Players laughing in the hottest game in town

‘TIS the season for annual general meetings, the one occasion each year when the owners of Australia’s public companies get to confront their managers, face to face, before rising up in a great grey wave and engulfing the canapes at the back of the room.

The owners, of course, are the shareholders, and the managers of their capital are the company directors. And although a casual observer might be excused for mistaking the directors for the owners, the directors hold themselves, as a group, to be nothing less than oppressed.

The proverbial man who fell to Earth would find this, were he to land in the ballroom of the Sheraton during AGM season, equipped only with some back editions of Australia’s finance press. He would hear tales of woe. His heart would be torn as he read how – slaving away on a pittance for the common good – our directors watched as their members were daily dragged off to court and sued; even as they eked out a living in constant fear of having their paltry assets seized.

Our proverbial man would glean the same perspective by reading submissions to government. In fact, so pervasive has this impression of directorial hardship become that it is influencing government policy. Reacting to fears of directors that the spectre of personal liability was causing companies to be placed prematurely into administration, the Assistant Treasurer brought a review of Australia’s director liability regime.

Mind you, this is hardly the directors’ fault. They were asked if they thought they had too much liability and gave the only human answer possible – the very same answer one gives when one is asked if one would like more remuneration.

Police, soldiers or firefighters – those who face real risk in their professional lives – would deem these fears from a group of highly paid part-timers quite amusing, were it not for the irony that their average incomes are dwarfed by the average director’s tax bill.

It is this risk of liability which the directors’ lobby relies on to promote pay levels at every opportunity. But what is the evidence for this grave risk? There is none. The list of prosecutions – civil or criminal – against major listed-company directors for breaches of their responsibilities over the past five years is miniscule.

Since 2005, ASIC has launched actions against directors of James Hardie (on appeal), AWB, Fortescue and Centro and has been successful only in those against the directors of James Hardie (with the Centro case yet to come before the courts). Other high-profile actions since the turn of the century have included an unsuccessful one against Jodee Rich and the OneTel directors, the civil suit against the former Telstra director Steve Vizard for insider trading and the successful criminal prosecution of former HIH directors Ray Williams, Rodney Adler et al.

There it is: a mere fraction of the thousands of people who have held office as a director of a large listed entity over the past decade have ever been subject to legal action, let alone successfully prosecuted. The risk of criminal or even civil sanctions is negligible. And the risk of personal loss even more remote, especially as most directors have access to the finest legal advice available in order to put their family assets well beyond the reach of any aggrieved investor or regulator.

In a curious form of legal aid, directors even enjoy the privilege of being able to defend themselves against actions of wrongdoing using funds supplied by their accusers – that is, shareholder funds when a shareholder class action is brought. (To be fair, they probably should.)

It is illegal to indemnify directors for the consequences of dishonest or illegal actions, but as the likelihood of any actions ever being proven is so remote, the chances of shareholders or insurers being able to recover these funds in such a case are similarly remote.

Which brings us to ego. There is, we are told, the question of damage to a director’s reputation from unsuccessful actions by regulators which may reveal embarrassing or hard-to-justify behaviour. Again, this reputational damage is unlikely given the rarity of actions against directors of major listed companies – and in any case, most of this reputational damage is self-inflicted.

Why are directors’ egos so uniquely fragile that they should be protected from embarrassment as a result of their mistakes when such a privilege is not extended to any other group? Politicians for whom, unlike directors, the consequences of honest incompetence are often career-ending must shake their heads in bemusement. They would also be agog at the unassailable electoral margins enjoyed by directors who year in, year out can expect 95 per cent of votes in favour of their re-election.

And when it comes to fear of personal risk restricting the “talent pool”, it is again hard to take the claim seriously. The empirical evidence on the make-up of boards suggests the largest restrictions on the director talent pool are imposed by directors themselves, with the female half of the population effectively excluded, a point more lately acknowledged by the director lobby.