It’s a well-known fable – a frog will immediately jump out of boiling water when suddenly dropped into it; but when gradually heated from tepid water, a frog becomes accustomed and boils alive. We’ve seen several “boiled frogs” at the Banking Royal Commission in recent weeks, with the grilling of some bank executives dishing up a long history of misconduct embedded in the financial industry. It serves as a timely reminder for all company directors of the important duties and corporate responsibility that come with managing a company.
Know Your Duties
Directors are tasked with a number of legal duties under the Corporations Act 2001 (Cth) and other laws. Establishing and managing a company isn’t as simple as “signing here”, sitting back at a board table and delegating work to employees. And it doesn’t matter whether your company is big or small.
At all times, every Director must be proactive in their duties to ensure that they:
- Act in good faith, in the best interests of the company and for a proper purpose;
- Exercise care and diligence;
- Avoid conflicts of interests;
- Ensure that the company complies with its obligations (i.e. keeping a current registered office and principal place of business, keeping accurate financial records and checking annual statements, notifying regulators of key changes, etc.);
- Avoid improper use of information or position gained through their role as Director;
- Prevent insolvent trading and properly manage company finances; and
- Cooperate with a liquidator if the company is wound up (i.e. accurate and timely reporting, handing over company books and records, etc.).
Recipes for Disaster at the Royal Commission
Unfortunately, not all Directors are conscious or caring of their corporate responsibility. Some of the biggest shockers – and lessons we can learn – from the Banking Royal Commission include:
- Not acting in good faith by charging fees for no service;
- Not exercising care and diligence by charging fees to dead people after their death;
- Not acting for a proper purpose by selling credit card insurance to unemployed, pensioners and students (where the policy prevents a claim being made unless the claimant is working 20+ hours per week);
- Non compliance with obligations by lying to the regulators;
- The drive for personal fee incentives is creating a huge conflict of interest with unsuitable products being sold to customers, pitting personal commission against customer needs.
While many of these examples come as a shock to us now, some commentators say this is the industry norm that has been heating up since banking deregulation began in the 1970’s.
Suffice to say, the fallout will be severe with more regulation, cultural change and even criminal fines and possible imprisonment for office holders on the menu.
Cooking with Consequences
It’s not just board resignations and cuts to executive pay that flow from potential breaches of director duties. Some consequences that a Director may face following a breach of duty include:
- Personal liability where the company or a third party suffers some loss, or where debts have been incurred when the company is insolvent;
- Civil and criminal penalties under the Corporations Act 2001 (Cth);
- Other regulatory investigations and action;
- Disqualification from managing a company;
- Worst and most expensive of all – irreparable brand damage caused by a breach of Trust. The facts are that no one wants to deal with a person who cannot be trusted (yes, even POTUS).
As we’ve seen from the Royal Commission, a company may also suffer irreparable brand damage following a potential breach of director’s duty (even if the company is still intact).
What You Can Do to Stay Out of Hot Water
If you are a Director, ensure that you and any Co-Directors:
- Fully understand the legal responsibilities of your role;
- Know the financial position and performance of the company;
- Prioritise the interests of the company, its shareholders and its creditors over personal interests;
- Make your own informed decisions about proposed actions that will affect company finances or business performance;
- Establish proper corporate governance and risk management frameworks as a core part of the business, including proper remuneration structures and regular conflict checks;
- Implement continuing professional development on legal and ethical responsibility, both for yourself and any staff;
- Ensure that the company’s debts are paid on time;
- Always be honest, ethical and careful in your dealings, both with the company and on its behalf;
- Most importantly, don’t get too far from the coalface. Be active in board meetings, ask questions and be involved with your colleagues, proactively manage data and staff, stay up-to-date with financial information and don’t get complacent in your responsibilities.
If you are unsure, it is tremendously important to seek professional advice ASAP – by the time you’ve committed a breach, you’re already at boiling point.
If you are concerned that you or someone else has breached a director’s duty, or you require assistance in managing your obligations, contact one of the team today on (02) 8488 3389.