It didn’t take long for the Director’s Club to mount a rearguard action following the Federal Court declaring that the directors of Centro breached their directors’ duties in failing to inform shareholders of current liabilities. The usual suspects, including the Board Room Trade Union (otherwise known as the Australian Institute of Company Directors) and high-profile corporate figures including David Gonski and Graham Kraehe, raised the inevitable dire implications that will flow from making directors responsible for their actions, or inaction.

The Financial Review reported that Gonski, one of Australia’s leading boardroom figures, stated “raising the bar [on directors’ duties] does not necessarily improve both the availability of good candidates … if directors are spending all their time concerned that all the procedures are not only followed but double checked, how much time will they have to think about strategy”. Gonski, who was clearly busy yesterday, also told The Australian than the decision “would appear to be increasing the burden on directors”.

While Gonski’s arguments are not altogether incorrect, “raising the burden” on professional directors, most of whom are being paid upwards of $100,000 annually for a part-time role is hardly onerous. Especially when the “burden” relates to the professional director being fully cognisant of the company’s financial position. In the Centro case, directors were apparently unaware that several billion dollars of debt was “current”, rather than “non-current”. This wasn’t a footnote buried deep in an annual report that was immaterial to shareholders — arguably, it was the most critical aspect of the company’s financial information that was being provided.

Even more so in the Centro case, given the highly leveraged nature of its businesses, and the fact that by mid-2007, serious issues had already arisen in the US regarding sub-prime debt. By the time the Centro directors signed off on the fallacious financial report, RAMS had collapsed, several Bear Sterns hedge funds had collapsed and finance was becoming increasingly scarce.

For any board member to provide effective and adequate guidance and opinions on business strategy, they would need to be fully aware of the business’ financial position. For example, a director should not be approving a major acquisition if they are not fully aware of the company’s debt position.

The AFR also reported the findings of an AICD survey, which found that “a third of directors had declined board invitations due to liability”. This is hardly a reflection on the strictness of corporate laws, but rather, an indictment on the performance of public companies. The AICD also found that “half [of the directors surveyed] knew someone who had resigned or turned down a position”. Aside from the self-serving nature of the survey — many directors would know the same people, so the second part of the survey is utterly misleading.

There is no doubt that the Federal Court has removed a clear escape valve for directors — that is, the ability to legally shrug responsibility for their actions by virtue of seeking the advice of highly paid external advisers (such as auditors or lawyers). That is no doubt a good thing. For too long, company directors have been able to use shareholders’ monies to abrogate their responsibilities to those very shareholders, too often, failing in their duty to be adequate stewards of other people’s capital.