ASIC’s expectations of directors
The role of directors as gatekeepers and director liability.
Greg Medcraft, Commissioner
This article was submitted to the Governance Institute for publication in the Governance Directions magazine in September 2014
When it comes to discussing ASIC's expectations of directions, we need to focus on the role of directors as gatekeepers; and director liability
Many aspects of our corporate, financial services and markets law are self-executing. It relies on gatekeepers, such as directors, to comply with their regulatory obligations.
To maintain investor confidence and fair, orderly and transparent markets, it’s important ASIC monitors gatekeeper conduct closely.
If a gatekeeper fails in their role, it can have serious consequences for, investors and our markets.
This is why we hold gatekeepers – including directors – to account. This has, and will, continue to be an ongoing area of focus for ASIC.
As gatekeepers, directors should ensure their company has strong internal audit and compliance functions.
A compliance function is meaningless if it is not backed up by supervision, review and is reflected in the company’s culture.
It is this last point – culture that I consider is most important.
Directors should ensure their stewardship drives the right compliance culture in their organisation.
Both ASIC and directors have oversight roles. We must detect, understand and respond to the conduct we see.
For ASIC, it is in the financial services and markets we regulate. For directors, it is in the companies to which they they are fiduciaries.
In 2011, ASIC won a big case in the Federal Court against former directors of the property company Centro.
The case provided valuable principles, which I think can be applied to all public company directors.
These lessons are:
- Scepticism – directors must question the information provided to them. There is no defence for wilful blindness.
- Accounting knowledge – directors are expected to have financial literacy and basic accounting knowledge.
- Accountability and control – it is up to directors to ensure the executive has systems, protocols and controls to ensure sound corporate governance.
I would like to add a fourth principle to this list – culture. A director’s stewardship should drive a culture of compliance within the company.
If we find a company’s culture is lacking, it is a red flag that there may be broader regulatory problems in the company. And this means we are more likely to investigate and gather intelligence on that organisation.
Director liability is a topic of keen interest to the AICD and its members.
Directors have a range of obligations under the Corporations Act, and the consequences for breaching the act are diverse. On top of this, there is the reputational damage that accompanies a finding of wrong doing.
Whether a director has failed in their duties will depend on the circumstances and this includes the economic climate at the relevant time.
In carrying out our own responsibilities, ASIC is mindful of ensuring our approach to director liability is not affected by knee-jerk reactions to a tough economic climate. The economy is cyclical and tough economic times are often followed by a period of prosperity.
There have been many reports into corporate governance failures and recommendations for improvements. In particular, the focus so far has been more on the implementation of good corporate governance, particularly by financial institutions.
A key area of focus for improving the implementation of corporate governance is in the area of culture.
Effective corporate governance relies on both ‘hard’ structural elements – such as specific legal obligations. It also relies on ‘soft’ behavioural factors driven by directors and management faithfully performing their duty of care to the company.
Directors should also ensure their stewardship drives the right compliance culture in their organisation. They should also go beyond what the law requires.
As the David Jones share trading incident highlighted – perception matters. We suggest applying a “front page” test to proposed share trading.
As directors your actions affect more than just the companies you act for and their shareholders.
You are integral gatekeepers in our financial system and through the proper performance of your role you help ensure that investors are confident and informed; and our markets are fair, orderly and transparent.
This is important in ensuring markets work to fund the real economy and in turn economic growth and well‑being.
From your position at the apex of your company you set the direction and are key to driving a culture of compliance in your organisation.
Such a culture is beneficial for companies, markets and the community as a whole.
After all, we all benefit from economic growth.
Greg Medcraft is chairman of the Australian Securities and Investments Commission. This is an edited version of a speech Mr Medcraft gave to AICD in June 2014.