ASIC Public Interest (individual) - Implications For Shareholders, Directors, Managers, And Essay.

Scenario: The CEO has asked the group for a briefing on the implications for shareholders, directors and managers of two issues of public interest that have recently been under investigation by ASIC.

Students are to identify the two recent issues (2015 – 2018) and provide the briefing. 

Overview of ASIC

In present market economies, the desirability of appropriate governance id usually promoted. Moreover, the variant which is not encouraged is that governance which is required for public interest can be developed only in the required form of market economy which is not present in the free market. As free-market represent specific interest group, who aim for their own objective even though other organizations resist there. However, governance of economic activity in public interest needs inclusive process considering all issues through which public is affected and continues constant research of effective democracy. Present report revolves around a discussion of current issues of Australia which affect director, manager and shareholder of a company. In order to develop an appropriate base provision and case law relating to same have been discussed so that it could be understood in an appropriate manner.

ASIC refers to Australian Securities and Investment Commission which is an independent Australian government body which is represented as a corporate regulator of Australia. The main responsibility of ASIC comprises managing, facilitating and enhancing the existing level of efficiency of the financial system and entities within it. Moreover, it is also responsible for encouraging confident and informed participants through investor and consumers of the financial system. The main areas of responsibility of ASIC comprise corporate governance, insurance, consumer protection, securities and derivatives and financial literacy. The main vision of the specified organization is to transform behaviour in order to assist consumer and investor in attaining an appropriate outcome. It also encourages strong and innovative developments of the financial system in order to assist Australian for controlling their financial lives. ASIC ensures the existence of the fair, orderly and transparent market and same is attained through accomplishing the entire obligations relating to market supervision, competition and corporate governance in an appropriate manner.

Provisions

Section 180(1) of Corporations Act 2001 provides specification relating to an objective standard for performance of director duties. It provides that an individual is required to exercise the available power and to discharge required duties with care and diligence as a reasonable person in case the same is a director or has occupied office within an organization as director. Further section 181 of Corporation Act 2001 specifies that good faith should be added to the above-specified provisions. It specifies that a director is required to exercise his powers in good faith, i.e. in the best interest of the corporation and for proper use only. Further, the business judgement rule which is provided in section 180(2) of Corporations Act provides that a director can rely on business judgement rule only in the following situations:

• In order to make a judgement in good faith and for an appropriate reason.
  
  
• In case material personal interest does not exist in a subject matter of decision.
  
  
• Rationally a belief is available that the decision is in the best interest of the corporation.
  
  
• They are confident to a significant extent that they can believe the judgement to be appropriate.

Duties of the director are a concerned issue as directors are the representative of a company, and they take a decision on behalf of the company. In the present case of Australian and Investment Commission (ASIC) v Cassimatis[1] the Federal Court of Australia deemed the nature of responsibility of care and industries owned by executives under section 180(1) of the Corporations Act 2001[2]. Further, the court conceded  that manager of the financial services company had broken their duties as executives, since a rational executive with their responsibilities and in the organization’s conditions must have been rationally aware that the organization was probably to breach the Corporations Act, with catastrophic effects for the firms[3].

Director duties

Moreover, the court stated that Storm had contravened the Corporation Act offering financial services in accordance with the model to the category of vulnerable clients recognized by ASIC and the managers had contravened their responsibilities related to care and diligence because:

A rational manager of a corporation in Storm’s conditions and with Mr and Mrs Cassimatis duties would have been conscious of strong likelihood of a breaking of Corporation Act in case he or she uses his or her authorities to allow the storm model to be applied to clients who are in a class pleaded by ASIC, specifically investors who are retired or close to retirement with some assets and restricted earnings. Furthermore, the court concluded that the contravention by Storm was not only reasonably predictable but that a reasonable executive in place of Mr and Mrs Cassmatis will have regarded them as likely[4]. It is approved by the courts that there had been only one contravention by each of the executives. 

Provisions

The Section 202A of Corporation Act 2001 specifies that executives of an organisation are to be paid remuneration in the manner as the same is determined by resolution[5]. Further, payments relating to travelling as well as other expenses which have been incurred in below specified situation are also part of executive remuneration:

• In attending the executives’ conferences or any other conferences on the board of managers.
  
  
• Attending any general conference of the organisation.
• Any other expenses related to the operations of the company.

Further, section 202B of Corporation Act 2001 specifies that:

An organisation should reveal all the information related to the remuneration paid to every executive of the firm or subsidiary if any by the corporation, individual controlled organisation if it is entitled to reveal the information by-

• Members with not less than 5% of the voted that might be given at a general conference of the organisation.
  
  
• Minimum of 100 members who are allowed to vote at a general conference of the organisation[6].

The organisation has to reveal information relating to the remuneration paid by the company to its executives, irrespective of whether it is given to the managers compared with their capacity as a director or another capacity[7].  The firm must obey with the directions as far as feasible through:

• Making the reports related to the remuneration paid to every director of the firm or subsidiary for the current financial year prior to the direction was specified.
• Further, the statement should be audited.
• The duplicate of audited statement has to be sent to every individual who is permitted to obtain the notice of general conferences of the firm.

The fact cannot be denied that the director’s remuneration as a mechanism of corporate governance has been utilized to resolve the agency issues, but it has developed into a corporate governance problem of its own.

Board of members is responsible for controlling the decision-making procedure in support of the owners, and the directors are responsible for verifying the daily decision making procedure. Moreover, executives could utilize the assets of an organization to improve their own livelihood. The same implies that they take benefit of their control authority to fulfil their own needs, for example, living the comfortable life along with exclusive cars and personal tour while leaving the cost to fall on the owners.

Accounting scandals of known companies such as Enron, WorldCom, Fannie Mae, General Electric (GE), Royal Bank of Scotland (RBS), represent the sensitivity of the issue of executive remuneration.  These instances have made believe that executives are an agent and there is no similarity in executives as shareholders as principal and in the form of the agent as executives of the company. As this relationship enhance the complexity rather than resolving them. Executive remuneration enhances only the personal interest and does not consider the interest of shareholder interest and same effects negatively to company performance as well as the general economy.

References

CORPORATIONS ACT 2001 - SECT 202A (2015). Available through < https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s202a.html> [Accessed on 2^nd October 2018]

He, W.P. and Lepone, A., 2014. Determinants of liquidity and execution probability in exchange operated dark pool: Evidence from the Australian Securities Exchange. Pacific-Basin Finance Journal, 30, pp.1-16.

Tills M. And Wills C. (2016). Available through < https://www.clydeco.com/insight/article/australian-directors-found-guilty-of-breaching-duties-following- corporation?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original>. [Accessed on 2^nd October 2018]

Wills C. and Tills M. (2016). Available through < https://www.mondaq.com/australia/x/527680/Corporate+Governance/Australian+Directors+Found+Guilty+Of+Breaching+Duties+Following+Corporations+Breaches>. [Accessed on 2^nd October 2018]

[1] (No.8) FCA 1023

[2] Tills M. And Wills C. (2016). Available through < https://www.clydeco.com/insight/article/australian-directors-found-guilty-of-breaching-duties-following- corporation?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original>. [Accessed on 2nd October 2018]

[3] CORPORATIONS ACT 2001 - SECT 202A (2015). Available through < https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s202a.html> [Accessed on 2^nd October 2018]

[4] Wills C. and Tills M. (2016). Available through < https://www.mondaq.com/australia/x/527680/Corporate+Governance/Australian+Directors+Found+Guilty+Of+Breaching+Duties+Following+Corporations+Breaches>. [Accessed on 2nd October 2018]

[5] CORPORATIONS ACT 2001 - SECT 202A (2015)

[6] He, W.P. and Lepone, A., 2014. Determinants of liquidity and execution probability in exchange operated dark pool: Evidence from the Australian Securities Exchange. Pacific-Basin Finance Journal, 30, pp.1-16.

[7] CORPORATIONS ACT 2001 - SECT 202B (2015)