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Directors cheer liability move

Directors cheer liability move

BOARD MEMBERS greeted a controversial proposal to extend liability to below board level with cautious optimism last month.The Corporations and Markets Advisory Committee (CMAC) — a top…

BOARD MEMBERS greeted a controversial proposal to extend liability to below board level with cautious optimism last month.

The Corporations and Markets Advisory Committee (CMAC) — a top advisor to the government — was asked to consider recommendations of the HIH Royal Commission Report. HIH Commissioner Justice Neville Owen said in his report on HIH that there were potential gaps in the regulation of corporate behaviour below board level. Boards have become increasingly concerned with the heightened workload recent corporate reform has thrust upon them, and what they see as unreasonable demands on their time in terms of compliance.

Owen pointed out that while directors have huge responsibilities in terms of policy setting, the actual day to day management of companies, particularly larger ones, is left to managers below board level.

CMAC suggested several changes to the Corporations Act which could extend duties traditionally associated with board members to “any other person who takes part, or is concerned, in the management of that corporation”. In addition, CMAC suggested extensions to prohibitions in connection with the improper use of corporate position or information to “any other person who performs functions, or otherwise acts, for or on behalf of that corporation”. CMAC also suggested prohibitions regarding providing false information apply to the same group.

Effectively this would increase the net to include consultants or independent contractors. But lawyers look set to gain exemption in the final report, according to sources with knowledge of the process.

The Australian Institute of Company Directors is yet to form its response to the proposals, which will be the subject of public submissions until late August. However, directors greeted the proposals with cautious optimism. The board member community has been concerned for some time that the Australian and global compliance revolution post Enron and HIH has placed unreasonable liabilities and expectations on boards when the biggest risk of breaches and failures comes from the operational aspects of businesses.

While CEOs and CFOs must now sign off on company accounts, CMAC’s proposals could see responsibility slip further down the chain, with other C-level figures — such as chief risk officers — seeing their liabilities increased.

However, some clarification of duties is needed to accurately assess the potential impact of the reforms. “The reforms of duties in relation to use of position and use of information is sensible in terms of adopting a functional definition of the personnel that will be subject to these duties,” said James McConvill, editor of Deakin Law Review. “The basic rationale there was to extend to contractors and consultants, but there is not much discussion on issues that come when looking at these people. If there is a clear definition of what being involved with the company’s policy and decision making, it could be a good thing.”

At this stage it is unclear which officials could be included, but there are examples from the US where liability has descended from the board. In one case several years ago under the US Anti Money Laundering Act, a US bank manager in Mexico was jailed for authorising loans to the brother of the Mexican President. The brother was allegedly borrowing money in a large number of countries and laundering it as part of his role in a drug syndicate. The manager that authorised the loan was punished, as opposed to the directors of the company on the basis that any reasonable test conducted before the loans were approved would have raised suspicions.

Stuart Fagg is the Editor of Risk Management magazine, Lawyers Weeklys sister publication

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