Director duties - time to close the expectation gap?

The recent decisions in the Centro and James Hardy cases have fuelled debate in the business community as to whether the law is reflective of the practical application of the role and responsibilities that directors undertake in company boardrooms.  The attention that this debate is drawing has manifested itself in a number of companies (particularly listed companies) closely considering the risks their own directors face.

One example of this was the recent amendment by Woodside Petroleum Ltd (Woodside or the Company), at its most recent annual general meeting, of Rule 88 of its Constitution.

Prior to the amendment of Woodside's Constitution, Rule 88 stated that "the management and control of the business and affairs of the Company are vested in the Board", who may exercise all the powers of the Company except any powers that are required to be exercised in general meeting under the Corporations Act 2001 (Cth) (Corporations Act) or Woodside's Constitution.

The revised Rule 88 reads "the business and affairs of the Company are to be managed by or under the direction of the Board", followed by the same limitation on directors' powers.  It is clear that Woodside has altered Rule 88 of its Constitution in order to align it with the replaceable rule in section 198A(1) of the Corporations Act.  It is debatable whether the scope of the newly worded Rule 88 is any narrower than the previous one.  One might speculate that Woodside has amended Rule 88 as such to preclude any argument against their directors that their Constitution vests them with responsibilities wider than those prescribed by section 198A(1) of the Corporations Act.

It is proposed that such a constitutional amendment does not properly address the disparity between the Australian community perception of the role and responsibilities of directors of a large listed company, and the company director's own perception of their role and responsibilities in the management of a large listed company.

Former New South Wales Supreme Court Judge, Robert Austin, now Senior Legal Consultant for Minter Ellison in Sydney, delivered a paper on this issue as part of the MacPherson Lectures at the University of Queensland in May 2010, arguing that as a whole, the current Australian law is closer to the community's perception than the director's self-perception, and this is because an unsatisfactory and ambiguous idea of corporate management is embedded in the law.  Austin claims that the directors' self-perception is closer than the law to a realistic recognition of the role and responsibilities that directors of large listed companies, acting as such, are capable of discharging.  He reasons that the best way to address this 'expectation gap' is to reformulate the role and responsibilities of directors in an authoritative way, a process that will inevitably require that the management function be expressly allocated to the company's executive directors and that the board of directors as a whole, acting in that capacity, be allocated an essentially supervisory function.

Austin proposes that for Australian public listed companies, the reallocation of functions that he advocates can be achieved by the adoption of constitutional amendments that are supported by amendments to the ASX Corporate Governance Council's Principles and Recommendations, without any need to change the statutory law.  He also acknowledges that the reallocation of functions will necessarily have implications for legal duties and responsibilities which will need to be explained.

While the debate continues, there appears to be little political appetite at present to address the increasingly vocal views of directors to more clearly recognise the practical realities of how larger listed companies are truly managed.