Earlier discussions on corporate governance norms have raised questions about the role of independent non-executive directors in maintaining appropriate standards of governance. In this context, a recent Australian judgment indicates the nature of duties which a non-executive director may be required to discharge.
Australian Securities and Investment Commission v. MacDonald involved a situation where the Australian market regulator, ASIC, alleged certain malpractices in the form of misinformation being given to the market regulator by the board of the defendant company. ASIC alleged “that a Draft ASX Announcement was approved at the 15 February 2001 Meeting of the JHIL board of directors and that it contained a number of statements to the effect that the Foundation would have sufficient funds to meet all legitimate Asbestos Claims, that it was fully funded and provided certainty for people with legitimate Asbestos Claims. ASIC alleged that those statements were false or misleading and that the directors were in breach of (their duties)…”
Among the many issues raised were those concerning the duty of care imposed on executive and non-executive directors; as well as those pertaining to the extent to which non-executive directors could rely while exercising their duties on the information given to them from others. The Court noted at the outset that the position in relation to non-executive directors was unclear. Non-executive directors were undoubtedly subject to similar fiduciary duties as executive directors such as the duty to act in good faith and for proper purposes, duties of no conflict etc. Nonetheless, there was considerable uncertainty in determining how these duties applied to non-executive directors. Quoting from a leading Australian textbook, it was noted:
“For a non-executive director case law has supplied no objective standard of the reasonably competent company director analogous to the reasonably competent member of a particular profession or trade, such as architect, solicitor, physician or builder, against whom the conduct of a director can be measured when determining whether there has been a breach of the duty of care, diligence and skill. Part of the reason is the absence of any shared body of detailed expert knowledge of what is involved in the directing of companies. The diversity of companies and varieties of business endeavour are such as to allow uniformity of standards only on very general matters.”
The Court however went on to hold that all directors, including non-executive ones, should have known that there was a possibility that the statements in the Announcement were false and/or misleading. Significantly, the Court decided that non-executive directors could not simply rely on the information provided by the management or by the executive directors. “This was a key statement in relation to a highly significant restructure of the James Hardie group. Management having brought the matter to the board, none of them was entitled to abdicate responsibility by delegating his or her duty to a fellow director.” Thus, the Court seems to have imposed a duty of care on non-executive directors which cannot be satisfied simply by relying on information provided to them by others. What exactly is the content of this duty is a question not conclusively answered.
Nonetheless, the ASIC has described the decision as “a landmark decision in Australian corporate governance”; and it appears that non-executive directors will not be held to have satisfied their duties by arguing that they relied in good faith on certain information provided to them. Particularly when the information concerns an important management decision, there appears to be a duty on non-executive directors to confirm the veracity of the information independently.