The increasing power of shareholders came to the fore in last year’s reporting season with a record number of “first strike” votes recorded against the remuneration reports of some of the nations’ leading companies.
Part of the same trend is the more proactive approach both large institutional investors and the more highly motivated retail investors are taking to litigation, with the instigation of class actions increasingly being seen as a vehicle to hold companies to account.
The positives that will flow from redressing what has been a power imbalance are obvious, but it is important to acknowledge that it will not be without consequence for market behaviour and the governing legislative and regulatory frameworks.
The expectations of shareholders, and stakeholders more broadly, in relation to the behaviour of corporate Australia are changing and evolving, yet our understanding of the utility and protections in relation to corporate disclosures remains static by comparison.
As shareholders are increasingly empowered and emboldened, which is in and of itself a good thing, it begs the question as to whether the regulatory framework and civil law remedies in place are keeping pace with the changes in the operating environment.
The role of regulators in ensuring corporate governance standards are maintained is well known and appropriate. As aggrieved shareholders bring litigation to seek redress for corporate governance failures, it opens up another front for directors to be liable for the consequences of their actions.
The statutory duties of directors are well defined in the corporations law and ASIC is able to bring action in relation to director liability in this context. ASIC is able to pursue actions both in relation to specific and general duties of directors. Simply, an action can be pursued on multiple fronts and multiple penalties, both civil and criminal, can arise from one set of behaviours. Moreover, ASIC is armed under its own legislation, the ASIC Act, with the power to address misleading and deceptive conduct. Hence, multiple layers of complexity.
The empowerment of shareholders allows them to bring civil litigation where the remedies are determined by the level of harm that is determined to have been suffered by the shareholders. In many circumstances these actions are settled and the nature of the settlement is confidential. The difficultly here is that the lack of visibility about the nature of the settlement makes it hard to understand the direction the law is going.
As the system becomes more adversarial it is likely to have the effect of directors seeking to make themselves a smaller target by reducing the level and content of the disclosures they make.
As we seek innovation in all other aspects of corporate life, we must consider whether we are stifling innovation in the approach to corporate disclosures by shifting into this increasingly adversarial environment. Companies are asked to do more, and say more, yet there seems a vigorous searching out of new and novel avenues for seeking redress for alleged deficiencies.
Class actions as an opportunity to seek redress are not new, and indeed, are recognised by the Productivity Commission as a critical element in enabling access to justice and empowerment in a costly legal environment. However, they are increasingly being applied to economic losses and shareholder interest is widening beyond continuous disclosure or misconduct to other issues including remuneration and environment disclosures.
Internationally there is mounting pressure for a much greater depth of meaningful disclosure in relation to climate related risks. We need to consider whether we are creating the right circumstances to encourage experimentation and innovation in the manner in which directors fulfil their obligations in relation to these disclosures. Perhaps revisiting some level of appropriate protection for directors is required as a first step.
More broadly, there is a need to recognise these complexities in the legal system and consider what the implications are for the nature of director and corporate behaviour, and whether or not as an economy we are achieving the appropriate policy mix.
Alex Malley is chief executive of CPA Australia