After Centro comes the regulatory nightmare

The Centro and James Hardie decisions recently handed down by the courts are leading Australian business into a strategic backwater at the worst possible time.

Australian non-executive directors will probably have paid attention to the James Hardie and Centro decisions recently handed down by the High Court and Federal Court respectively.

If they haven't, they should.

At face value, the Centro decision establishes a general principle that Australian non-executives can be liable for misstatements in corporate financial statements, even if those statements have been signed off by the company's auditors, company management, the audit committee and directors with qualifications or experience in accountancy.

Based on this, it seems only people whose risk appetite would put Bear Grylls to shame should want to be non-executive directors of large banks. What hope does any business generalist, who is not a specialist in derivatives and 'financial exotics', realistically have to understand a large bank's derivatives book at a point in time, let alone be confident that it is accurately represented in a company's financial statements – without relying on expert advice?

On top of this, the Hardie decision now seems to establish the general legal principle that company directors have a strict liability to ensure the accuracy of board minutes, embellished with the memorable comment that this is one of the most ritually observed obligations of community and not-for-profit organisations throughout the country.

I would invite the author of that remark to attend board meetings of my kids' local footy and cricket clubs, which generally concentrate more on cash flow and survival than the last meeting's minutes.

I can't speak for others, but it's also been my experience that individuals who are the most hawkish on meeting minutes sometimes have the least substantive contribution to make in helping the organisation in practical ways, and when board discussions turn to the vital strategic questions of the day.

It may be argued that the particular facts of the Centro and James Hardie cases merited the conclusions reached by the courts. I express no view on those particular circumstances and outcomes. My point is that they appear to have given rise to general legal precedents which, if applied strictly by future courts, as they surely must be, will be a poor outcome for Australian business, the Australian economy and national economic wellbeing.

Australia faces a moment in time of great economic opportunity and risk, probably the most significant in our 230-year history.

Our businesses face great strategic questions – positive and negative – associated with the rise of China, the hammering of our manufacturing and trade-exposed industries by competition from emerging economies and the rise of the dollar, and the disruptive effect of the internet.

Is it our commercial destiny, at this pivotal time, for Australia's boards to be focused on the nuances of meeting minutes and how they might be read by a court in five years' time? Or to have directors coming to meetings seeking to ensure that their personal position on any remotely controversial matter is faithfully recorded in the minutes, so as to minimise future exposure to legal action that could threaten personal finances or reputation? Or second-guessing company auditors and financial experts on line items in financial statements?

My bet is that these new legal precedents will serve the national interest a lot less than the interests of ambulance-chasing class action lawyers. I'm also willing to bet that our national economic competitors, especially in emerging economies, will look with bemusement at this growing national obsession with the risk side of the risk/reward ledger.

While accuracy and transparency remain vital in corporate life and important to Australia's reputation for low sovereign risk, this is not the right balance. It's not healthy.

Australia's economy won't achieve its potential unless our major companies, and that means their boards, are able to spend their time and energy on understanding the new global economy and how to generate attractive risk-adjusted returns for their shareholders in that environment, rather than covering their backsides.

A legislated response is required to restore the right balance in the boardroom. Diligent non-executives should be able to rely on the advice of qualified experts. And while board minutes should be a fair overall reflection of discussions, they cannot be allowed to become the basis of a game of 'gotcha' for lawyers, especially the contingent fee crowd.

By accident of nature, Australia sits in the 21st century in the largest and fastest growing part of the world economy. We enjoy an enormous natural endowment that is prized by our trading partners.

We need to keep our eyes on the prize of national wealth creation in a radically changing environment.

Let's minute that.

John Wylie, managing director of Lazard in Australia, is an investor in Australian Independent Business Media, publisher of Business Spectator.


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