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Mar 26, 2014

Sinodinos the chairman: what he really should have known

Australian Water Holdings was a small enough entity for its former chairman, stood-aside government minister Arthur Sinodinos, to know what was going on. So why didn't he?

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In 2008, Australian Water Holdings was a small company with some 10 employees, three shareholders and a single customer, Sydney Water.

Not really a lot to know if you are the company’s chairman. Except for the things that Arthur Sinodinos — former chief of staff to a prime minister, Liberal Party luminary, political rainmaker, Senator, all-round nice guy and deputy chairman, then chairman of the board of Australian Water Holdings between 2008 and 2011 — didn’t know about AWH.

According to his own statement to the Senate, chairman Sinodinos didn’t know the family of corrupt Labor politician Eddie Obeid had a 30% stake in his company. Or that the company had a connection to Obeid, even though Eddie Obeid jnr was a senior executive in the small company.

He apparently didn’t know his CEO was spending lavish amounts of company money on entertainment, limos and gambling, even though Sydney Water was challenging the level of expenses it was being charged. Or that his company was making hefty donations to political parties, including the NSW Liberal Party (of which Sinodinos himself was treasurer, then president).

And according to evidence in the current Independent Commission Against Corruption inquiry into AWH, the chairman apparently needed to be told of the company’s solvency position by another investor.

There is debate about whether a company chairman carries extra legal responsibility, but the duties and obligations of all company directors are set out in sections 180-184 of the Corporations Act. Arguably the most important is the duty of care and diligence. On this, Justice John Middleton found in ASIC v Healey (2011), which concerned the liability of directors for mis-statements in the accounts of shopping centre owner Centro, which collapsed in late 2007:

“Directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company. A director must become familiar with the fundamentals of the business in which the corporation is engaged; a director is under a continuing obligation to keep informed about the activities of the corporation; directorial management requires a general monitoring of corporate affairs and policies, and a director should maintain familiarity with the financial position of the corporation …”

So what does this mean in practice, I asked Julie Garland McLellan, who has directed and chaired listed companies, advises other boards and facilitates and writes for the Australian Institute of Company Directors? It would be “unusual” for the chairman of a small, privately owned company to be unaware who the shareholders were, she says. And it would be “normal” for the chairman of a small company to review the spending of the CEO to ensure his or her spending was in line with company policy.

The chairman of every company in Australia, big or small, has fiduciary duties and obligations under law, as well as the basic responsibility of knowing what is going on in his or her company.

A chairman who is paid $200,000 a year and is given a 5% shareholding in his company undoubtedly has those responsibilities as well.

But will Arthur Sinodinos’s performance as a company chairman be scrutinised? Not if his lawyer Tony Bannon SC has his way. Bannon yesterday told ICAC the inquiry was “not directed to alleged breaches of directors’ duties, and we deny there was any alleged breach of directors’ duties”.

Paddy Manning —

Paddy Manning

Crikey business editor

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