Powered by
MOMENTUM
MEDIA
ASIC has sued a former chief executive over breaches and misleading statements, highlighting the importance of disclosure and robust governance when it comes to personal relationships in the workplace.
Personal relationships and concerns arising from an executive’s previous employment can raise significant legal and governance issues for companies and their boards.
Such issues are particularly seen where personal relationships intersect with decisions concerning remuneration, performance, promotion or employment, or where information relevant to an executive’s appointment occurs.
ASIC’s civil penalty proceedings against former Super Retail Group CEO and managing director Anthony Heraghty is a current example of this, as ASIC alleges that Heraghty failed to uncover and manage a conflict arising from an alleged relationship with a senior executive, and that information provided to the board and investors was misleading.
Talking to Lawyers Weekly, Jessica Tilbury, corporate and governance lawyer from Holding Redlich, explained how this situation can create conflicts of interest and place a larger emphasis on disclosure, independent decision-making and effective governance controls.
Conflicts of interest and disclosure
When referring to the issue, Tilbury disclosed that whilst a personal relationship does not create a governance issue, concerns arise when it interferes with corporate decision-making.
“A personal relationship becomes a governance issue when it has the potential to influence, or appear to influence, corporate decision-making,” Tilbury said.
“The governance issue arises when the relationship has the capacity to influence, or be seen to influence, important corporate decisions.”
Where a conflict arises, the focus shifts to whether it has been appropriately disclosed and managed.
“The Corporations Act and the general law are built on the same principle: directors and executives must put the company's interests ahead of their own,” Tilbury said.
“When a personal relationship creates a conflict, the issue is not the relationship itself, but whether the conflict is properly disclosed and managed.”
Furthermore, Tilbury recommended that boards should take practical steps to ensure conflicted executives are removed from relevant decision-making and that independent oversight is maintained.
“Once a conflict is identified, the board should focus on removing the conflicted executive from decisions where their independence could reasonably be questioned,” Tilbury said.
“That may mean recusal, changing reporting lines or appointing an independent decision-maker, particularly for remuneration, promotion, performance or termination decisions.
“The greater the executive’s influence, the greater the need for independent oversight.
“The objective is not simply to avoid an actual conflict, but to ensure the decision is demonstrably independent and can withstand scrutiny if challenged later.”
Due diligence and governance
Tilbury also highlighted the integral nature of robust due diligence when appointing senior executives, particularly where allegations or issues arise from previous employment.
“The existence of allegations from previous employment does not, without more, make an executive unsuitable for appointment,” Tilbury said.
“The critical governance questions are what the board knew, what appropriate due diligence should reasonably have uncovered, how the information was assessed, and whether any identified risks were properly managed.
“The board should also distinguish between allegations, findings and established facts, and give appropriate weight to the circumstances and outcome of any previous investigation or proceedings.
“Importantly, due diligence is not a one-off exercise; if material concerns emerge after appointment, the board should reassess the risk and consider whether further investigation, disclosure, independent oversight or other controls are necessary.”
Tilbury noted that the legal risk may ultimately turn less on the existence of an allegation and more on what a company – such as Super Retail Group – had known, what it reasonably should have known, and how it responded.
“The legal risk is often less about the fact of the allegation than about what the company knew, what it reasonably should have known, and what it did with that information.”
