Raising the Bar For Company Chairmen

In February of this year, former One.Tel chairman John Greaves sought in the New South Wales Supreme Court to strike out claim made against him by the Australian Securities & Investments Commission (ASIC), Australia’s corporate watchdog.
Greaves was non-executive director who, in addition to chairing the board, was chair of One.Tel’s finance and audit committee and founding director. He had the most experience in financial matters among the directors. And he was also the only one of four non-executive directors singled out by ASIC.
ASIC’s civil claim against Greaves followed the collapse of the telecommunications company in May 2001. It alleged standard of care and levels of responsibility required of chairmen, beyond those required of other directors. The claim focused on breach of special responsibilities arising out of the various positions held by Greaves at One.Tel, specifically focusing on his chairmanship of the company.
Greaves sought dismissal of the claim on the basis that chairman’s legal responsibilities were procedural in nature and related only to the conduct of board and shareholder meetings. Perhaps he was also seeking to infer that there was no reason to single him out. If there was no basis for action against other non-executive directors, there should be no basis for action against him.
In landmark Australian decision, Greaves’ application was refused. In the process, the court set the stage for the boundaries of chairmanship responsibilities to be clarified – and some would say expanded. The decision reinforced the court’s role in determining liability for the conduct of company directors: to articulate and apply standard of care that reflects contemporary community expectations. And this is so, even though it might establish responsibilities and legal duties never before expressly set out in law.

ASIC’S Claim
ASIC pleaded Greaves had the following specific duties:
•The general performance of the board – to take reasonable steps to ensure that all board members monitored management of the company, properly assessed its financial position and performance, and properly and promptly detected and assessed any material adverse development affecting its financial position or performance.
•The flow of financial information to the board – to take reasonable steps to ensure that all board members were informed of all material financial information concerning the company, which was necessary to enable the board to monitor management, to properly assess its financial position and performance, and to properly and promptly detect and assess any material adverse development affecting its financial position and performance; and to take reasonable steps to ensure that the financial information revealed the adequacy of cash reserves within the group, the actual (and not estimated) financial position and performance of the various business segments in the group, and key events or transactions which affected the financial position or performance of the group.
•The establishment and maintenance of systems for information flow to the board – to take reasonable steps (in conjunction with managing directors) to ensure that systems were established, maintained and monitored which resulted in the required material financial information being accurate and reliable and flowing from management to the board so as to enable the board to monitor management, to properly assess the financial position and performance of the group and to properly and promptly detect and assess any material adverse development affecting its financial position or performance.
•The employment of finance director – to take reasonable steps to ensure that the group employed finance director with the financial qualifications, skills and experience reasonably appropriate for person holding that position.
•The public announcement of information – to take reasonable steps to ensure that public statements made on behalf of the company did not mislead the Exchange or the investing public; and to take reasonable steps to ensure that the company complied with relevant disclosure requirements for price sensitive information.
•The maintenance of cash reserves and group solvency – to take reasonable steps to ensure that if the group was to continue its existing operations the cash reserves within the group were maintained at level which ensured that the companies within the group were able to pay their debts as and when they fell due.
•Making recommendations to the board as to prudent management of the group – to make recommendations to the board as to the prudent management of the group, including its funding requirements, cessation of business and/or appointment of an administrator.

ASIC’s Case and Section 180 of the Australian Corporations Law
Central to ASIC’s case against Greaves was that he had special “responsibilities” under section 180(1) of the Australian Corporations Law. ASIC sought to prove that by virtue of his various positions and expertise – as foundation director, chair of the board and the finance and audit committee, and, perhaps most significantly, the person with the highest qualifications and experience in financial matters amongst the directors – Greaves should have been more active and vigilant with respect to One.Tel’s circumstances. Greaves’ principal contention was that his “responsibilities” referred only to the specific tasks delegated to him.
Section 180 of the Australian Corporations Law requires directors to exercise their powers and discharge their duties with the degree of care and diligence that reasonable person would exercise if they were director of corporation in the corporation’s circumstances, and occupied the office held by, and had the same responsibilities within the corporation, as the director.
The Supreme Court sets clear parameters for the interpretation of director’s “responsibilities”. The court regarded “responsibilities” as wider concept than that asserted by Greaves. It referred to the acquisition of responsibilities “not only through specific delegation but also through the way in which work is distributed within the corporation in fact, and the expectations placed by those arrangements on the shoulder of the individual director”.
From this platform, the judgment is most significant in two respects. First, it found that, together with his various positions in One.Tel, subjective consideration of Greaves’ qualifications, experience and expertise would contribute to his responsibilities under section 180. Second, it found that, particularly in the context of listed public companies, ASIC had reasonably arguable case that the role of chairman (assessed on an objective basis) likely carried with it factual responsibilities beyond mere procedural functions.

New Zealand’s Duty of Care – Section 137
Section 137 of New Zealand’s Companies Act is broadly aligned with Australia’s section 180. It requires directors, when exercising their powers or performing their duties, to exercise the care, diligence, and skill that reasonable director would exercise in the same circumstances taking into account (without limitation) the nature of the company, the nature of the decision, and the position of the director and the nature of the responsibilities undertaken by him or her.
The first question, of course, is whether the concept of “responsibilities undertaken” by director under New Zealand law, or other aspects of section 137, admits consideration of that director’s personal qualifications and skills in all circumstances, even without the assumption of special responsibilities.
In any debate on this point, much might be made of two things. First, the “responsibilities” required by New Zealand’s legislation must be those actually “undertaken” by the director. The argument is that the statute precludes responsibilities being implicitly assumed by director consequent simply on his or her particular personal attributes. But not

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