Tuesday, September 03, 2013

Blood on the Boardroom Floor: Will Directors face the firing squad?

Business might feel they have been liberated by all the talk about abolishing the carbon tax. But extreme weather events can’t be abolished. They are tipped to get worse and worse and worse. And with them the danger for company directors and officers grows higher, because they have statutory duties to act in the best interests of their company and with reasonable care and due diligence. A failure to do so is an offence under the Corporations Act for which directors and officers may be personally liable, according to a paper on Climate Change in Australia's board room by Liberty Insurance.
One of the major duties of a director is to protect the assets of the company (the assets of shareholders) and to address the risks underlying the company’s business operations effectively.
In the event that a legal action is brought against directors or officers for failing to discharge their statutory duty to act in the best interest of the company, the directors or officers may be able to invoke the operation of the “business judgment rule”. Under this rule, directors can defend their action by saying that they have discharged their duties to the company by having made an objective judgment, in good faith, that they rationally believed was in the best interest of the company.
If directors and officers of a company do not obtain adequate information about climate change and fail to take appropriate steps to mitigate the risks or maximise the opportunities available to the company, they might potentially be in breach of their duty of care and diligence owed to the company. In failing to make informed decisions in good faith, the “business judgment rule” may not excuse their actions or inaction in an allegation of a breach of duty. In our political and litigious climate, clear and effective communication is crucial between the company and its stakeholders. Directors and officers need to ensure that they communicate clearly with their shareholders, investors, employees, etc., so that there is a good understanding of the company’s strategic policies in relation to climate change and the reasons for those policies.

A company may decide to do nothing at this stage. The decision must be based on sound business judgments. All available facts and reasons for such a decision must be carefully considered. Ignorant inaction may lead to a breach of, amongst other things, directors’ duties to act in the best interest of the company. Directors and officers may be exposed to litigation from shareholders and investors unless they can show that they have acted with due care and skill and in the best interests of the company. The board has a duty to create sustainable business growth and return for the company over time. 

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