There have been a few recent reminders that directors must think beyond financial consequences of their companies’ decisions, to include considerations of corporate culture, reputational harm and potential breaches of the law.
In ASIC v Cassimatis (No. 8)  FCA 1023 the Federal Court found that Mr and Mrs Cassimatis, the executive directors and sole shareholders of Storm Financial Ltd, breached their directors duties of care and diligence by causing and/or permitting Storm to provide investment advice, to fund investments with both a home loan and margin loan, to all clients including financially vulnerable, elderly clients, to whom such advice was unsuitable. This meant that Storm contravened relevant sections of the Corporations Act about advice. The Court found that this inappropriate advice could be catastrophic for Storm in that it could result in Storm losing its Australian Financial Services Licence and its very existence.
In reaching his finding Justice Edelman noted that “Mr and Mrs Cassimatis had an extraordinary degree of control over Storm” and would or should have known that the ‘Storm model’ was being applied to financially vulnerable clients which would likely lead to inappropriate advice, which would potentially be catastrophic and, significantly, it would have been relatively simple to take measures to attempt to avoid the application of the Storm model to these vulnerable people.
His Honour emphasised that s180 of the Corporations Act:
- does not prohibit directors taking risks, that is their job, but they must carefully consider risks and the burden of avoiding them;
- applies to all risks, such as reputational harm and potential loss of license from non-compliance with the law, and not just financial risk (eg if a decision would involve a serious breach of law by the company, would not likely be discovered and would likely make a lot of money; agreeing to such a course may be a breach of directors duties regardless of the financial advantages);
- applies to directors who are the sole shareholders of the company (Mr & Mrs Cassimatis argued that the directors of a solvent company owed their duty to the shareholders and, as they were the shareholders, their decision was implicitly ratified by the shareholders. The Court held that while acquiescence of shareholders can affect the duty of care and diligence, it does not relieve the directors of such duties, as the interests of the corporation may differ from that of the shareholders).
Crimes of Corporate Culture
The above case, highlighting that directors must consider non-financial risks, ties in with directors’ criminal exposure for “corporate culture”.
Under Part 2.5 Division 12 of the Criminal Code a Body Corporate may be found guilty of any criminal offence. Where fault is required Clause 12.3 provides that “If intention, knowledge or recklessness is a fault element in relation to a physical element of an offence, that fault element must be attributed to a Body Corporate that expressly, tacitly or impliedly authorised or permitted the commission of the offence”.
The provision then continues that authorisation or permission may be established by “Proving that the Body Corporate failed to create and maintain a corporate culture that required compliance with the relevant provision”. The Criminal Code defines “corporate culture” as “An attitude, policy, rule, course of conduct or practice existing within the Body Corporate generally or in the part of the Body Corporate in which the relevant activities take place”.
If corporate culture allows the relevant breach the company is guilty. But what about the directors?
For example, what if the directors of a company had directed staff not to break the law (for example told staff not to engage in cartel conduct) but, due to incentives and pressure in the business, the staff did so anyway, behind the directors’ backs?
If the directors failed to maintain a corporate culture that encouraged compliance with the directive not to breach the law, it is extremely likely that the directors will be found to have breached their duty to act with reasonable skill and diligence with respect to maintaining corporate culture, and thereby could be ordered (at the instigation of the company, shareholders or ASIC) to compensate the company for its loss (being the penalties imposed). Further, s75B of the Competition and Consumer Credit Act, makes a person (including a director or officer) guilty if they aided, abetted or were in any way knowingly involved in the contravention (which in this case was poor corporate culture, not the cartel provisions).
Both ASIC and APRA have made numerous recent references to criminal charges being pursued against companies and directors for “poor culture” (including suggesting that these corporate culture contravention provisions be extended to financial service providers and life insurers, to which the provisions do not currently extend). ASIC has made it clear that it intends to pursue both companies and officers for corporate culture breaches.