Lack of liability reform a COAG failure

THE upcoming election is an important one for our nation. Regardless of which party forms the next government, it is an opportunity to rethink not only the way government approaches some key issues but how it conducts its relationship with business.

The Australian Institute of Company Directors – a non-partisan organisation representing a diverse membership of more than 26,600 – considers these issues to be of the highest importance. They are also of vital concern to the 2.1 million Australians who are directors.

Director liability

Reform of corporate regulation, and especially laws which have a direct impact on directors and the way they operate, is a significant issue for the business community, for the economy and, ultimately, for Australian society as a whole.

The AICD is particularly concerned with the number of laws that hold directors personally liable in one way or another.

The problem involves the sheer weight of law in this area, as well as its operation.

In addition to the Corporations Act and other Commonwealth statutes, there are more than 750 state or territory statutes that hold directors liable for corporate breaches, in some cases even when they have no personal involvement in those breaches. Unlike other defendants, in some cases directors are also required to prove their innocence – a reverse onus of proof – with no clear statement of duties or defences.

These laws are having a significant impact on boards and on business decision-making. A survey of ASX200 directors, conducted by the AICD of with the federal Treasury, provided some hard evidence confirming our long-held views on this issue.

More than 71 per cent of the survey respondents said they had turned down an offer to join a board because of the risk of personal director liability, and close to half had resigned from a board because of liability risk.

Importantly, the survey showed that, by encouraging an overly cautious approach to decision making, focusing directors’ minds excessively on risk avoidance rather than adding value and wealth creation, these laws have the potential to stifle business and growth.

1. Reinvigorate the COAG reform process

Reforming and harmonising director liability laws were referred to the Council of Australian Governments (COAG) as one its key reform objectives.

Governments around Australia are now supposed to be undertaking legislative reviews after the states and territories conduct audits of their legislation on the basis of agreed benchmarks. However, there appears to be little progress on this process, which has been given low priority by state governments

At this point, director liability reform is one of the greatest failures on COAG’s national reform agenda.

The next federal government, of whatever political colour, should redouble its efforts to ensure the states carry through with their reviews. In future, there should be renewed talks with the states to seek to apply more rigorous and consistent benchmarks for reform of director liability legislation, with real KPIs and consequences if they are not met.

2. Creating a ‘safe harbour’ for directors

We strongly believe there is a need for a broad-based business judgement defence or safe harbour for directors. The defence would be available when directors make commercial decisions in good faith, having informed themselves about the subject matter and having acted in the best interests of the company. If directors’ actions meet the criteria, they should not, with benefit of hindsight, be liable for errors of judgement.

3. Insolvency law reform

Current laws on insolvent trading make trading out of insolvency not only extremely risky but they prohibit it for the directors of a company in solvency stress. Each director faces being held personally liable for any further debts incurred, unless the company is placed into external administration.

The critical element to address our concerns regarding the current laws on insolvent trading is a broad business judgment rule defence to allow directors and companies a fair go to salvage companies for the benefit of all.

4. OH&S law reform

We welcomed last year’s agreement by the Workplace Relations Ministers’ Council to harmonise state and territory legislation and to implement a uniform national approach to OH&S.

While we understand there are remaining issues of concern for the government of Western Australia, which has chosen not to participate in the intergovernmental agreement, this reform is crucial and we have urged WA to join the other states in creating a truly national OH&S regime.

5. Getting regulation right

We believe deregulation – stemming the growth in regulation and cutting back existing red tape – is a crucial part of the new government’s economic task and a key element of the agenda for boosting national productivity.

Governments keep coming up with legislation that is impractical, often unworkable, disproportionate to the ‘problem’ it is purporting to solve, and bringing unintended consequences.

The processes that create new regulations must ensure they genuinely are needed and are as efficient as possible, that proper consultation takes place with business and that existing red tape is frequently reviewed, rigorously assessed and vigorously pruned back as necessary. We need better regulation, not more regulation.

The system of creating and removing regulation needs to be reformed, not just the regulations themselves.

At the federal level, there needs to be a whole-of-government approach. There must be commitment by every minister and within every department to a better regulation and deregulation agenda. This must be properly resourced.

Targets need to be set, progress monitored and gains regularly quantified by a suitable independent body, preferably the Productivity Commission.

Reform must be national in focus because much of the problem lies in regulations imposed by state or local governments, or in the interaction between them and rules at the Commonwealth level.

A reinvigorated national reform plan is needed, which includes improving the mechanisms used by the Commonwealth and the states to create new regulations and assess existing ones.

At Commonwealth and state levels, basic principles such as ‘one in, one out’ – where removing regulation is a prerequisite for adding new ones – should be the ‘default mode’ for reform.

There must also be a requirement to frequently review existing regulations, to rigorously assess them against cost-benefit principles and to remove them where they are no longer justified.

There should be a firm requirement to consult business when formulating new regulation.

Governments should include sunset clauses and review provisions in legislation to provide a mechanism to ensure that new regulations are assessed after a period of time and removed if found to be ineffective or no longer required.

We believe that in developing policy and making regulations which impact on business, future governments should commit to the following principles:

1) A case for regulatory action must be established.

2) Regulatory proposals should not be put forward without an examination of the alternatives to regulation.

3) The likely cost to business of proposed regulation needs to be rigorously calculated.

4) Effective consultation with stakeholders should occur at all stages of considering and preparing regulatory proposals.

5) An adequate regulatory impact statement must be prepared.

6) Post-implementation reviews must be conducted.

* Richard Lee is chairman and John Colvin is chief executive of the Australian Institute of Company Directors.