Liability laws damaging the economy, survey reveals

A recent survey conducted by the Australian Institute of Company Directors revealed that the burden of OHS laws imposing personal liability on directors is stifling business decision-making and having a serious detrimental impact on key aspects of corporate performance.

Business decision-making and strategic focus:

• More than 90% of those surveyed said that personal liability of directors had an impact on optimal business decision-making or outcomes.
• 65% said this risk of personal liability caused them or their board to take an overly cautious approach to business decision-making, either frequently or occasionally. 17% said this happened frequently and only 15% said it had no impact.
• 79% said they were concerned that the time their board devotes to compliance with regulations detracts from them focusing on issues like enhancing corporate performance and productivity.
• More than 90% said they are concerned about lost time and opportunity costs for companies defending actions brought as a result of automatic liability for directors under a wide range of legislation.

Board recruitment and retention:

• Almost a third said they had personally declined an offer of a directorship primarily due to the risk of personal liability.
• More than 22% said they had resigned from a position for that reason.
• 57% said they knew of other directors who had declined an offer of a directorship because of liability risk.
• 52% knew of someone who had resigned from a board due to liability concerns.
• Almost three quarters of aspiring directors said the risk of personal liability had made them reconsider directorship as a career.

Lack of business judgment defences:

• More than 73% believe there is a medium-to-high risk of directors being found personally liable for business decisions they made in good faith.
• 54% thought there were no reasonable defences or ‘safe harbours’ for directors making decisions in good faith - the so-called ‘business judgment rule’.
• More than 64% said they were seriously concerned about being subject to criminal and civil penalties as a director.

The survey involved 623 directors from ASX 200 companies, small and medium enterprises and not-for-profit organisations, from across the institute’s membership.

The survey results highlight the impact of personal liability for directors embodied in provisions in hundreds of pieces of legislation at the Commonwealth, state and territory levels. There are more than 700 state and territory laws alone which impose personal liability on individual directors for corporate misconduct. That is, directors are liable simply because they are a director, even where they may not have had any personal involvement in a breach.

Under some legislation, the onus of proof is reversed, removing the presumption of innocence, providing very narrow legal defences and limited rights of appeal.

“This survey, and the previous Federal Treasury survey of ASX 200 directors in 2008, highlights the damaging effect of director liability provisions on our economy,” said John Colvin, CEO of the Australian Institute of Company Directors. “The time, resources and money being taken up with dealing with the risk of personal liability for directors embodied in myriad pieces of legislation around the country is getting in the way of boards doing their real job: making good business decisions which lead to more investment and jobs for Australians.

“It’s also having a chilling effect on board recruitment and retention. The survey shows that the burden of legal risk being confronted by Australian directors is stopping qualified people from taking up board seats and causing others to leave through resignation or retirement.

“In this environment, the balance of risk and reward is so tilted that it’s not surprising that many experienced and highly qualified directors are asking - is it worth it?

“This is not just about directors’ self-interest. It is about everyone’s prosperity. By encouraging an overly cautious approach to decision-making, focusing directors’ minds excessively on risk-avoidance rather than on ways to add value, and by discouraging talented people from taking up or holding directorships, these laws stifle business. And that means they undermine our economy, capital investment and job creation.”

The survey respondents singled out OHS legislation, especially in NSW, as a cause of concern, saying these laws influenced decisions about the location of investment and restricted business activity in that state. The institute says that this highlights the need for the NSW Premier, Kristina Keneally, to reconsider her decision to reverse NSW’s commitment to OHS law reform as part of the national harmonisation of OHS legislation.

The institute strongly believes there is a need for a broad-based defence or ‘safe-harbour’ for directors, consistent across Commonwealth, state and territory laws. The defence would be available when directors make commercial decisions in good faith, having informed themselves about the subject matter and having acted in the best interests of the company.

If directors’ actions meet the criteria, they should not, with benefit of hindsight, be liable for errors of business judgment. Such law reform would enable the majority of directors, who carry out their duties diligently, to better focus on strategic decision-making, thereby enhancing company performance and economic prosperity more broadly.

The survey results also highlight the need for the Commonwealth and states to complete their legislative reviews to reform and harmonise laws on director liability after conducting audits of their legislation on the basis of benchmarks agreed by the Ministerial Council for Corporations. However, Colvin comments that there appears to have been too little progress on this process, which has been given low priority by state and territory governments. He stated that this reform was urgently required.