Book review: The Star Judgment

The Star Judgment concluded that the Board Directors were compliant with the law. But what can it teach us about doing a good job, not just being compliant?  My lessons are:

• Think about all the risks, not just the financial ones, and have them in your mind when decisions are being made.
• Don’t rely on management to interpret an independent expert report, particularly one that raises issues.
• Any circular resolution should be administrative only and confirm something previously discussed – if it raises unanswered questions, it needs board discussion.
• And if your board papers are too long and hide the key bits of information in a footnote, it is your job to direct management to fix that.

Despite finding directors didn’t breach the law,  Justice Lee asks directors to do better – “to approach their task understanding the discharge of their duties requires more than formal compliance…to have a willingness to interrogate, to probe, and, where necessary, to challenge”.

The Star Judgment, by Justice Michael Lee

This is not the kind of book I normally read. In fact most would argue that it isn’t really a book. But on my e-reader, it clocks in at nearly 400 pages, and Justice Michael Lee’s previous high profile case, the defamation trial brought by Bruce Lehrmann, was literally released as a book, so this one counts.

This case was brought by the Australian Securities and Investments Commission (ASIC) against two executives and 8 non executive directors of Star Entertainment Group, a listed casino group in Australia. ASIC alleged that all of them breached section 180 (1) of the Corporations act when they failed to remove access to  a  Hong Kong based group to the Star casinos, when there was reasonable evidence they were money laundering.

Section 180(1) requires directors and officers of a company to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they occupied the office. In the end, Justice Lee found that the executives had breached section 180 (1), but the non executive directors had not, largely,  according to the judgement, because management hadn’t given the Directors adequate information for the Directors to take action.

On the basis of the information that was provided to it, Justice Lee concludes that the NEDs did not breach their duty of care. However, he also points out that it is impossible to test the hypothetical of whether the directors would have done something different if they had asked more or better questions of management and then received better information about what was actually going on in the organisation. There were some strong hints in some of the documents. But without further questioning, they went unheeded.

So I read the judgment thinking about that hypothetical – what lessons can we learn about doing a good job as a director – doing more than being compliant? How can you ask better questions, and take better action, given the clues provided by management, to tease out the real risks that occurring on your watch?  Looking at the sequence of events, my key takeaways:

• Engage directly with the major risks of the business, not only the financial risks. There were some implied references to criminal activity from the junket operators, in Asia and in Australia, and even in Star’s facilities in several board papers, but the papers downplayed them, and didn’t describe what was happening explicitly, despite ongoing police investigations. A comprehensive understanding of the issues arising in similar business overseas, might have generated some pointed questions to uncover the serious issues occurring in the business.
• Engage directly with independent expert reports – particularly those raising issues. KPMG did a review of Star’s anti money laundering programme. It raised several high issues. The Audit committee received an executive summary (from KPMG) and a management summary that said that all of the findings were in the process of being fixed.  They didn’t receive the full report, nor did they hear directly from KPMG. If the Board had more direct information about the issues, they might have taken action sooner, and monitored progress much better.
• Circular resolutions should only be for procedural matters, and the Board should already be across the key issues. There were two circular resolutions approving increases in credit limits for Star’s biggest junket operators. They were approved quickly by the Board (within 24 hours). Both of the junket operators, it later emerged, were not suitable operators.
• The Board is in control of the information it receives.  In particular, if board papers are too long, and not insightful enough, the board can direct management to do better, rather than missing important footnotes in the torrent of less relevant information.  Justice Lee commented that ‘directors cannot rely upon an inability to cope with the volume of information they receive’ and ‘information must be ‘in a form that is both comprehensive and capable of proper digestion’.

The finding that the Non Executive Directors had not breached  Corporations Act doesn’t doesn’t necessarily mean the Non Executive Directors did a good job, rather that they didn’t do a bad enough job to breach the Act. Justice Lee had some fairly stern words for them at the end of the judgment:

One would hope that someone proposed to be a director of a corporation conducting a high-risk enterprise such as a casino would recognise that they are being asked to guide and monitor the management of the company operating in a singularly high-risk context. Their obligation, after all, is to perform their role at a level of diligence that a reasonable director or officer, acting in the corporation’s specific circumstances would achieve.

Directors are remunerated, sometimes handsomely, to do their job, which requires real engagement with information provided to them. A director, whether executive or non-executive, is required to take reasonable steps to place themselves in a position to guide and monitor the management of the company and is expected to take a diligent and intelligent interest in the information available to them, understand that information, and apply an enquiring mind to their responsibilities. Non-executive directorships of public companies, particularly those conducting high-risk enterprises, 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.

 

Bit of beauty

I read most of this judgement getting sunburnt sitting by a lake in Thailand, the view was worth it.