As an officer of a company, you will have heard all about Corporate Governance. But what is it? How compliant must your company be before you attract personal liability? How much must you know about the company’s affairs before the knowledge of the company is attributed to you? And how long can you plead ignorance as to what is taking place in the company before you have a duty to investigate?
This posting covers some of these scenarios. Please note it is not intended to be a summary of the law or legal advice on which you can rely in all situations. It may not be appropriate to your circumstances and if you have any doubts as to whether any of the following is applicable in your circumstances you should consult with your professional adviser.
Corporate Governance has become increasingly more important over the last decade – aimed at preventing the corporate disasters that were the Enron's, the Worldcom's and locally the Teleone's. It is a policy rather than a set of defined rules introduced to ensure companies are no longer the personal playthings of domineering chairmen or company directors able to impose their personalities on puppet directors. As the concept gained worldwide acceptance, companies and indeed even countries became to be judged on the strength or otherwise of its corporate governance policies.
"Corporate Governance affects a company on a day to day basis in everything it does ... all the time"
The role of the chairman and CEO began to separate. Non executive directors became exactly that – non working directors appointed for a particular expertise or network base and to protect minority shareholders and creditors. Checks and balances have been introduced and (in theory at least) each officer is accountable for the ills of his department.
No longer is a director able to say “but I was not at the meeting” or “I did not know because I do not work there”. No longer does a seat on the Board mean box seats at sporting events or cases of wine on the weekend or free trips overseas. No longer is being a company director or other company officer a status symbol to be accepted for that reason alone. In today’s world of intense scrutiny, public investigations and an ever increasing need to hold someone liable, being an officer or director of a company carries with it a responsibility to:
- The company’s creditors
- The company’s customers
- The company’s bankers
- The company’s shareholders
- The company’s staff
- Consumers or users of the company’s products, and
- Regulatory bodies such as ASIC and the ATO
So that any affected person has the comfort of knowing that the company is responsible, properly structured and compliant with all relevant statutes.
Corporate Governance affects a company on a day to day basis in everything it does. The greater the degree of corporate governance, the higher the rating the company will enjoy. This might affect its share price (if listed) its credit rating with lenders, the type of staff it is able to attract and even its terms of trade with suppliers. It will of course be different for each company but every company will be affected.
To ask again – what does Corporate Governance mean? Stripped down to basics, it is a set of principles designed to avoid conflicts of interest on the one hand and an unfair bias on the other. So in a company which practises good corporate governance, a director is no longer able to divert business to another company in which he has a personal interest to the prejudice of the 1st company. Similarly, a board should now be structured so that a director is no longer able to impose his personal will (regardless of his strength of character) on a company as no single officer should have decision making powers to the extent that he is able to unilaterally drive the direction of a company.
But although only a set of principles, the practise of corporate governance has been supplemented by legislation. There are numerous sections in various statutes which ensure that a company is forced to employ sound corporate governance principles. From the more well known obligations that render a director personally liable to creditors if a company incurs credit when trading in insolvent circumstances to more oblique sections which oblige a director to act in good faith and exercise his powers for a proper purpose. On a more practical note, directors are liable to indemnify the ATO for various taxes and superannuation not properly deducted.
In addition, directors (and some company officers) have fiduciary duties designed to prevent conflicts of interest arising.
So how do you ensure your company complies? Mostly it is a question of sound business practise coupled with common sense and good advice from your professional advisers. Some more obvious techniques:
- Avoid potential conflicts of interest
- Separate and delegate different functions to different individuals - the Chairman should not be the same person who manages the company on a day to day basis, the CEO should not be solely liable for the finances of the company and company secretarial work should be specifically allocated to and administered by a suitable competent person
- Put in place suitable management procedures and administration practices which will facilitate good record keeping and sound financial management
- Be aware of your responsibilities under the various statutes and particularly under the Corporations Law and Income Tax Acts
Remember – the company is an intangible thing. It exists through its officers and directors. If a company fails to comply with any law or regulation or if a creditor or customer sues the company – it is the directors and officers who will have to answer – and if found wanting, could be held personally liable.
Practising good corporate governance is not only about avoiding personal liability – it is also good for business. After all who would you rather deal with? A company that does practise good corporate governance or one that does not?
If you are concerned that your company may not comply or that you are vulnerable to be sued personally for your company’s liabilities, fill in the form below to see if we can assist.
The reader is informed that this idea is not legal or commercial advice from AC&E International Pty Limited, and you should seek your own legal advice prior to acting on any of the information contained in this idea. AC&E International Pty Limited does not accept any responsibility or liability for the accurateness or completeness of information contained in this idea, and there is no assumed direct or indirect liability by AC&E International Pty Limited. The reader should be aware that some information may be incorrect, incomplete or out of date when viewed, and is advised to verify the information themselves and seek their own legal advice before acting or relying upon it.