The ‘dangerous’ assumption about directors

“One of the problems with royal commissions for reputations is that the mere asking of a question, no matter how answered, is taken to suggest wrongdoing or the giving of false evidence.”

Sep 11, 2019

AFR

It’s not every day that a leading barrister takes aim at two sacred cows: the royal commission as the gold standard for justice, and the all-encompassing responsibilities of the modern company director.

When barrister and non-executive director Philip Crutchfield QC takes the stage at the Turnaround Management Association’s annual conference in Melbourne on Wednesday afternoon, he might need to pull on his metaphorical hard hat.

Crutchfield, who is chairman of ASX-listed fintech Zip Co, says the standard set since the financial crisis – particularly flowing from the Australian Securities and Investments Commission’s case against the directors of Centro – is that “directors now have an obligation that is personal, and cannot be delegated, to understand aspects of the company’s business in ways which are simply unrealistic”.

Phillip Crutchfield QC says the fallout from the royal commission can be brutal for those named.  Wayne Taylor

In the Centro case, it was the directors’ understanding of accounting standards relating to the classification of liabilities. But he also gives the example of a life insurance company, where a director gets information on “things like morbidity risks, mortality risks, actuarial calculations, liquidity risks, capital management reports, the list goes on”.

Directors shouldn’t double check the work of management and auditors and other experts, Crutchfield argues. Their contribution should be about strategy, culture and the future direction of the firm.

One important change that could be made would be to amend the standard clause in the constitution of most companies that says, effectively, the business shall be managed by the directors, Crutchfield says.

“To the extent to which it is understood to mean that the directors are involved in or have any knowledge of the day to day activities of the company, it is dangerously wrong.

“Non-executive directors are not in the business, and make their contribution in very different ways than that of day to day involvement.”

That’s actually the tamest part of Crutchfield’s speech. Come to think of it, he should really upgrade from a hard hat to a metaphorical dragoon helmet like those worn in the French Army in the late 18th century.

Because in warning about the damage a royal commission can do to those caught in its sweep, Crutchfield has compared the banking royal commission with the brutal executions of the French Revolution.

“In the financial services royal commission, the metaphorical tumbrels of the Jacobin revolution rolled up and down William Street delivering victims to and from the guillotine. And the bodies were delivered by the media to the baying mob the next day.”

As Robespierre might have said back in the day: How good are lawyers?!

Crutchfield was intimately involved in the royal commission, having acted for AMP. He also acted for the corporate regulator in the rate-rigging case against Westpac.

While he is full of praise for the royal commission’s work and says “what was disclosed should be a wake-up call for corporate Australia”, he is concerned about the increasingly frequent use of royal commissions to examine highly charged issues such as banking and trade unions.

These, he argues, “should have been matters for reasoned, calm and lengthy debates over policy in our Commonwealth Parliament, not the subject of royal commissions”.

Crutchfield further argues the approach taken by royal commissions creates further concerns about natural justice, given how quickly they can destroy reputations “whether findings (which cannot readily be challenged in a court) are made or not”.

“One of the problems with royal commissions for reputations is that the mere asking of a question, no matter how answered, is taken to suggest wrongdoing or the giving of false evidence. The mere making of an imprecise or misguided submission can also lead to immediate damage. The reporting the next day of a person’s name in association with the damaging question or submission can have lethal consequences.

“So, many people, including those who are not even called to give their side of the story, suffer severe collateral damage.”

It’s a good point that is well made. But the counter argument is that you need to crack a few metaphorical eggs to make a reform omelette. It was only by deeply drilling down into the detail of the banking sector – which sometimes involved naming names of those who made specific decisions at certain points – that we were able to see how the industry worked, and when it did not.

But again, Crutchfield deserves credit for trying to pinpoint a solution, rather than just diagnosing the problem.

He suggests expanding the existing regime – whereby ASIC (Australian Securities Investment Commission) can issue a letter to say it is taking no action against an entity – to cover circumstances where a person’s reputation has been damaged but they haven’t been investigated by ASIC or broken any laws.

“Expanding these powers of ASIC, and publicising their availability would go some way to filling the natural justice lacunae that currently exists, so that people can get on with their lives and get back to making contributions to our community.”