For anyone who is a director or considering an appointment, it is worth refreshing your understanding of exactly what "directors and officers" are responsible for.
In this article, we provide an overview of the duties of directors and some practical steps directors can take to ensure compliance. And these duties extend more broadly than you may think, based on a recent High Court decision in ASIC V King (2020), which reviewed the question of "who is an officer for the purpose of the Corporations Act?"
What are directors responsible for?
When appointed to a board, a director needs to exercise a degree of care and diligence, so as to ensure that the company is properly administered and key risks are managed.
The board of directors of a company is responsible for the management and operation of a company's business affairs, including its operating structure and strategic direction. The board needs to meet regularly to discuss company matters and make business decisions.
Directors may exercise all the powers of the company except for certain powers which are reserved to the shareholders (under the Corporations Act 2001 (Cth) (Corporations Act) or the company's constitution).
Directors are constrained in the exercise of these broad powers by their obligation to comply with duties imposed pursuant to:
- the general law (consisting of equitable fiduciary duties arising from the special (fiduciary) relationship between director and company and common law duties (for example, negligence))
- legislation (primarily, statutory duties, including under the Corporations Act)
- contract (pursuant to the company's constitution and any director services agreement).
Duties of directors under the Corporations Act
Among other things, a director needs to ensure that it complies with that person’s:
- duty to exercise their powers with care and diligence
- duty to exercise their powers in good faith in the best interests of the company and for a proper purpose
- duty not to improperly use their position to gain an advantage for themselves or someone else or cause detriment to the corporation
- duty not to improperly use information obtained through their position to gain an advantage for themselves or someone else or cause detriment to the corporation.
Duty of care and diligence
Directors need to be able to demonstrate they understand the following matters in respect of the company:
- the financial affairs of the company
- the business of how the company operates, and factors significant to the company’s financial and business performance
- the company’s management and funding processes including the company’s business model
- the company’s key stakeholders
- the economic environment in which the company operates
- the risks faced by the company and management of those risks.
Practical steps directors can take
Key actions a director may take to ensure that they comply with their duties include:
- read and understand the company's constitution and governance documents
- maintain a good understanding of the company's business and activities
- seek advice on relevant legislation, ASIC policies and industry standards (or relevant ASX Listing Rules, if the company is listed on the ASX) that apply to the company’s activities
- make proper enquiries where further explanation is required and seek appropriate expert advice, including questioning opinions of experts and advisors, if required
- attend all board meetings wherever possible
- establish and monitor compliance with corporate governance procedures and any breaches
- ensure financial awareness and circulation on a regular basis of financial information and stay informed about the company's financial affairs and position
- ensure and maintain (including by engaging in regular training or briefings, if required) financial literacy and an understanding of key accounting concepts
- regularly assess solvency and ensure that when incurring debts there is a reasonable basis for an expectation that the company is solvent
- properly supervise and constructively challenge the management of the company
- exercise due care and skill in decision making and independent judgment
- comply with the business judgment rule when making decisions
- take time to read and understand all documents presented for director sign off, approval or adoption
- implement and regularly monitor, update and audit a comprehensive compliance plan addressing the regulatory regime in which the company operates
- on appointment as director and at all relevant times, give the company written notice of any material personal interests and update the notice to include subsequent disclosures as applicable
- avoid conflicts of interest, being situations in which a personal interest conflicts with the interest of the company
- ensure that the company and its board has the benefit of appropriate professional advice and protection of appropriate insurances.
What about an “officer” of a corporation within the meaning of section 9 of the Corporations Act?
In some instances, the duties that apply to “directors” under the Corporations Act may also apply to other persons who are not “directors” but are “officers” of the company.
In the recent case of ASIC V King  HCA 4, the High Court considered who was an “officer” for the purposes of the Corporations Act.
The court was asked to consider whether a “Group CEO”, who was involved in the management of a subsidiary (but who did not hold a named “officer” role within the subsidiary) fell within the meaning of “officer” of that particular subsidiary.
The court determined that was the case.
In this case, the High Court held that:
- an officer is not limited to a person who holds or occupies a named office in a corporation or a “recognised position with rights and duties attached to it”
- the factual findings accepted by the court, including that the group CEO acted as the 'overall boss' of the group (including its subsidiaries) and assumed 'overall responsibility' for the subsidiary, were sufficient to establish that person “[had] the capacity to affect significantly the corporation's financial standing”.
ASIC Commissioner John Price indicated ASIC welcomed the decision, which “sends a clear signal to anyone running a company – in name or in effect – that they should be responsible and held accountable for their actions”.
This case serves as a caution to all directors and officers of holding companies that they can been deemed liable for the conduct of subsidiaries. This decision may prompt directors of holding companies to ask questions of the company, management, CEO and their team in order to help the company group.
- An edited version of this article was originally published in Women On Boards' e-newsletter.