The role of the Chair: insights from ASIC v Mitchell (No 2)

ASIC v Mitchell (No 2) (Mitchell) is hardly the grand slam that ASIC might have hoped to secure.  Nonetheless in rejecting the entirety of ASIC’s case against second defendant Stephen Healy, the Federal Court has provided useful guidance on governance generally and specifically the role and responsibilities of the Chair of the board of directors in the modern Australian company. 

The law surrounding the role of the role of the Chair has come a long way in recent times. Once considered a merely ceremonial role, cases like the 'Greaves One.Tel' (ASIC v Rich) case confirmed that the conduct of a Chair is assessed by reference to “contemporary community expectations”. These expectations include a higher duty because their ‘special knowledge’ gave them a higher duty of care, such as in Hall v Poolman. However, Mitchell shows that the duty has its limits and they include the Chair’s ability to rely on the CEO’s determination about what documents and information would best assist the Board in its considerations.

Facts

In May 2013, the Board of Tennis Australia, chaired by Mr Healy, approved a A$195.1 million broadcast rights deal with Channel Seven. The deal had been secured largely through the efforts of Tennis Australia’s CEO, Mr Wood, and was significantly more lucrative than its predecessor.

ASIC alleged that in internal deliberations by Tennis Australia the Chair failed to exercise the degree of care and diligence that a reasonable person in his position would exercise. Mr Healy was said to have failed to ensure that certain documents and information related to Channel Seven’s bid and rival broadcasters’ interest in bidding were disclosed to Tennis Australia’s Board. According to ASIC, the reasonably foreseeable consequence of this failure was to deny Tennis Australia the opportunity to secure a more lucrative deal.

Justice Beach rejected the entirety of ASIC’s case against Mr Healy. Prefacing detailed reasons, Justice Beach noted that “much of ASIC’s construction of its evidence displayed confirmatory bias” and that the “various cover up and conspiracy theories that it floated turned out to lack substance”.

Mr Healy’s reliance on Mr Wood

In reply to ASIC’s charge that he had failed to meet his s 180(1) duty, Mr Healy showed that it was reasonable for him to rely on the CEO’s judgment as to what should be disclosed to the Board.  

The evidence established that Mr Wood as the CEO was best placed to determine what documents and information would best assist the Board in relation to the negotiation of the new broadcast rights deal. It was clear that Mr Wood’s responsibilities as CEO included preparation of Board packs and this he did. Justice Beach accepted that Mr Wood excluded the documents identified by ASIC after careful consideration. Mr Healy relied on Mr Wood’s judgment in good faith, having independently assessed the appropriateness of Mr Wood’s judgment.

While Mr Healy as Chair could not delegate or abrogate the responsibilities inherent in his position, his duty to exercise reasonable care and diligence did not require him to countermand Mr Wood’s considered judgment. Having formed a reasonable view about the CEO’s judgment, Mr Healy was entitled to rely on that judgment. ASIC failed to rebut the presumption that the reliance was reasonable and so failed to prove Mr Healy’s breach of s 180(1).

The role of the Chair

Perhaps the most interesting facet of Mitchell, is Justice Beach’s comments on the role of the Chair. Determining whether Mr Healy’s conduct fell short of the requirements of s 180(1) required consideration of Mr Healy’s office and particular responsibilities within Tennis Australia. Noting Mr Healy’s chairmanship of Tennis Australia, this raises the question, what is the role of the Chair?

No detailed position statement describing the role of the President and Chairman of Tennis Australia was put before the Court. There is relatively little case law examining the role of the Chair and the Corporations Act and ASX’s Corporate Governance Principles and Recommendations (4^th ed) provide only limited guidance. Against this backdrop, the judgment of Justice Beach is instructive for the general propositions it includes:

• while the Chair is not a ‘directorial overlord’ and does not have authority to manage the corporation, he or she does have the power and authority to manage Board meetings and so may have greater responsibility for the performance of the Board as a whole;
  
  
• the Chair has responsibility for setting the agenda for Board meetings and must ensure that the Board has before it sufficient information to consider, discuss and decide on the agenda items. The Chair is responsible for ensuring the Board has sufficient time to attend to necessary matters;
  
  
• the Chair is responsible for ensuring “workable and harmonious relations” between executive and non-executive directors and between the Board and executive management. The Chair must also manage unhelpfully disruptive directors;
  
  
• the chair may have greater responsibility for ensuring that the Board sets and implements an appropriate corporate culture and corporate governance structure within the organisation;
  
  
• the Chair must ensure appropriate communication with and the taking into consideration of the interests and concerns of members of the organisation; and
  
  
• the Chair may have a public relations role in respect of the Board and outside parties.

When assessing the Chair’s role, it is necessary to consider what the Chair undertook to do. In this respect, the Chair’s represented personal qualities (such as particular accounting, financial or legal expertise) may be relevant and can serve to ratchet up expectations beyond the base level expected of a reasonable director.

The importance of properly defining the role of your Chair

Justice Beach’s decision is unlikely to have pleased ASIC. Nevertheless, it provides useful guidance to corporate Australia as to the proper role of the Chair of the Board. In our view, the decision serves as a reminder of the importance of properly defining the role of the Chair, particularly given Justice Beach’s willingness to consider internal expectations of Mr Healy’s performance as the Chair, the things he undertook to do and his personal qualities.

Boards should look closely at their Board Charter and Constitution and determine whether, collectively, they define the role of the Chair in a sufficiently detailed manner. If it was ever in doubt in modern corporate Australia, Mitchell clearly establishes that the role of the Chair is not merely ceremonial. All directors should carefully consider whether the Board skill matrix properly records their special skills and experience, with Chairs, in particular, noting that they may one day be held to a higher standard as a result of these professed talents.