Directors spooked by personal liability laws

Laws that place personal liability on company directors are hampering business decision making and could even be depriving start-ups of leadership, according to a new report.

A survey by the Australian Institute of Company Directors found that more than nine in ten firms felt that personal liability of directors had an impact on business decision making or outcomes.

The study, involving 623 directors from a range of sectors and business sizes, also found that a third of directors had personally declined an offer of a directorship due to the risk of personal liability.

A further 65% said that the personal liability risk caused an overly cautious approach to decisions, while nearly three-quarters of aspiring directors questioned their career due to the rule.

The Australian Institute of Company Directors says that there are more than 700 state and territory laws that place personal liability on individual directors for corporate misconduct, even where they may not have personal involvement in any breach.

The institute says that under some legislation the onus of proof is reversed, removing the presumption of innocence.

John Colvin, CEO of the Australian Institute of Company Directors, called the situation “chilling.”

“The survey shows that the burden of legal risk being confronted by Australian directors is stopping qualified people from taking up board seats and causing others to leave through resignation or retirement,” he says.

“In this environment the balance of risk and reward is so tilted that it not surprising that many experienced and highly qualified directors are asking – is it worth it?”

“This risk also appears to be discouraging aspiring directors, who are our next generation of business leaders.”

“This is not just about directors’ self-interest. It is about everyone’s prosperity.”

“By encouraging an overly cautious approach to decision-making, focussing directors’ minds excessively on risk avoidance rather than on ways to add value, and by discouraging talented people from taking up or holding directorships, these laws stifle business.”