Personal liability laws scare off directors

A survey of Australia’s top directors has found a stunning 70% have declined board positions primarily because of concerns about personal liability.

A survey of Australia’s top directors has found a stunning 70% have declined board positions primarily because of concerns about personal liability.

The survey, conducted on behalf of the Federal Treasury for Corporate Law Minister Nick Sherry, has been released as part of Sherry’s push to harmonise directors’ liabilities across Australia’s states and territories.

The results of the survey indicate current laws are having a detrimental effect on decision making within Australian companies.

More than 87% of directors surveyed said they knew of someone who had refused a board position because of concerns about personal liability and over 65% of respondents said the risk of personal liability had occasionally forced them to take an “overly cautious” approach to decision making.

Directors said this overly cautious approach resulted in higher costs for shareholders, through fees paid to advisers such as lawyers and investment bankers; delayed decision making; and even the closure of operations.

“The diminution of the entrepreneurial approach, or increase in process, can’t be quantified,” said one respondent.

“But as we move to a more bureaucratic approach, where the penalty for a wrong decision is so much greater than the reward for a correct decision, then the impact on national competitiveness, economic growth and general welfare is obvious.”

It’s a sentiment that Sherry shares.

“We need a balance in our corporate laws between promoting accountability and ensuring suitable people are willing to serve as directors and take appropriate business risks. Nationally consistent laws will contribute to quality decision-making by directors which will increase economic growth and benefit all Australians,” he said in a statement.

Sherry’s ministerial team will be charged with coming up with a report on this issue to the Council of Australian Governments by mid 2009.

Sherry’s team will look at three key principles:

1. Where companies contravene statutory requirements, liability should be imposed in the first instance on the company itself.
2. Personal criminal liability of a corporate officer for the misconduct of the corporation should generally be limited to situations where the officer encourages or assists the commission of the offence (accessorial liability).
3. In exceptional circumstances, where there is a public policy need to go beyond the ordinary principles of accessorial liability, a form of deemed liability could be imposed on a corporate officer only using a “designated officer” approach (for minor offences) or a “modified accessorial” approach (for more serious offences).

Related stories:

• Changes will tone down director liability laws
• Directors behaving badly