Corporate Governance

Significant company failures over the past few years have seen the question of corporate governance hit headlines as never before. Investors and other stakeholders such as employees and creditors have voiced concerns regarding the lack of accountability of the higher echelons of the management, in particular the board of directors.

With added scrutiny, not only companies are under pressure to appoint acceptable people to the board of directors, the directors themselves are now taking company management very seriously. In the recent years, the Courts have not shied away from lifting the corporate veil in holding directors responsible for bad management practices but also the Australian Securities & Investments Commission ("ASIC") has brought about high profile prosecution of the top flyers.

Good corporate governance require directors to take responsibility of their decision making and be accountable to those concerned including the employees, creditors, investors and the regulators.

Who can be directors?

Anybody who is over the age of 18 years can be a director. The person cannot be an undischarged bankrupt or convicted of serious offence such as fraud or offences under the company law.

What are the directors' duties?

Directors have to know what the company is doing, act honestly and in the company's best interest. The directors have to ensure that the company is maintaining proper accounting records. In carrying out their duties, the directors must have first hand knowledge of the company's operations and performance. They need to engage professional advisors to assist them in decision making. They also need to regularly question the lower management and other staff about the business. For listed companies they also have to meet the necessary requirements of ASIC and the Australian Stock Exchange.

To whom and how are the Directors liable?

Directors' liability can arise in numerous ways, such as:

if the directors have been acting dishonestly or fraudulently, they can be liable to the shareholders;
if the directors have allowed the company to trade whilst it was insolvent, then they can be liable to the creditors;
if the company has not been filing proper documents with the regulators or meeting statutory requirements, then the directors can be liable for that.

There are various laws which hold directors responsible. Some of these are:

Corporations Act 2001
Trade Practices Act
Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 - CLERP
Tax Laws
Insurance Laws, such as Workers Compensation
Occupational Health and Safety Act
Industrial Relations Laws
Environmental Laws
Banking and Finance Laws
Intellectual Property laws
Criminal Laws

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