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Address to the Australian Institute of Company Directors Launceston

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Address to

The Australian Institute o f Company Directors


23 A p ril 1992


Warwick Smith MP Federal Member for Bass Shadow Minister for Communications



Thursday 23 April 1992

How to avoid the A/an Bond fate !

The rise and fall of Alan Bond to super national hero, TV mogul (Channel 9), sharemarket supremo, now to bankrupt recluse hounded by cheap journalism over $2000 cars is, I suggest, a roller coaster ride all would seek to avoid.

Bond epitomises the best and worst of the 1980's. Entrepreneurship - essential for growth and development still in public policy terms has limits often 'other peoples' money is involved. In Bond's case, it was millions of small shareholders funds and the borrowings from banks.

Bond was not alone. The list is frightfully long -

Bruce Judge - Ariadne Christopher Skase - Quintex The Spedley Group Budget Rothwells Gary Carter

The spectacular falls did irreparable harm to Australia. The 'cowboys' of the South Pacific was how wr were described by the SEC and New York Stock Exchange. Mind you that is a case of 'kettle calling' - the U.S. has its star performers - read Barbarians at The Gate about the R J Reynolds/Nabisco buy out!

The 1980s now reflected upon sees a frenzy of activity to 'correct' the 'problems'. The 'fog' that surrounds so much of this frenzied activity and what it means to Directors of Public Companies particularly, is the purpose of today's discussions. Booms lead to busts invariably. And in Australia it also leads to more Inquiries to

see what went wrong and seek new solutions. In tandem, often Government will be legislating as well - as is the present case.

It is all confusing to say the least if you are a Director just seeking to do your job. But be aware your 'job' demands more of you than perhaps you realise and hence the reason why your Institute is more pro-active in its information program. Not before time I might say.

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I want to give a little history first and outline my own involvement in these issues for the last three years. Of many in the Parliament I am one of the very small number who has followed the matters closely as the public policy debate has developed.

I wish to lay before you several exhibits to which I will speak briefly:

Exhibit 1 The Rise and Fall of Alan Bond (Paul Barry)

Exhibit 2 Mergers, Monopolies and Takeovers (Griffiths)

Exhibit 3 Insider Trading - Fair Shares for All (Griffiths)

Exhibit 4 Joint Select Committee on Corporations Legislation (Edwards) (ASC Establishment)

Exhibit 5 The Rights of Shareholders (Lavarch)

All the reports mentioned I participated in. I was, up until December last year, Deputy Chairman of the Legal & Constitutional Standing Committee of the House of Representatives of Exhibits 2, 3, and 5. I was primary author with the relevant Chair from the Government.

Let me digress to give another dimension to the 1980s for in its lies the answer as to how so much disaster was visited on shareholders - who, after all, are the primary responsibility of Directors and to whom so many Directors displayed despicable contempt.

The 1980s saw the private sector become a net debtor rather than a net owner of debt assets such as bank deposits. In the second half of the 1980s business debt accounted for much of the surge in overall debt.

• EPAC - Total gross private sector debt as at June 1990 was $458 billion - growth averaged 17% per annum during 1980s.

• Gross foreign debt of private trading enterprises in June 1990 - $51 billion in 1980 - $5 billion.

• EPAC - top 25 Australian companies have seen massive liabilities increase as a proportion of equity rose from 28.6% in 1981 to 51.8% in 1990.

• EPAC - For 210 major Australian companies debt over 1981-1990 period - $9.1 billion to $65.2 billion.

• Reserve Bank - Credit to the business sector by financial intermediaries rose from $43 billion in 1981 to $213 billion in June 1990.

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• Banking sector now carrying enormous bad debts - all lent to corporate collapses. All in last 2 years have utilised over payments to superannuation as a method to support balance sheet to maintain share value.

• Westpac in October 1990 reported problem loans of $2 billion.

• Australian Banker's Association - for 3 major publicly listed banks, funding for bad and doubtful debts represented 2% of assets in 1980 and .9% by 1990.

On 20 October 1987 the stockmarket crash set the ball rolling - Rothwells recue etc. etc. The debt mountain began to unravel. The pain has been spread to every corner of the country. Business learnt - its one thing to get the loan, its another to pay it back. Consumers learnt they pay too for imprudent bank practices. All the major banks have now changed Chief Executives. But minority shareholders, consumers, business confidence, ethics and our international reputation took the most severe beating since the 1930s.

For public policy makers to sit by would be inappropriate. So inquiries proliferated - some were specialist, some more general, like the Banking Inquiry - all had a primary focus of illuminating the recent past to seek guidance of what, if anything, should be done.

The Policy Dilema

To intervene or not to intervene. My guiding approach was in all inquiries to seek greater peer review and market surveillance. This is the victory over increased regulations. The Lavarch Report has been welcomed by the market as meeting the balance and unlike the Government does not seek to place even more onerous requirements on business than are necessary.

The bias and the direction of this Report is to ask the industry itself to take more seriously and be far more active in its own surveillance and peer review, whether it be auditors or the ASX.

It is far preferable for the law to be focused in the direction of the market in this way rather than to provide greater levels of intrusive law and regulation. Over the recent period, the regulators have been experts at putting the case to have more law. This must be resisted. The best way it can be resisted is for the industry itself to be far more active in self-regulation and peer review.

It is the bias in both the Lavarch and the Insider Trading Reports (now broadly adopted in legislation).

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As Greg Bateman of Abbott Tout (leading Australian commercial solicitors) says

"it will be a shame if the Attorney-General pushes on with his current program of highly technical and long-winded company law reform without pausing to consider the more balance and sensible approach as found in the Lavarch Committee".

The Committee Report:

Some 30 recommendations: The key points are -

1. Clearer Listing Rules by ASX especially 3A (1)

"requires companies to report all events and matters that investors would reasonably require for the purpose of making an informed assessment of the assets and liabilities financial position, profits and losses or prospects of the listed company" - this is a 'continuous disclosure requirement' - but it is not a regime for continuous disclosure in legislative form. This may yet emerge from Government, however.

2. Business Judgement Rule

Committee recommends this proposal as an appropriate protection for Directors. This would mean that a director would be immune from liability in respect of his or her business judgement in relation to the conduct of the company's business. That immunity would be lost if at the relevant time it is shown that the director:

• had not informed himself or herself to an appropriate extent; • did not act in good faith for a proper purpose; or • acted in a manner that a reasonable director could not possibly regard as being for the benefit of the company.

To show that they are carrying out their duties, the directors should have the benefit of a statutory right to rely on others to act or to provide information. That reliance must be reasonably based.

It is our view the Business Judgement Rule is an absolute essential requirement for any amended Corporations Bill. The Attorney-General appears cool to the idea.

3. Rights of Shareholders

Derivative actions are proposed to empower disgruntled shareholders to pursue Directors. This is an innovative proposal but it is not new. It is an appropriate protection for small shareholders. It effectively overturns the ancient rule in Foss V Harbottle which prevents action by a shareholder against a company.

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At present, if a Director has breached his or her duties and caused damage to the company, a shareholder faces certain legal obstacles in mounting court proceedings directly against the director. Further, the costs of such an action may be prohibitive. To overcome this, the Committee has recommended the introduction of the statutory derivative action. This would confer upon each shareholder (and certain other categories of persons or entities) the statutory right to apply to the court for permission to take proceedings (in the name of the company) against current or former directors of the company.

The key features of the recommended statutory derivative action are:

(a) It is anticipated that, in seeking permission to take proceedings against the directors the shareholder only has to show the court that there is a prima fade cause of action on the part of the company against its director.

Indeed, the shareholder would not possess all the relevant information (which would be held by management of the company) and the shareholder's affidavit material would be likely to be drawn on the basis of his or her "information and belief".

(b) The court must not give the shareholder the permission to take the proceedings (against the director) unless:

(i) it is probable that the company will not sue its


(ii) the shareholder is acting in good faith with a view to the best interests of the company; and

(iii) it appears to be in the best interests of the company that

proceedings against the director be taken.

(c) If the court gives the shareholder permission to go ahead (with the action against the director) it will be empowered to order that the company fund all the legal costs of the shareholder in taking the proceedings against the director. It is anticipated that this will be the major benefit of the statutory

derivative action. The company which has failed to sue its director, will be funding the shareholder's court proceedings (in the name of the company) against the director.

(d) We were concerned that the targeted director should not be disadvantaged in terms of funding for the court action. We recommend that if the shareholder is funded by the company then the defending director should likewise be funded by the company. This would be in the form of an interest-free loan. If the director wins the case he or she is entitled to be indemnified by the company an hence the loan does not have to be repaid. If the director loses the case he or she will still owe the money to the company.

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Such a proposal significantly redresses the balance which has tilted so far in favour of directors to the detriment of shareholders. It will cause greater compliance by directors of their duties.

This procedure, if adopted, will dramatically impact on corporate life.

It is based on the Ontario model which has received support from the Law Council of Australia, The Business Council of Australia and the Australian Securities Commission.

The proposal seeks to get over the uncertainties of Foss V Harbottle and the twin difficulties of lack of resources and lack of information . The Business Council said in evidence to our Inquiry: ·

"If a shareholder has been wronged by the directors through a director's breach of duty it is the company and/or the directors which should be ultimately responsible for the legal costs. The use of

derivative actions on the Ontario model should be given closer consideration".


This brief overview only purports to raise broad issues and the public policy directional trend. The jury is still out on much of the reform. In these several reports we seek to be no more intrusive than is necessary to address legitimate public policy failings in corporate law.

Whether 'the noose tightens for company directors' or whether its 'another turn of the screw for directors of companies' is a matter of judgement. Some change due to the 1980's is inevitable. I and my colleagues will seek to maintain the balance in favour of market action (via the ASX) and peer review. But directors themselves

must be more diligent, be better informed and keep markets and shareholders better informed.

Executive Chairmen do not rule with divine monarchical power. Shareholders money is not the 'property' of managements - creditors and shareholders have rights and ought be able to pursue them. Penalties for breach of director's duties are necessary but clearly during the 1980's were inadequate. Directors can expect during the 1990's more demands for performance, accountability and ethics: it will come in part from legislative action, in part from its own peer pressure, and in part from a more sceptical and cautious institutional and private investor.

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