THE CHANGING POSITION AND DUTIES OF COMPANY DIRECTORS.

• Date: 01 April 2018
• Author: Nettle, Geoffrey

Contents I Introduction II Directors' Duties A The Development of Directors' Duties in Equity B Legislative Intervention III The Business Judgment Rule IV The Statutory Business Judgment Rule V Position in the United Kingdom VI Position in South Africa VII Conclusion as to the Australian Business Judgment Rule VIII Duties of Union Officers A Historical Development B Development of Statutory Duties C Current Position IX Duties of Public Officials X Conclusion I Introduction

The development of directors' duties over the last century is a subject in which the late Professor Ford took particular interest. The first edition of his work Principles of Company Law, published in 1974, included a sizeable chapter on the subject and each subsequent edition has expanded and developed it. (1) Forty-three years on, it might seem remarkable that Professor Ford was able to write accurately in that first edition that the duties imposed upon company directors were 'not very demanding'. (2) But that was before the corporate excesses of the 1980s and their financial consequences, which resulted in very wide-ranging legislative intervention. (3)

In times past, the study of directors' duties principally focused on the fiduciary quality of the relationship between a director and a company by analogy to the relationship between a trustee and a beneficiary. (4) By contrast, these days, we tend to go first to the statutory duties prescribed by pt 2D.1 of the Corporations Act 2001 (Cth). Those provisions largely cover the field, and, for a time, it might have been thought that they would also make the law simpler. But, inasmuch as the duties prescribed by pt 2D.1 are informed by general law antecedents, it remains necessary from time to time to look back to whence we have come in order to assess where we are going in future.

Directors' duties are not alone in that trajectory of development. Like the duties of company directors, those of union officers, and, to a lesser extent, public officials, were originally conceived of as fiduciary in nature by analogy to the duties of trustees, but are now in varying degrees regulated in their own right and by statute. There is, however, a notable difference. Whereas the effect of legislative intervention in directors' duties has been greatly to add to the scope of those duties and to increase the standard of care required of company directors, union officers continue to enjoy protections which directors either never had or have since been denied and, in the case of public officials, apart from an obligation to avoid conflicts of interest, the idea of a fiduciary duty of care and diligence is for all intents and purposes academic.

I propose, first, to recall in brief how it came about that the duties and standard of care demanded of company directors increased to their present levels. That will necessitate some reference to the so-called business judgment rule and, particularly, to the effect, or more accurately the lack of effect, the statutory embodiment of that rule has had on directors' liability. I intend then to contrast those developments with the way in which the duties of union officers have evolved in the last 40 years and, on that basis, to pose the question of why there are significant differences between the two regimes. Finally, I propose to make brief mention of the duties of public officials in order to identify the point that, although the actions of public officials may have far more broad-ranging effects on the nation's well-being than the actions of any company director or union officer, a public official's duties are, paradoxically, much less onerous. Ultimately, what I shall seek to convey is that there is little reason in principle why the duties of company directors and of union officers should not now be much the same, and although, for practical reasons, the same cannot be said of the duties of public officials, it is at least arguable that they should be more closely aligned.

II Directors' Duties

A The Development of Directors' Duties in Equity

Directors' duties first evolved in Chancery by analogy to the duties of trustees as part of the thinking that led from unincorporated joint stock companies regulated by deeds of settlement to the concept of a corporation. (5) The development of directors' duties was equally influenced by the partnership theory of corporations that, as shareholders were taken to have appointed the directors as their agents, they were responsible for the quality of the directors whom they selected. (6) Hence, if shareholders chose to appoint a director who lacked relevant skills, the shareholders could hardly be heard to complain when and if their appointee performed, or failed to perform, accordingly.

The result was acceptance of the idea--which in effect continued to hold sway for much of the 20th century--that a director's fiduciary duty to act with care and diligence was one to act according only to such level of skill as the director possessed. He--for they were then invariably male--was to be judged on the basis of what he knew, rather than what he ought to have known, and on the basis of what he did, rather than what he ought to have done. (7)

As Professor Ford observed, it eventually came to be recognised that, because the functions of a company director were in some respects different from those of a trustee, a director's duties in respect of business judgments were less than a trustee's responsibilities in respect of decisions relating to a trust. (8) A trustee was duty-bound to preserve the trust fund and so to exercise constraint and conservatism in decision-making, whereas a director's function was to conduct a business--not infrequently a speculative business --and a director's duties had to be conceived of accordingly. Acceptance of that resulted in the precept--which, like the concept of a subjective standard of skill, held sway until the latter part of the 20th century--that, if a director acted within power for a proper purpose and with such care as was reasonably to be expected of him having regard to his skill and experience, he would not be held liable for errors of judgment. (9) Nor was he otherwise liable for 'negligence'--meaning at that time imprudence of such a nature as to constitute a breach of trust--unless his breach of duty were so gross as to amount to crassa negligentia or 'culpable' negligence. (10)

Hence, Lord Hatherley LC's aculeated apophthegm of 1872 in The Overend & Gurney Co v Gibb that, if directors acted in the execution of what they believed to be their duty, however mistaken they might appear in hindsight to have been, the only question was whether they exceeded the powers entrusted to them and, if they did not, whether

they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into? Was there crassa negligentia on their part ... so that they should be fixed with the loss ... ? (11) Evidently, that formulation was unremarkable according to the laissez-faire standards of Victorian England in which it developed. By contrast, however, it surely is remarkable that, even 40 years later, the same approach continued to apply. In 1925, Romer J rearticulated that approach in Re City Equitable Fire Insurance Co Ltd in the form of the three well-known propositions that would prove to be of such enduring influence in the law relating to directors' duties. (12) A director was bound to act honestly but he was not required to exercise any greater degree of skill than that which might reasonably be expected from a man of the director's knowledge and skill. A director was not bound to give continuous attention to the affairs of the company. And, in the absence of grounds for suspicion, a director might entrust some other company official to perform some duties.

Some scholars have argued that the languidness of the development of directors' duties up to that point was a reflection of the fact that the law was then still some seven years away from the recognition in Donoghue v Stevenson of the common law duty to take care (13) and still the better part of 40 years short of the recognition in Hedley Byrne v Heller of the recoverability of damages for pure economic loss. (14) It is also perhaps a reflection of the fact that, prior to World War II and the great social changes which resulted from that conflict, society was less litigious and more disposed to put up with the commercial consequences of human frailty. (15)

It is apparent, however, that neither the pace of common law development, nor the postwar change in society's attitude to litigation and regulation, is the whole of the answer. For, even as late as 1974--a year after the 1973 oil crisis sent many economies, including Australia's, into recession; a decade after the recognition of damages for pure economic loss; and four decades after the recognition of the common law duty to take care--Professor Ford was still able to write, accurately, in the first edition of Principles of Company Law that a director's duties were equitable and that the common law, in the sense that includes equity, had not recognised a standard of the reasonably competent company director, analogous to the reasonably competent member of other professions. (16)

Granted, it was also said by Professor Ford in that first edition that things were changing. (17) Reference was made to Sir Douglas Menzies's observation of some 15 years before that, although the law had not previously demanded much more of directors than that they act honestly, it was to be understood that the law's approach to directors' duties was formulated at a time when the tasks of many directors were limited to attending board meetings when convenient, adopting policies recommended by the company's officers, and signing...