Senior executives are not being given the same protection as their directors, despite often being subject to the same liabilities and being increasingly exposed to shareholder class actions.
Research from Chartered Secretaries Australia (CSA) found that 52 per cent of organisations have not entered deeds of indemnity and access to protect CEOs, chief risk officers, CFOs and corporate counsel from corporate liability.
With the Federal Government planning to extend liability for corporate wrongdoing to senior managers as well as board members, it’s a major concern, said Tim Sheehy, chief executive at CSA. “Good governance dictates that office-holders making important decisions should be held accountable for their actions in the same way as directors,” he said.
“It follows that if office-holders are to have the same responsibilities, it is only fair they have the same protections, but this is not happening at the moment. In a climate where senior executives are more exposed than ever, companies that do not insure them against potentially crippling defence costs are quite simply letting them down.”
The increasing frequency of shareholder class actions is also a major concern, Sheehy said. The CSA research found that 68 per cent of companies have not considered the impact of class actions and two-thirds do not account for them in their risk management strategy.
“The worrying aspect of these findings is that new risks are not hitting the radars of most organisations. With shareholder class actions fast becoming a permanent feature of our litigation scene, companies would be foolish not to acknowledge their potential impact,” said Sheehy.
Indeed, shareholder class actions are becoming an increasing part of Australian corporate life. The most high profile class action of recent times was filed in April this year against AWB Ltd, following the collapse of the company’s share price as the Cole Commission revealed the extent of its dealings with Iraq and breaches of the United Nations Oil-for-Food Programme.
“AWB made deals with Saddam Hussein’s regime that breached UN sanctions,” said Ben Slade, NSW principal of law firm Maurice Blackburn Cashman, which filed the action on behalf of AWB shareholders. “The deals secured wheat sales to Iraq by AWB conspiring with the Iraqi Grains Board to improperly obtain funds from the UN escrow account. AWB concealed these deals not only from the Department of Foreign Affairs and Trade and the United Nations but also the share market.”
At present, major claims against Aristocrat Ltd and Multiplex Ltd are underway while class action specialist Slater and Gordon is currently pursuing class actions related to the collapse of property group Westpoint, in which investors lost more $300 million.
CSA’s Sheehy said that companies run the risk of losing top talent if they fail to act on exposure. “Well-conceived deeds of indemnity and access, and directors’ and officers’ insurance policies have helped many organisations to attract and retain high calibre directors and officers. They provide an important safety net that supports the kind of responsible risk-taking needed for business success,” said Sheehy. “It can only be expected that companies who cannot provide similar assurances to their senior executives will lose the best talent.”
Stuart Fagg is the editor of Lawyer’s Weekly’s sister publication Risk Management magazine