Board Decision-making - 22nd Aug 2013

 A January 2013 New South Wales Court of Appeal judgment created a stir in Australian legal and corporate circles about the culture of board decision-making.  This from the Chapman Tripp website:

The article was written for the February 2013 issue of Boardroom magazine.

A recent New South Wales Court of Appeal judgment has created a stir in Australian legal and corporate circles about the culture of board decision-making.

At issue was an appeal by former non-executive directors of James Hardie Industries Limited (JHIL) to have their disqualification orders reduced. They had been disqualified from occupying a management or governance role for five years after they were found to have approved the release of misleading information to the ASX.

The evidence to the Court was that, after the meeting had discussed the draft announcement to the ASX, the Board Chairman asked: “Is the board happy with that?” All the directors present had either nodded or remained silent and, as was usual practice for the board, this was taken as sign-off.

One of the Appeal Court Judges (Barrett JA), however, did not consider that the board had satisfied the requirements of section 248G of the Australian Corporations Act and felt moved to comment on what he considered was appropriate procedure, saying:

“Value is often attached to collegial conduct leading to consensual decision-making, with a chair saying, after discussion of a particular proposal, “I think we are all agreed on that”, intending thereby to indicate that the proposal has been approved by the votes of all present.

“Such practices are dangerous unless supplemented by appropriate formality.

“The aim is not to consult together with a view to reaching some consensus, although it may well be, as a practical matter, that such consultation facilitates the making of the decision that is ultimately required. The aim is rather that members of the board should consult together so that individual views may be formed and the individual will of each member may be made known in a clearly communicated way.

“The culmination of the process must be such that it is possible to see (and to record) that each member, by a process of voting, actively supports the proposition before the meeting or actively opposes that proposition; or that the member refrains from both support and opposition. And it is the responsibility of an individual member to take steps to ensure that his or her will is expressed in one of those ways”.

These “observations” were incidental to the decision, but in the opinion of at least one legal commentary, may have “a lasting legacy” on board conduct. Whether these ripple effects make it across the Tasman is hard to predict.

The strong Australian presence in the New Zealand corporate sector would suggest that there may be a roll-on effect. But the default position under the New Zealand Companies Act is different to that in Australia. (In both jurisdictions, the default positions can be contracted out of in a company’s constitution.)

The default position under section 248G of the Corporations Act is that board resolutions “must be passed by a majority of the votes cast by directors entitled to vote on the resolution”. This is not a requirement in the equivalent provisions in Schedule 3 of the New Zealand Companies Act, which state:

• a resolution of the board is passed if it is agreed to by all directors present without dissent or if a majority of the votes cast on it are in favour of it, and
• a director present at a meeting of the board is presumed to have agreed to, and to have voted in favour of, a resolution of the board unless he or she expressly dissents from or votes against the resolution at the meeting. [Emphasis added.]

The New Zealand courts are clear that there is an obligation on each director to read their board papers, make any additional enquiries that are necessary and form their own judgement on the matters before the board. But the New Zealand legislation also permits decisions to be made by acquiescence. Does this suggest that New Zealand law places a higher value on consensus decision-making than Australian law?

Casual readers of the High Court’s judgment last year against the Nathans Finance directors might think so. In that case, the Court criticised the board for not meeting to discuss the final content of the company’s 2006 prospectus and investment statement.

“At such a meeting, the directors could have read through the two offer documents and compared the content with the position they knew existed. Further advice could have been sought on any agreed approach, based on an updated factual position on which the lawyers could advise.

“The absence of a collective discussion meant that the directors “considered” the documents on an individual basis and, in my view, failed to treat the issue with the solemnity it deserved,” the Court said.
The point the Court was making was that the Nathans’ directors were (or should have been) aware that there were serious concerns around Nathans’ exposure to VTL (of which it was a wholly-owned subsidiary) so should have met to discuss and ensure that this risk was presented accurately to the market.

This is not the same thing as consensus. Indeed, the “casual” consensus which arose from the directors’ individual consideration might have been upset had there been a meeting at which the documents were properly discussed. Which is, in essence, the same point being made by Barrett JA in the New South Wales Court of Appeal – directors’ meetings are not merely for the sake of form, but for the purposes of ensuring robust consideration and discussion of proposed courses of action.
New Zealand has a highly consensual governance culture. This is a good thing to the extent that it encourages collegiality. But it can have a downside if directors censor themselves to avoid disturbing the consensus.

The standards to which decision-making directors will be held are the same, however their decisions are made. Whether decisions are made by formal vote or by acquiescence, they should only be made after appropriately robust engagement by all directors.

Geof Shirtcliffe is a partner at Chapman Tripp, specialising in corporate law and governance.

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