Directors face revolt by shareholders

THE businessmen who breached the Corporations Act while serving as directors of Centro face the prospect of a shareholder revolt at other companies where they are on the board, a key corporate governance advisor has warned.

By InvestSMART · 1 Sep 2011

By InvestSMART ·
1 Sep 2011

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"I think shareholders will have to look very closely at these directors to look at their tenure on other boards," Ann Byrne, chief executive of the Australian Council of Super Investors, which provides advice to superannuation funds that together control more than $300 billion, said.

Ms Byrne said the Centro board had failed to look after shareholders' interests.

"Therefore, as a representative of our funds, we have to question whether or not these particular directors will do that on any other company where they are, in fact, a member of the board."

Centro said Jim Hall and Paul Cooper, two of the directors who the Federal Court yesterday declared breached the Corporations Act when approving company accounts in September 2007, would remain on its board.

Mr Hall is also a director of Paperlinx, Alesco and ConnectEast.

The other Centro directors declared to have breached the Corporations Act - chairman Brian Healey, chief executive Andrew Scott, Sam Kavourakis, Graham Goldie and Peter Wilkinson - are no longer with the company.

Ms Byrne said the $30,000 civil penalty imposed on Mr Scott was "much less than what he would have got in director's fees for one year" and she would have liked to see the non-executive directors given "something greater than bad publicity as a penalty". She said: "I think it sends a message to investors that in times when there clearly has been a lack of oversight, the only people who must suffer a financial penalty are, in fact, the investors."

The Australian Shareholders' Association chief executive, Vas Kolesnikoff, said "where the people see highly paid executives and directors found guilty of breaking the law, but no penalty is imposed, then is it no wonder that the legal community is seen to be out of touch".

The Australian Institute of Company Directors said the decision raised important issues about the degree to which directors could rely on the advice of management and external advisors.

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Frequently Asked Questions about this Article…

What happened in the Federal Court ruling about Centro directors breaching the Corporations Act?

The Federal Court found several Centro directors had breached the Corporations Act when they approved company accounts in September 2007. The ruling identified a group of directors involved in the breach and prompted scrutiny of their conduct and oversight of shareholder interests.

Which Centro directors remain on the Centro board and where else do they serve?

Centro said Jim Hall and Paul Cooper would remain on its board after the Federal Court decision. Jim Hall is also a director of Paperlinx, Alesco and ConnectEast, according to the article.

What penalties were imposed on Centro executives after the breach finding?

The article reports that former CEO Andrew Scott was given a $30,000 civil penalty. Commentators noted that this penalty was much less than what a director might earn in a year and expressed concern about whether penalties were sufficient.

Could the Centro decision trigger shareholder revolts at other companies where these directors sit?

Yes. A corporate governance adviser warned the directors who breached the Corporations Act face the prospect of a shareholder revolt at other companies where they serve on boards. Investors and advisers said shareholders will need to look closely at these directors’ tenure on other boards.

What did the Australian Council of Super Investors say about director accountability?

Ann Byrne, CEO of the Australian Council of Super Investors, said the Centro board had failed to look after shareholders' interests. She urged funds and investors to question whether the implicated directors will properly represent shareholders on any other company boards.

How did investor groups react to the size of the penalties and oversight failures?

The Australian Shareholders' Association, represented by Vas Kolesnikoff, criticised the situation where highly paid executives or directors found guilty face little or no penalty, saying it makes the legal community seem out of touch. Other commentators argued that investors often bear the financial consequences when oversight fails.

What corporate governance issues did the Australian Institute of Company Directors highlight?

The Australian Institute of Company Directors said the decision raised important questions about the extent to which directors can rely on management advice and external advisers — an issue central to board oversight and director responsibility.

What should everyday investors take away from the Centro directors' breach and potential shareholder action?

Everyday investors should be aware that the Centro case highlights risks around board oversight, director accountability and penalties. The article suggests investors and fund representatives will need to scrutinise directors’ tenure on other boards and consider whether those directors will act in shareholders’ interests, as the prospect of shareholder revolts at other companies has been raised.