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Company directors pondering issues on conflict of interest might want to look at the legal system, suggests Andrew Field.
The failed takeover bid last year by Airline Partners Australia (APA) for Australia’s national carrier Qantas has left in its wake a number of questions regarding the motivations of directors and their understanding of their responsibilities. Two issues of concern arose during the December 2006 press conference when Qantas Board Chairman Margaret Jackson enthusiastically announced that the Qantas board unanimously endorsed the takeover bid and encouraged shareholders to accept.
The first issue concerns the question of who the directors were representing when they took part in that unanimous vote. The takeover bid was subsequently rejected by a majority of shareholders so the board’s view did not reflect that of their shareholders.
The second issue focuses more directly on the issue of actual and apprehended conflicts of interest and how they are dealt with. To return to the press conference, Jackson subsequently turned frosty when asked whether board member James Packer had a potential conflict of interest due to his $55 million Macquarie Bank stake. Macquarie Bank was one of the APA members and stood to profit if the takeover was successful.
Jackson’s reply was: ‘We were aware of James’ shareholding in Macquarie. He declared it. I don’t believe that James had any conflict of interest and I find it offensive that you might even suggest that.’
If a director, by exercising his or her powers in a particular way, stands to profit beyond whatever remuneration they receive as a director, then it is legitimate to ask questions about conflict of interest. The question asked of Jackson was legitimate, even if it was only done so that the question could be answered in the negative and fears allayed.
So how might directors better deal with conflicts of interest? Australia’s judiciary might have some answers as there is some similarity in the positions of judges and directors.
Just as the Australian Constitution regulates judges’ independence and lack of interest in disputes, Section 191 of the Corporations Act requires that company directors disclose any ‘material personal interest’ they may possess in a matter which relates to ‘the affairs of the company’. Once disclosed, such a director will usually not participate in further discussions in relation to that matter, although Section 195 does allow the remaining directors to overrule this. Section 182 specifically identifies potential conflicts of interest, stating that a director must not improperly use their position to ‘gain an advantage for themselves or someone else’ and Section 181 requires that directors exercise their powers ‘in the best interests of the corporation’.
As well as constitutional regulation, it is vital for judges to be seen to be impartial in order to maintain public confidence in the legal system. Similarly, directors also rely on the confidence of their shareholders and stakeholders for the success of their business.
When a judge has a conflict between their financial interests and those relating to a dispute before the court, they must stand down – or ‘recuse’ themselves – from judging the dispute. This also means that where it appears that the judge has prejudged a case, perhaps because of a minor financial interest or family connection, then the judge must also stand aside.
Justice Deane identified in the High Court decision of Webb v The Queen four situations where a reasonable apprehension of bias might exist. His Honour said:
The first is disqualification by interest, that is to say, cases where some direct or indirect interest in the proceedings, whether pecuniary or otherwise, gives rise to a reasonable apprehension of prejudice, partiality or prejudgment.
The second is disqualification by conduct, including published statements. That category consists of cases in which conduct, either in the course of, or outside, the proceedings, gives rise to such an apprehension of bias.
The third category is disqualification by association. It will often overlap with the first and consists of cases where the apprehension of prejudgment of other bias results from some direct or indirect relationship, experience or contact with a person or persons interested in, or otherwise involved in, the proceedings.
The fourth is disqualification by extraneous information. It will commonly overlap with the third and consists of cases where knowledge of some prejudicial but inadmissible fact or circumstances gives rise to the apprehension or bias.
Clearly, the reach of these situations is much broader than anything which might disqualify a director from participating in a board decision.
The value of the judge’s example to directors is best appreciated by observing that the application of the interest rules are not as strict as might generally be supposed. The High Court has said that owning shares in multiple public companies is now common and many Australians own them either directly or indirectly through their superannuation funds. Owning shares in a litigant will not necessarily disqualify a judge. The question is whether the shareholding would concern the reasonable, well informed observer. Therefore useful questions to ask include: How large is the shareholding? How large is the company? Would the dispute affect the value of the shareholding?
Judges also have lives off the bench. The Guide to Judicial Conduct (available on the web) provides advice on how to avoid business and social conflicts of interest. It cautions making public statements, accepting gifts and engaging in community activities. There are frequent examples of judges disregarding this advice, but it would be inappropriate for them to become champions of various social causes or be associated with various factions in the community.
However, directors are not judges. Unlike judges, directors can be required to put the interests of some members of the community (the company and shareholders) over others. Their tenacity in discharging these duties is the basis of their appointment as directors.
But the example of the judiciary can be useful to illustrate how acutely judges understand the effect of their actions and utterances. A similarly conversant understanding by directors will be of value to assist them.
To return to the Qantas example, it is unclear what effect questions about the Qantas directors’ personal interests had on the failure of the APA bid. However there are two certainties. First, the board recommended the takeover. And second, the shareholders refused to follow this advice. The degree to which the failure to follow the board’s advice contributed to the subsequent resignations of Margaret Jackson and James Packer from the Qantas board remains unknown. However, it cannot escape attention that the conflict of interest issue was badly handled in the public arena. Perhaps a more judicial approach would have assisted.
MBR subscribers: to view full academic paper, email mbr@buseco.monash.edu.au
Public access: www.mbr.monash.edu/full-papers.php (six month embargo applies).
Andrew Field is a Senior Lecturer in the Department of Business Law and Taxation, Monash University.
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