ASIC Favours Stronger Penalties While Directors Seek More Protection

Tuesday 5 August 2014 @ 9.49 a.m. | Corporate & Regulatory | Crime | Trade & Commerce

The ABC reports that the Australian Securities and Investment Commission (ASIC), the corporate regulator, has renewed its calls for stronger penalties to be imposed on company directors breaking the law. It is reported that ASIC has used its latest update on white collar crime to make the call "on the same day as Australia's most powerful boardrooms urge the Government to introduce new legal safeguards for company directors".

The legal changes being argued for are those put forward by the Australian Institute of Company Directors (AICD) who argue that increased threats of investor lawsuits and criminal prosecutions are making boards scared to make tough decisions an outcome that AICD argues is "bad for business growth".

Background

AICD a group which it is reported represents some of "Australia's most powerful boardrooms" is due this Thursday (7 July 2014) to release a proposal to the federal governments financial laws inquiry which it is reported will "water down" the Corporations Act 2001 (Cth) and the ASIC Act 2001 (Cth), by arguing that corporate directors need a ''safe harbour'' from personal liability.

Various news reports indicate that the AICD has been lobbying the Finance Minister Mathias Cormann, the Assistant Treasurer Arthur Sinodinos and the Attorney-General George Brandis for a new legal defence to be added to existing laws, namely the concept of a "honest and reasonable director defence" which it is said would protect shareholders and consumers from boardroom negligence.

Were the proposed new defence to be adopted by the Federal Government it would protect directors from prosecution where it could not be proven they had "lied or failed to act with integrity and commitment". The proposed new provision would apply to directors who faced alleged contraventions, for example, offences included in areas like financial reporting, continuous disclosure rules and conduct that was misleading or deceptive.

Reaction to the Proposal

The SMH has reported that the exercise is ". . . not a totally cynical exercise" by AICD saying that an argument can ". . . at least be made that directors deserve more shelter than they get from the Business Judgment Rule that [Howard Government Treasurer] Peter Costello introduced in 1998".

That rule provided partial protection for directors found to have breached the law over decisions that are "informed, made in good faith for a proper purpose, and not affected by a conflict of interest". That  rule is however confined to a director’s duty of care and does not extend to the many other provisions of the Corporations law and other related legislation which can also impose personal liability on directors. It is these wider liabilities the AICD argues:

". . discourage people who would be good directors from taking on the job, and discourages existing directors from taking decisions that would be good for their company, and ultimately, good for the country".

SmartCompany quotes Peter Swan, professor of finance at the University NSW Business School who takes the view that the AICD proposal being considered by the Federal Government, does not “pass the smell test” arguing that exposure to jail time is inhibiting companies’ is not borne out by examples of company directors facing litigation over risk or innovation.

“They are so blatantly pushing their own barrow on grounds which have no basis,  .  .  .  Why should directors get complete exemption?”

The ABC reports ASIC commissioner Greg Tanzer responding to the question:

"So you seem to be suggesting that it's more of a time to be talking about tightening regulation and tightening responsibilities for directors, rather than watering down the existing laws?"

By saying:

"No, what I'm saying is that specifically in the area of penalties, we think that there is a case for reviewing the existing civil penalty regime, particularly around profits. But the issue of the overall directors' liability regime and the questions of business judgement rule: they're really matters for Government."

From this it seems ASIC is much more concerned with obtaining stronger penalties for directors involved in breaches of the law, such as insider trading and misleading and false conduct. Mr Tanzers response indicates that ASIC leaves the broader matters raised by the AICD to the Federal Government for any changes it may be considering to the corporate and financial laws - changes noteably to laws introduced by the previous conservative Howard government that, as Malcolm Maiden reports in SMH, " .  .  . had they been in place at the time, may have seen the directors of James Hardie escape prosecution".

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