company's compliance with the ASX Listing Rules; |
| • | where the business of the company is being established, and expenditure exceeds and is expected to continue to exceed income, the chairman will take a close and active interest in the cash reserves of the company, including the steps that should be taken to ensure that cash reserves are maintained so as to enable the company to pay its debts as and when they fall due; |
| • | if the company is in start-up phase, the chairman should also take steps to ensure that systems are implemented to properly monitor the cash flow in and out of the company and that he or she is promptly informed of any matters materially affecting the company's cash flow; |
| • | the chairman will take steps to ensure that there is an active and functioning audit committee, among other things to assess the general standards of performance of the financial system and management; |
| • | the chairman of the company will take steps to ensure that the company has a process of ongoing internal audit review by an internal auditor. |
Austin J noted that ASIC's evidence did not purport to establish that Mr Greaves had specific duties on particular occasions. Rather, it sought to establish Mr Greaves' 'responsibilities' having regard to usual practice. Austin J concluded that ASIC's evidence provided a reasonably arguable case for the view that Mr Greaves had the responsibilities alleged by ASIC, sufficient to allow the case to proceed to trial.
V. REASONABLE STEPS
ASIC's amended pleadings alleged Mr Greaves needed to take 'reasonable steps to ensure' that each of his responsibilities were met. ASIC had originally asserted that Mr Greaves had 'to ensure' that the responsibilities were met, an obligation carrying a much heavier burden. The change in wording represents an acknowledgment that Mr Greaves did not have an unqualified obligation to produce the outcomes originally alleged in ASIC's claim.
VI. COMMUNITY EXPECTATIONS AND CORPORATE GOVERNANCE
The type of evidence submitted to, and accepted by, the Court is of interest. As mentioned above, the primary evidence submitted by ASIC was affidavits of two prominent Australian company chairmen. The opinions of these chairmen were then substantiated by reference to various reports and academic writings from Australia and elsewhere.[4] The Court stated in relation to this evidence:
Much of the literature of corporate governance is in the form of exhortations and voluntary codes of conduct, not suitable to constitute legal duties. It is sometimes vague and less than compelling, and must always be used with caution. Nevertheless, in my opinion this literature is relevant to the ascertainment of the responsibilities to which Mr Greaves was subject during the period from January to March 2001.[5]
Furthermore, Justice Austin held that courts must perform the difficult task of articulating a standard of care by reference to community expectations in relation to corporate governance and that it is preferable that such a task be undertaken with the assistance of the type of evidence submitted by ASIC rather than by the reliance of a judge on 'unassisted armchair reflection'.
Even so, Justice Austin did acknowledge that analysis of a defendant's corporate governance standards against community expectations did appear, on its face, to be harsh on defendants:
It may appear, at first blush, to be unduly harsh on a person in Mr Greaves' position that evidence of this kind might be relied upon to establish that in 2001 he was subject to responsibilities and, ultimately, legal duties never before set out in a statute or by judicial decision. It should be remembered, however, that the Court's role, in determining the liability of a defendant for his conduct as company chairman, is to articulate and apply a standard of care that reflects contemporary community expectations.[6]
VII. RELIANCE ON MANAGEMENT
Mr Greaves submitted that imposition of extra duties on a chairman would be inconsistent with other law concerning the extent to which directors can rely on others. In particular, Mr Greaves argued that the law permitted a director to rely on the honesty and integrity of his subordinates unless something occurs to put him on suspicion, and that a director did not have a responsibility to supervise co-directors or to acquaint himself with all of the details of the running of a company.
While acknowledging that it is sometimes permissible for a director to leave matters to management or even to other directors, Austin J noted that this does not prevent a conclusion that, in particular circumstances, a director could not safely trust subordinates. Directors are under a continuing obligation to keep informed about the activities of the corporation and, in particular, its financial status. As this duty exists for all company directors, the Court held, it must therefore apply to the chairman whose responsibilities may be 'enhanced'.
VIII. CONCLUSION
The decision points to an expanded operation of s180(1) of the Act, whereby it is now recognised that chairmen (and other directors such as those holding special positions on audit committees) may hold special responsibilities when discharging their duty of care and diligence to the company, depending on an individual's particular responsibilities and expertise and the particular circumstances of the company. Those responsibilities, defined against evolving standards of corporate governance and the qualifications, expertise and experience of the particular individual, are likely to require that a chairman must ensure, amongst other things, that a company has an effective reporting system to enable the board of directors to effectively monitor the financial health of the company. Furthermore, a chairman may have a responsibility, above that of the other directors, to take additional appropriate action where financial problems emerge in a company.
Given these increased responsibilities, the company chair may lose its lustre for some directors, and remuneration for company chairmen may well increase to reflect the increased work and risk attached to the role.
[*] Partner, Allens Arthur Robinson, Sydney.
[**] Lawyer, Allens Arthur Robinson, Sydney.
[1] [2003] NSWSC 85; (2003) 44 ACSR 341 (hereinafter, 'ASIC v Rich')
[2] ASIC v Rich [2003] NSWSC 85; (2003) 44 ACSR 341, 352.
[3] Ibid.
[4] The reports and academic writings to which the Commission referred were: Hedrick-Struggles, The Role of the Chairman; Sir Adrian Cadbury, A Company Chairman (2nd ed., 1995); John Harper, Chairing the Board (2000); and The Responsibilities of the British Public Company, Final Report of the Company Affairs Committee, as endorsed by the Confederation of British Industry Council on 19 September 1973.
[5] ASIC v Rich [2003] NSWSC 85; (2003) 44 ACSR 341, 358.
[6] Ibid.