The liability burden imposed on directors is hurting investment and jobs.
MOST Australian states are continuing to fail badly when it comes to removing the excessive liability burden imposed on company directors, damaging business investment and job creation, according to the ‘Boardroom Burden Report Card for 2010’.
The report card measures the ‘business-friendliness’ of legal regimes on a state-by-state basis.
Overall, the latest report card shows that only three jurisdictions – ACT, Tasmania and Victoria – received better than a ‘pass’ mark, while five failed (see table). Only ACT (69 per cent) achieved even a ‘credit’ mark.
Queensland was again ‘bottom of the class’ this year, with a mark of just 18 per cent. Western Australia (33 per cent), South Australia and New South Wales also did poorly, all falling well short of a pass.
WA had the greatest number of laws imposing personal liability on directors with 139, followed by New South Wales with 134 and Queensland with 106.
The report card for each state was measured on three criteria, with a maximum possible score of 100.
A score of 100 represents a state or territory that imposes a level of personal liability on directors that is reasonable and not so excessive as to discourage efficient decision-making and investment by boards.
Fifty points were allocated to the content of laws imposing liability on directors, and measured how punitive the relevant laws are.
Laws lost marks if they were strict liability and lacked a business judgement defence.
WA, Tasmania, Northern Territory, South Australia and Queensland all scored a ‘fail’ on this measure.
WA ranked fourth on this criterion with 18.85 points.
Up to 30 points were allocated to the number of laws in operation in each state and territory.
WA ranked last on this criterion with 139 relevant laws; it had a score of zero.
Up to 20 points were allocated to the operation of the laws, and the procedural fairness with which they are administered.
This measure deducted marks where laws involved a reverse onus of proof and ‘deemed liability’ or had no business judgement rule defences and added back marks where other defences apply.
WA ranked equal second on this criterion, with 15 points. NSW and Queensland did very poorly on the measure of procedural fairness when directors are prosecuted under a director liability provision.
This measure was based on the two most commonly prosecuted pieces of legislation, the Environmental Protection Act and the Occupational Health and Safety Act in each state and territory across the country.
Any business looking to establish a headquarters or locate a new project in Australia, thereby expanding investment and jobs, should take this ranking into account.
They should ask themselves: do we want to do business in a state that that manages a mark of just 18 per cent or one that gets 70 out of 100?
The report card comes with a important message for all governments, especially for those at the ‘bottom of the class’ – they must do the hard work of reforming liability legislation, because the director liability burden affects business decision-making and can have an impact on where companies invest and create new jobs.
Governments in all Australian states and territories should be looking to reform their director liability laws along the lines already agreed by both the Ministerial Council for Corporations and the Council of Australian Governments.
However, to this point, progress on this reform appears to have been non-existent, which is very disappointing for the director and business community.
With 708 provisions in state and territory laws imposing personal liability on individual directors for corporate misconduct, the burden on directors had become too great, especially when it is considered that they are also dealing with Commonwealth legislation like the Corporations Act, the Trade Practices Act and the tax laws.
These provisions mean that directors are liable simply because they are a director, even where they may not have had any personal involvement in a breach.
In some states and under some legislation the onus of proof is reversed, removing the presumption of innocence, and there are very narrow legal defences and limited rights of appeal.
The BBRC was based on research by Minter Ellison.
• John Colvin is the Australian Institute of Company Directors’ chief executive. This is an edited extract from the AICD’s announcement of the Boardroom Burden Report Card.