In a recent article for Bank Note I discussed the decision in the James Hardie litigation in the New South Wales Supreme Court and a number of practical issues for directors to consider that flow from that decision.

In this article I want to focus on the current state of the law as it applies to non-executive directors and chairmen of companies incorporated in Papua New Guinea (PNG Companies).

(a)    Recent Cases

In Papua New Guinea (PNG), decisions of PNG Courts are, of course, the most persuasive. There are, however, relatively few recent cases in PNG on the duties of directors.

Many of the principles enunciated in recent Australian cases (including the James Hardie decision) on the duties of directors (particularly in relation to non-executive directors) also have application to directors of PNG Companies. Although the statutory provisions in PNG are different (particularly in that there is no business judgment rule) there is sufficient commonality with Australian provisions in relation to:

1. the duties of directors to act in good faith in the best interests of the company and to exercise care and diligence;
2. the right of directors to rely upon information and advice provided by others; and
3. the liability of directors for insolvent trading,

to allow Australian cases and decisions to be highly persuasive in the PNG context. 

New Zealand cases dealing with provisions of the Companies Act 1993 (NZ), on which the Companies Act 1997 (PNG) is based, are also likely to be highly persuasive in PNG.

(b)    General Principles Applicable to Non-Executive Directors of PNG Companies

From these cases, the following general principles can be derived which are likely to be applicable to non-executive directors of PNG Companies:

1. the director’s duty of care and diligence is based on an objective standard (a reasonable person test) which takes account of the position of the director and the nature of the responsibilities of the director in the company;
2. a director may rely upon information and advice prepared by others (including executive directors and management employees of the company) so long as the director believes on reasonable grounds that they are reliable and competent, and the reliance was made in good faith; and
3. directors may delegate their powers of management to others (including to a managing director) and will not be responsible for the actions of the delegate so long as the directors believe on reasonable grounds that the delegate will exercise the power properly and the directors properly monitor the exercise of the power.

- In determining whether a non-executive director has breached the statutory standard of care and diligence (to which “skill” is added in the PNG provisions), a court will have regard to the company's circumstances and the director’s position and responsibilities within the company. Relevant circumstances will be the degree to which the board has conferred power on and delegated functions to executive directors who are reasonably believed to be reliable and competent. Relevant factors arising from a non-executive director’s position and responsibilities may be whether he or she was engaged to bring particular competence or skill to the board and whether he or she serves on or is chairman of a particular board committee.

- A director appointed to a company because of special expertise in an area of the company’s business, however, is not relieved of the duty to pay attention to the company’s affairs which might reasonably be expected to attract inquiry, even outside that area of expertise.

- Any director (executive or non-executive) is entitled to rely without verification on the judgment, information and advice of management and other officers appropriately so entrusted. However, reliance would be unreasonable where directors know, or by the exercise of ordinary care should have known, any facts that would indicate that reliance should not be placed on a particular person.

- Although the reasonableness of the reliance or delegation must be determined in each case, the following will be important in determining reasonableness:   

1. the function that has been delegated is such that it may properly be left to such officers;
2. the extent to which the director is put on inquiry or, given the particular circumstances, should have been put on inquiry; the relationship between the director and the delegate must be such that the director honestly holds the belief that the delegate is trustworthy, competent and someone on whom reliance can be placed;
3. the risk involved in the transaction and the nature of the transaction; and
4. the extent of steps taken by the director to engender trust.

- A particular responsibility of all directors and a responsibility from which non-executive directors are in no way relieved, is to ensure that the company does not trade while insolvent. This requires directors to ask themselves a series of questions along the following lines:

1. are the trading difficulties of the company due to temporary illiquidity or underlying insolvency?
2. can assets be realised to pay accrued and future creditors in full within a reasonable time (90 days is often given as a guide)?
3. how sure are directors of this outcome? If the honest and reasonable answer is “certain” or “probable”, the director can have a reasonable expectation of solvency. If the honest and reasonable answer is anywhere from “possible” to "no way of knowing", the director probably does not have a reasonable expectation of solvency.

- There is a useful “Guidance for Non-Executive Directors” in Annex C to the Higgs Report from the United Kingdom. Although this report relates to UK circumstances, it has been given credence in Australia as a source of principles of good corporate governance.  There is no reason why it should not attract similar attention in PNG.  A copy of this annex follows at the end of the article.

(c)    General Principles Applicable to Chairmen of PNG Companies

- The following general principles, which are likely to be applicable to the chairman of the board and probably to the chairman of an individual board committee, can also be derived from the cases:

1. The chairman is usually a very experienced non-executive director and will be judged accordingly. The chairman is subject to the same duty of care and diligence as other directors but, because of his position as chairman and the nature of the responsibilities undertaken by him, a higher standard of care is likely to be applied to him (as was the case with Mr Greaves in ASIC v Rich and Mr. Irving in Hall v Poolman).
2. The chairman has all the responsibilities which are held by other members of the board, but to a greater extent than any other director. He is responsible for the performance of the board as a whole and of each member of it. He has primary responsibility for ensuring appropriate membership of the board, for making necessary changes in board membership, for setting an example to all his colleagues in all matters affecting the company, for acting as spokesman for the board both inside and outside the company and for promoting the position of the company.
3. The chairman should see that company policies are initiated and followed, secure board approval for the right policies and ensure by appropriate instructions and continued monitoring that policies are put into effect by those with executive responsibilities. The main focus of the chairman should be to ensure that the board concentrates its energy and wisdom on the appropriate matters requiring decisions and is competent to come to suitable conclusions.
4. The chairman must adopt a leadership role in the conduct of the board’s responsibilities and lead and manage the board in the discharge of its duties, by ensuring the board is in a position to perform and does perform its responsibilities.
5. This role includes setting the agenda for the performance of the board’s responsibilities, ensuring board meetings take place with sufficient frequency and on the basis of adequate information provided to all directors and that the board is kept properly informed of the financial position and performance of the company.
6. The chairman must lead the board in the monitoring of management, the assessment of the company's financial position and performance and the detection and assessment of any material adverse developments.
7. As well as being the spokesman for the board, the chairman will in many instances be the public face of the company through chairing the annual general meeting, conducting public briefings and speaking to the media. Where the chairman undertakes this role, he should be particularly concerned about the accuracy of public statements made on the company’s behalf and the company’s compliance with the disclosure requirements under the ASX Listing Rules.
8. The position, responsibility and potential liability of a non-executive director acting as chairman of a board committee is, within the context of the committee’s particular responsibilities and duties, very similar to those of the chairman of the board. In particular, the chairman of a board committee is likely to be judged by a higher standard than other non-executive directors who sit on the committee.

Annex D to the Higgs Report contains a useful “Guidance for the Chairman”. This develops further many of the principles that can be derived from the PNG,  Australian and New Zealand cases.  It was referred to in ASIC v. Rich as containing “emphatic statements” which appeared to reinforce ASIC’s case against Mr. Greaves. A copy of this annex follows at the end of the article.

It should be noted however that the Australian Institute of Company Directors does not agree that Greaves’ case has extended the responsibilities of a non-executive chairman. Its Policy Position Paper 2006-01 states that:

“The AICD believes that some inferences that have been drawn from the Greaves Case without setting it in its proper context could have a major impact on corporate governance in Australia. If executive responsibilities are imposed on a non-executive chairman, there will be a fundamental change to the structure and operation of company boards. The collegiality, candour and trust promoted by collective responsibility for board decisions, and conducive to board's sound strategic decision making, would be materially affected.”

Although I agree that a chairman is not intended to have executive responsibilities, I think the better view is that the responsibilities of a chairman are distinctive and can lead to a non-executive director in that position being judged against a higher standard.

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HIGGS REPORT

ANNEX C – GUIDENCE FOR NON-EXECUTIVE DIRECTORS

As members of the unitary board, all directors are required to:

1. provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enable risk to be assessed and managed;
2. set the company’s strategic aims, ensure that at the necessary financial and human resources are in place for the company to meet its objectives, and review management performance; and
3. set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met.

In addition to these requirements for all directors, the role of the non-executive director has the following key elements:

1. Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.
2. Performance: Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives, and monitor the reporting of performance.
3. Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.
4. People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning.

Non-executive directors should constantly seek to establish and maintain confidence in the conduct of the company. They should be independent in judgement and have an enquiring mind. To be effective, non-executive directors need to build recognition by executives of their contribution in order to promote openness and trust.

To be effective, non-executive directors need to be well-informed about the company and the external environment in which it operates, with a strong command of issues relevant to the business. A non-executive director should insist on a comprehensive, formal and tailored induction. An effective induction need not be restricted to the boardroom, so consideration should be given to visiting sites and meeting senior and middle management. Once in the post, an effective non-executive director should seek continually to develop and refresh  their knowledge and skills to ensure that their contribution to the board remains informed and relevant.

Best practice dictates that an effective non-executive director will ensure that information is provided sufficiently in advance of meetings to enable thorough consideration of the issues facing the board. The non-executive director should insist that information is sufficient, accurate, clear and timely.

An element of the role of the non-executive director is to understand the views of major investors both directly and through the senior independent director.

The effective non-executive director:

1. upholds the highest ethical standards of integrity and probity;
2. supports executives in their leadership of the business while monitoring their conduct;
3. questions intelligently, debates constructively, challenges rigorously and decides dispassionately;
4. listens sensitively to the views of others, inside and outside the board;
5. gains the trust and respect of other board members; and
6. promotes the highest standards of corporate governance and seeks compliance with the provisions of the Code wherever possible. 

HIGGS REPORT

ANNEX D – GUIDANCE FOR THE CHAIRMAN

The chairman is pivotal in creating the conditions for overall board and individual director effectiveness, both inside and outside the boardroom. Specifically, it is the responsibility of the chairman to:

1. run the board and set its agenda. The agenda should take full account of the issues and the concerns of all board members. Agendas should be forward looking and concentrate on strategic matters rather than formulaic approvals of proposals which can be the subject of appropriate delegated powers to management;
2. ensure that the members of the board receive accurate, timely and clear information, in particular about the company’s performance, to enable the board to take sound decisions, monitor effectively and provide advice to promote the success of the company;
3. ensure effective communication with shareholders and ensure that the members of the board develop an understanding of the views of major investors;
4. manage the board to ensure that sufficient time is allowed for discussion of complex or contentious issues, where appropriate arranging for informal meetings beforehand to enable thorough preparation for the board discussion. It is particularly important that non-executive directors have sufficient time to consider critical issues and are not faced with unrealistic deadlines for decision-making;
5. take the lead in providing a properly constructed induction programme for new directors that is comprehensive, formal and tailored, facilitated by the company secretary;
6. take the lead in identifying and meeting the development needs of individual directors, with the company secretary having a key role in facilitating the provision of those services. It is the responsibility of the chairman to address the development needs of the board as a whole with a view to enhancing the overall effectiveness as a team;
7. ensure that the performance of individuals and of the board as a whole and its committees is evaluated at least once a year; and
8. encourage active engagement by all the members of the board. 

The effective chairman:

1. upholds the highest standards of integrity and probity;
2. sets the agenda, style and tone of board discussions to promote effective decision making and constructive debate;
3. promotes effective relationships and open communication, both inside and outside the boardroom, between non-executive directors and the executive team;
4. builds an effective and complementary board, initiating change and planning succession in board appointments, subject to board and shareholders’ approval;
5. promotes the highest standards of corporate governance and seeks compliance with the provisions of the Code wherever possible;
6. ensures a clear structure for and the effective running of board committees;
7. ensures effective implementation of board decisions;
8. establishes a close relationship of trust with the chief executive, providing support and advice while respecting executive responsibility; and
9. provides coherent leadership of the company, including representing the company and understanding the views of shareholders. 

This article has been prepared for the general information of clients and contacts of PLN Lawyers Sydney and the affiliated firms of the Pacific Legal Network. While it deals with and comments on the law in specific areas it is not intended nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.