There is an old fairytale about a boy who cried wolf. The story is a parable for the importance of reputation. The boy who falsely screamed that a wolf was coming would later not be believed when an animal really was really baying at his door. The moral of the story is that one shouldn’t warn of dangers that are not really there because their credibility will be harmed. John Colvin and the Australian Institute of Company Directors would be well advised to read the parable.

In Wednesday’s Australian Financial Review, Colvin wrote another lengthy article criticising the onerous liabilities being faced by company directors. Colvin claimed:

There are more than 660 state and territory laws which impose personal liability on individual directors for corporate misconduct. That is, a director is liable because he is a director, even when he may not have had any personal involvement in the breach…

The balance of risk and reward is so tilted that many experience and highly qualified directors are asking if it is worth it.

This is not the first time that the AICD has complained about onerous directors’ liabilities. In December 2007, Colvin’s predecessor, Ralph Evans stated:

There are a number of instances under state occupational health and safety laws where there is a presumption of guilt under certain circumstances [and that] if people do the right thing, they should have a codified defence in the course — that doesn’t currently exist.

The AICD confirmed to Crikey that  the onerous legislation is largely centred around New South Wales-based occupational health and safety laws. These laws specify that a company director will be “deemed” to be liable simply by virtue of their role unless they are able to prove that they were unable to influence company procedures or undertook necessary due diligence.

The AICD noted, the NSW courts have taken a hard-line enforcing the deemed liability laws. According to AICD data, between 2004 and 2008, 144 company directors were found guilty of OHS offences, of which 115 of those prosecutions occurred in NSW.

Those figures need to be placed in context. In Australia there are believed to be more than two million company directors.

That means the proportion of directors convicted over these so-called onerous laws is 0.0068%. To compare, there is roughly a 0.04% chance of someone being struck by lightning. Therefore, based on the AICD’s own data, company directors are six times more likely to be hit by lightning than to be prosecuted. It also shouldn’t be forgotten, directors’ liabilities are almost always covered by indemnity insurance and most prosecutions result in a mere financial penalty.

While the NSW OHS laws result in occasional harsh results, to extrapolate one set of allegedly ill-advised laws across the country is much like a cry of wolf. The AICD should focus its attention on repealing or altering the specific regulations, which are unduly onerous rather than making motherhood statements that the “balance of risk and reward” is preventing businesspeople from becoming directors.

In public companies anyway there appears to be no shortage of willing candidates, rather, the problem appears to be that board positions are filled by a small clique, referred to as the “Director’s Club”, keen to protect their own turf. Data compiled by corporate governance analysis, ISS Australia (now RiskMetrics) in 2006 indicated that “123 directors collectively held more than 45% of all board seats in ASX 100 companies”.

These directors hire each other to respective boards (directors form part of companies’ nomination committees and are able to choose which new directors can be appointed). Those same directors also prevent outsides from joining boards by using the “no vacancy” rule (as is occurring in the upcoming Fairfax boardroom elections), making it virtually impossible for even a deserving candidate to be appointed to a listed-company board without the auspices of the current directors.

The AICD’s brief is to represent the interests of existing company directors. It is a job it undertakes with distinction. But like any special-interest group, its claims must be treated with the scepticism reserved for lobbyists and trade unions.

Peter Fray

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