No Code of Conduct Required for Australian Directors

No Code of Conduct Required for Australian Directors

The Corporations and Markets Advisory Committee (CAMAC) has advised the Federal Government against devising a Code of Conduct for directors in Australia. In an extensive report recently made public, CAMAC has concluded that directors in Australia are well guided as to their duties by the current system but that further reviews should be conducted in light of potential changes currently being considered overseas.

Terms of Reference

In August 2009, as part of its overall response to the global financial crisis, the Federal Government asked CAMAC to consider the adequacy of guidance available to directors in Australia. In doing so, CAMAC was asked to have regard to the positions adopted by other countries and whether the performance of directors in Australia might be enhanced through an additional form of guidance such as a Code of Conduct introduced and implemented by the relevant Corporate Regulators.

Report

CAMAC reported back to the Federal Government in late April 2009 and the report was recently made public (Report). In the Report, CAMAC expressed the view that providing additional guidance will not, of itself, ensure improved governance but efforts to assist directors to understand their roles and enhance their effectiveness are worthwhile and should be pursued. In addition, CAMAC advised the Federal Government against the formulation of a new Code of Conduct for directors, on the reasoning that directors already have sufficient guidance as to their duties and how they should be discharged.

According to CAMAC, the current system serves directors well and comprises of several different sources of guidance for directors including through:

• Legislative direction;
• Decisions by the Courts;
• The pursuits and policies of Corporate Regulators;
• The ASX Corporate Governance Council;
• Government Inquiries;
• Private sector services; and
• Professional and Industry bodies.

However, CAMAC did suggest that more can be done to guide directors on broader behavioural issues that go the effectiveness of directors and the proper and effective functioning of the boards they form. It concludes that guidance on broader behavioural issues will, in the long term, empower directors to properly discharge their duties and not just fall into line at board level and take up the role of passive participants.

CAMAC also concluded that:

• The current system of guidance in Australia is comparable to its overseas counterparts. However, CAMAC noted that most of the overseas systems are currently subject to extensive reviews as a result of the global financial crisis and that it would be prudent to further review Australia’s system in light of the outcome of the current reviews overseas and any subsequent changes implemented; and
• The number and complexity of statutes or standards for the imposition of personal liability on directors may detract from the ability of directors to implement effective compliance systems. In addition, there is also the risk that directors can become unduly preoccupied with matters of compliance at the expense of focusing on entrepreneurial activities for the benefit of shareholders.

Implications for Directors

Most Australian directors will appreciate the fact that the Report does not recommend the implementation of a Code of Conduct by the Corporate Regulators given the extent to which their duties as directors are already regulated and the scrutiny that they are subjected to. At the same time, some directors, and perhaps those from small to median size enterprises, may welcome the idea of additional guidance on behavioural aspects of their profession and the effectiveness of directors at board level.

Unfortunately, the Report does not shed any light on the extent to which directors can rely on the advice or information of senior management and external advisors in attempting to discharge their duties. This remains a live issue and one that is continually left to the Courts for determination. However, what has become a little clearer in recent times is that the reasonableness of a director’s reliance on the advice or information of senior management or external advisors may be affected by the extent to which the director is prepared to test the relevant advice and conduct independent reviews of the reliability of those providing the advice or information.

Directors must appreciate that their overriding responsibility is to act in the best interests of their companies and in attempting to discharge this responsibility, directors must understand how their corporate governance systems work. More importantly, directors must appreciate that:

• Good corporate governance is about the way the directors of a company create and develop a corporate governance model that is aligned with the requirements of that company and then periodically test the model for its practical effectiveness and the extent to which it can be relied upon[1]; and
• They are ultimately responsible for the company’s conduct and overall standing and they therefore have a stake in and a responsibility for the conduct and performance of their senior management teams.

If you have questions regarding the code of conduct and how it could effect you, please contact a member of our Financial Services team.