More than just reputations at risk for joint-venture directors

SHAREHOLDERS may have put beyond question their expectations of the role and responsibilities of company directors, but what of the directors of joint-venture companies. To whom are they responsible and accountable?

Although governed by the same Corporations Law, directors of joint-venture companies are confronted with unique issues that could put them at risk of breaking the law.

KPMG energy and natural resources group national general manager Helen Cook said it was an issue that arose about six months ago.

“It hasn’t had a huge amount of profile yet but I think that is likely to change as boards increasingly get under the spotlight,” she said.

KPMG board and corporate governance advisory head Deborah Smithers said executives appointed as non-executive directors of joint-venture companies risked their reputations, financial loss and criminal penalties if they did not understand the seriousness and complexity of their role, and failed to act in the best interest of the company.

KPMG has run a series of seminars across the country to educate joint-venture company directors.

Ms Smithers said the growing interest in non-executive directors’ responsibilities was due to increased media and government scrutiny brought about by recent high-profile corporate collapses.

“The Australian Securities and Investment Commission is taking a greater interest in continuous disclosure and pressing for higher financial penalties for corporate transgression, while the collapse of Enron has placed all directors under a greater spotlight,” she said.

Australian Institute of Company Directors CEO John Hall said the basic rule was that directors must act in the interests of the organisation they were a director of, and not in the interests of the organisation that appointed them.

Ms Smithers concurs with this view, and said joint-venture directors were often making decisions that were in the interest of their nominee or parent company, rather than the joint-venture company, often in order to ensure the security of their directorship.

“Many problems arise when parent companies appoint their executives to the boards of joint ventures with the aim of protecting their own interests,” Ms Smithers said.

“The temptation is to make decisions that please their principal employer.

“Very quickly non-executive directors find that they are confronted with situations that create a potential conflict of interest. Decisions that benefit the joint venture may adversely affect the parent, and vice versa.”

Conflicts of interest could occur when a director supplies services to the company, has related party loans, guarantees and other securities, and receives remuneration unrelated to performance.

It also might occur when the director has personal relationships with other members of the organisation or com-petes with the company for tenders.

Clayton Utz senior associate and resources specialist Mark Gerus said there were two aspects to the common law duties of directors. Directors had both a fiduciary duty and a duty of confidence in their role as director, he said.

“In addition to the duties the director has in relation to the Corporations Law, he or she may find themselves with a special obligation and respon-sibility to another company,” Mr Gerus said.

He said conflicts often arose over what the interests of the company were as opposed to those of the joint-venture company.

For example, questions may arise over whether a company under-taking exploration work in a joint venture was able to pursue its own interests, which were not part of the joint venture on neighbouring tenements.

Mr Gerus said directors must be careful when sharing confidential information with other parties, including the parent company, to ensure there was not a breach of confidence.

PricewaterhouseCoopers managing partner Alan Good said it was important for a director to declare an interest if discussing a contract with the parent company.

In such cases the director should probably abstain from voting on the matter, he said.

Ms Smithers said people needed to realise that those who took on the role of a director must commit themselves to the highest standards of ethical and lawful conduct.

“The critical issue of sustainability, deregulation and competition, e-commerce, strategic alliances and the increased focus on customer performance standards are changing the landscape for the mining, oil and gas, forestry and power generation sectors,” she said.