Federal Court’s Star judgment should be required reading for Australia’s directors

Australia’s directors have taken comfort from a Federal Court decision clearing The Star Entertainment’s former directors of breaching their duties, but the judgment should be required reading inside boardrooms. Justice Michael Lee has provided a timely reminder that in accepting the handsome pay and perks of the job, directors should never lose sight of their statutory obligation to protect the interests of shareholders by holding management to account. “The law now expects significantly more of officers of a corporation in discharging their duties and when delegating to others,” he wrote in his judgment on Thursday. Justice Lee found former Star Entertainment chief executive Matt Bekier and one-time chief legal and risk officer Paula Martin broke the law by failing to adequately recognise the risk of criminal junket operators operating in its Sydney casino and did not properly inform the board of the threat. However, he also ruled that the Australian Securities and Investments Commission had failed to make its landmark case that seven Star non-executive directors did not exercise care and diligence in the discharge of their duties. The Australian Institute of Company Directors welcomed the decision even though it was hardly a complete endorsement of the Star board’s practices. “The decision provides some clarity on key questions including the role of the board versus management, the volume and quality of board papers and the need for active board oversight,” the AICD said. But, “the judgment reinforces much of what the AICD teaches and promotes as good governance principles”. Justice Lee was not fully convinced, however, about Star. “Directors are remunerated, sometimes handsomely, to do their job, which requires real engagement with information provided to them,” he wrote. Directorships with public companies, particularly those in “high-risk enterprises” such as casinos, “are not just tokens or glittering prizes decorating a CV”. “The job requires intelligent people prepared to engage actively. “In such a context one would expect directors to approach their task understanding the discharge of their duties requires more than formal compliance. “It can require a willingness to interrogate, to probe, and, where necessary, to challenge.” Justice Lee admitted “a sense of disquiet” about some of what he heard about the Star board during the trial. “It is not a portrait of directors actively pressing management with difficult questions as to whether the business was being conducted ethically, lawfully, and to the highest available standard. “The contemporaneous minutes disclose little by way of sustained scrutiny or insistence upon explanation in circumstances where risks were obvious.” In driving home his concerns, he called out Star’s governance statement, which laid out the board’s role in overseeing the company’s “culture and values”. “It is easy to be cynical about these sorts of statements, so beloved by consultants drafting such documents,” Justice Lee said. “But to the boards who adopt them, one presumes they are supposed to be more than platitudes. “The directors adopting this statement for Star had assumed a governance role in a company operating a casino. This was no ordinary enterprise, and the role demanded vigilance.” Yet, Star’s culture, Justice Lee said, “was so dysfunctional and unethical that senior management was tardy in preventing junket operators from behaving inappropriately and lied to its bankers to secure an ongoing commercial advantage”. “Ultimately, it fell to investigative journalism, and then a statutory inquiry, to expose the extent of the problems. “Given some of the lamentable events canvassed in these reasons, the more self-congratulatory submissions of the non-executive directors are jarring.”