Page 1

TITLE: “Corporate Governance and The Role of the Courts in Changing

Community Behaviour” for the 2005 ASIC Summer School DATE: 10 February 2005 VENUE: The Langham Hotel, Melbourne AUTHOR: The Hon. the Chief Justice Marilyn Warren1 Introduction TABLE OF CONTENTS

1. Introduction 2. Corporate Governance and the Role of the Courts

a. Concept of Corporate Governance b. The Enforcement Role of the Courts c. Deterrence and Prevention d. Guiding Principles of the Courts in their Approach to Corporate Law

3. Morality and Corporate Law a. Legal Fiction of the Corporation b. Regulation versus Self-Regulation c. Regulatory Approaches between the US, UK and Australia (CLERP 9)

Compared 4. Corporate Governance and the Courts: Some Contemporary Issues

a. Case Management (Timeliness) b. Insider Trading c. Resources of the regulator/plaintiff versus those of the corporation d. Sanctions and Sentencing

5. Conclusion: The Courts and Changing Community Behaviour 1 The author acknowledges the assistance of her Research Associate, Natalya Dingley, BA JD, in the preparation of the speech.

Page 2

1. Introduction Sir Edward Coke famously said that corporations “cannot commit treason, nor be outlawed, nor excommunicated, for they have no souls”.2 This sentiment found renewed resonance in the unabashed economic imperatives increasingly advanced in the latter part of the 20th century by commentators such as Milton Friedman who considered that the only “social responsibility of business is to increase its profits”.3 Friedman argued that since only people can have responsibilities, a corporation, as an “artificial person”, can only have “artificial responsibilities”.4 Compare this with the current views prevalent within today’s environment of high-profile corporate collapses (e.g. Enron and HIH) which appear to indicate the public’s desire for corporations to acquire souls. In remedying and protecting against future corporate excesses, there appears to exist a tension between what Micklethwait and Wooldridge have termed the “bad apples” and the “rotten roots” schools of thought.5 The former regards the problem as confined to flawed individuals, while the latter envisages deeper structural problems inherent in the lack of “checks and balances” imposed on the modern corporation.6 It is an interesting argument and one which sets the scene for the topic I present here today. For decisions in the boardroom and elsewhere should be informed by moralistic reasoning – a situation which does not occur much at all if one advocates the “rotten roots” school of thought. Indeed, one often gets the impression from some sections of the corporate world and from reading the business section of newspapers that “if it’s legal, it’s alright”.7 If the courts are to begin changing community behaviour – and by “changing community behaviour” I refer to in particular the ability of the courts to help prevent further breaches and offences of corporate governance laws and rules - that is one perception which must be corrected. Why? Because obeying the law is not enough. Principled reasoning must accompany adherence to the law. It should never be forgotten that the law and ethics together combine to form the very fabric of our society. As Chief Justice Malcolm of Western Australia pointed out in a speech given last year: “The degree of acceptance and observance of the law is closely linked with the acceptance and observance of the basic moral or ethical values reflected in the law”.8 Therefore, it is critical that we have laws which are not only generally accepted but ones which are also followed in spirit, otherwise we run the risk of complete disorder.

2 Sutton’s Hospital Case (1612) 10 Co Rep 1a, 32b. 3 Milton Friedman, “The Social Responsibility of Business is to Increase its Profits”, New York Times Magazine (New York), 13 September 1970 at 33. 4 Ibid. 5 John Micklethwait and Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea (2003) at 154-7. 6 Ibid. at 154. 7 A view also held by the Hon. Justice David Malcolm AC in How the Courtroom Impacts the Boardroom, Paper delivered for the Centre for Engineering, Leadership and Management at the Hyatt Regency, Perth, Western Australia on 17 March 2004. 8 Ibid.

Page 3

Given this, today I intend to address the topic of how the courts influence corporate behaviour by analysing it in terms of the broader debate on corporate ethics and also, on a more practical level, some of the issues faced by the courts in their handling of corporate governance cases. I propose to conclude with some final observations on what needs to be done for courts to be able to better challenge corporate conduct in future.

2. Corporate Governance and the Courts The issue of whether the courts can change corporate behaviour must be viewed against the backdrop of the current corporate governance environment – which in the Australian context increasingly involves a complex amalgam of both legal and self-regulation.9 Australian academic John Farrar notes that some reasons for the complexity are that the law has experienced various “paradigm shifts” over time which have inevitably impacted on the role of the courts.10 There are at least two other factors which have added to the complexity states Farrar: the process of rapid change11 and a global trend towards self-regulation.12 This trend has been overshadowed however by the high-profile corporate collapses of the last few years which have raised serious doubts about the ability of business to self regulate.13 As I shall explain, self-regulation forms an integral part of corporate governance law. 2a. Concept of Corporate Governance But first let us look at the term “corporate governance” and what it actually means. At its most simplest it refers to the “control of corporations and to systems of accountability by those in control”.14 This description remains however indefinite and somewhat clichéd – mainly for the reason that it does not come near to describing the complexity of it in practice. By “corporate governance”, one is referring not only to the legal restraints but also to the norms of so-called “best practice”.15 Added to this, the attempts of organisations themselves to formulate codes of business ethics.16 In this way, the difficulties associated with regulating the entire spectrum of corporate governance may be clearly seen. 2b. The Enforcement Role of the Courts

9 John H. Farrar, “Corporate Governance and the Judges” 15 Bond Law Review 49 at 49. 10 Ibid. 11 Farrar comments that this has often seemed “excessive” and “gratuitous”. Ibid. 12 Ibid. 13 Ibid., 49-50. Throughout this paper I refer to the notion of “community” to the extent that it refers to the interaction of the general public with corporate governance law and rules (and these laws and rules are, as I explain in Part 2(a) below, quite wide-ranging in scope). For instance, the community as it may represent directors, general company employees (a substantial amount of the population one would assume), shareholders (again, numerous), other investors, commentators, past, present and potential corporate criminals and wrongdoers etc. Note that I feel that the term “community” is appropriate here given that these categories of persons cover an extremely wide cross-section of society. 14 John H. Farrar, “Corporate Governance and the Judges”, op. cit. at 50. 15 Ibid. 16 i.e. codes of ethics which are formulated for the internal guidance of companies fall under the category of “soft law” (see the “hard law”/”soft hard law”/”soft law” distinction made below).

Page 4

The regulatory environment is of course administered by ASIC, the Australian Stock Exchange (ASX) and the Australian Competition and Consumer Commission (ACCC).17 The courts generally only become involved in enforcing corporate governance matters in two given situations: (1) where the law stipulates that to enforce a matter ASIC must prosecute and (2) where private litigators, such as shareholders, seek to clarify and extend directors’ duties. In this way, one might say that the courts have less of a role to play than, say, the regulator, in influencing corporate behaviour or the perceptions of the wider community in relation to corporate governance (ASIC after all has an explicit educational role in promoting good governance). However, much of what one reads about in the media concerning corporate governance will be those small fraction of matters which make it to the courts. The role of the courts in influencing corporate behaviour can therefore at times be disproportionate to the amount of matters dealt with overall.18 In fact, one might go so far as to say that how the public reacts to the handling of the justice system to high-profile court matters is crucial to the way in which the corporate governance system as a whole is perceived. Courts enforce corporate governance laws mainly through interpreting the relevant legislation (usually, this will be the Corporations Act 2001 (Cth)) and through application of the common law where legislation does not exist. Difficulties however surface where the courts’ interpretation of the common law may be viewed by some as “erratic”, hence leading to the introduction of more statutory provisions to override the old common law. For instance, the view of some commentators that the courts were increasingly becoming inconsistent in their interpretation of the common law relating to corporations was a major force behind the introduction of the statutory Business Judgment Rule (BJR), implemented into the Corporations Law (now Corporations Act 2001) during the late 1990s. Previously, the Business Judgment Rule had existed only in the common law, however, at the time some commentators confessed their frustration at what they saw as the rule’s consistently unpredictable applications.19 Whilst it is arguable that at times the capacity to enforce against wrongdoing may be strengthened by codification (particularly where the law needs to be made clear and there is a history of inconsistent decisions in the case law), the law is at other times better served where it is left up to the discretion of the judges to apply it as may be appropriate to the given facts of a case. That is not to say that the courts cannot 17 Other market regulators include the Australian Prudential Regulatory Agency (APRA) and the Reserve Bank of Australia (RBA). 18 Unlike the courts, which only become involved at the enforcement stage, ASIC’s activities cover three broad areas: (1) enforcing the law; (2) improving the financial system; and (3) contributing to consumer protection and financial literacy. In its 2003-4 annual report, ASIC reports the following activities undertaken by it: 3,853 new licences granted in the financial services industry; a further 2,007 ASIC approvals resulting in reduced business costs and innovative products; (with respect to prevention and enforcement) 28 jailed, 60 “illegal schemes shut down” and insolvent trading deterred. ASIC is also responsible for the upkeep of consumer websites and services for reporting corporate misconduct. 19 Robert Baxt, “Directors’ Duty of Care and the New Business Judgment Rule in the 21st Century Environment”, paper delivered at A Celebration of the Scholarship of Emeritus Professor Harold Ford at the University of Melbourne Law School on 16 March 2001. The decision which prompted much support for the introduction into statute of the BJR was the decision in the AWA appeal, or Daniels v Anderson (1995) 37 NSWLR 438 at 502.

Page 5

themselves overcome certainties in the law, as the decision handed down by the High Court in Spies v R in 2000 would appear to demonstrate.20 Simply, that statutory rules can at times assist in providing a clearer and more direct message not just to the courts but also to the community, particularly the corporate community, so they may be very clearly directed on the behaviour expected of them in relation to the carrying out of their duties.21 2c. Deterrence and Prevention The courts’ role is also to deter individuals before them from committing further crimes (“specific deterrence”) or from making further civil breaches and also to deter others in the community who might potentially commit corporate crimes (“general deterrence”) or otherwise breach civil provisions. In an insolvent trading case, Elliott v ASIC22 or “Water Wheel” as it is known, deterrence was an important issue when deciding whether to allow the appeal against the penalties ordered against appellants. The judge at first instance23 determined that Elliott should be prohibited from managing a corporation for a period of four years. His Honour stated that when considering the period of disqualification, general deterrence was considered but noted that personal deterrence was a particular factor.24 Elliott appealed against the disqualification but it was dismissed owing to the fact that the duration of the prohibition order was deemed moderate rather than severe.25 In this way, it may be seen that the courts are seeking to deter not only the individual before them from re-offending, but also seek to protect the community through preventing others who might otherwise have thought to offend. 2d. Guiding Principles of the Courts in their Approach to Corporate Law Now I have discussed the specific roles of the courts with respect to corporate governance (mainly this is enforcement through interpretation of legislation or application of the common law), the question then is just how do the courts approach corporate law matters as a general rule? Are there any “guiding principles” applied by the courts? Chief Justice Malcolm listed three general principles which guide Australian courts in their approach to corporate law:

20 In Spies v R (2000) 18 ACLC 727, the High Court took the opportunity to clear up the issue as to whether the duty of care extended to creditors of companies. The possibility of such an extension of the duty of care, although not apparently after all accepted in Spies v R, was originally inspired by Mason J’s formulation in Walker v Wimborne (1976) 137 CLR 1. The call for widening the duties of directors to include consideration of (future) creditors was recently revived in relation to the James Hardie issues. 21 Drawbacks in codifying common law rules however include a certain loss in the flexibility of application and also a possible narrowing of the judge’s discretion. As Professor Baxt also notes, although codification is often done with the intention of removing difficulties in its interpretation, the setting down of principles into language may create even greater difficulties than before. As an example, Baxt sets out the problems associated with the previous s181(1) of the Corporations Law (now s180 Corporations Act) where the original intention was to limit the director’s duty to act in good faith to what they believed to be the best interests of the company (more subjective), to the far more objective duty which came out in the final draft – changes imposed last-minute changes by the Senate: See (Prof.) Baxt, “Directors’ Duty of Care and the Business Judgment Rule”, op. cit. 22 Elliott; Plymin v ASIC [2004] VSCA 54. 23 Mandie J. 24 ASIC v Plymin; Elliott [2003] VSC 230 at [109] (penalty judgment); Ibid. at [139]. 25 Ibid. at [138]. However, with regard to Plymin, on appeal the original prohibition order of 10 years was deemed excessive in the circumstances. It was accordingly reduced to 7 years. See para.’s [142]-[145], Ibid.

Page 6

1. the “non-interference principle”; 2. the “commercial reality principle”; and 3. the “non-prescriptive principle”.26

They are useful to note here not as legal principles which are, or even ought to be, strictly applied by the courts, rather, as an insight into the way in which courts go about resolving corporate law matters. The first principle, the “non-interference principle”, is self-explanatory in meaning: it signifies the historical reluctance of the courts to interfere in the management or internal affairs of the modern corporation. Lord Justice Scrutton neatly encapsulated this attitude in an early 20th century English corporations case when he stated:

“It is not the business of the Court to manage the affairs of the company. That is for the shareholders and directors… I should be sorry to see the Court… take upon itself the management concerns which others may understand far better than the Court does”.27

According to Malcolm CJ, the second principle, what he describes as the “commercial reality principle”, calls upon the courts to reflect an awareness of the realities of commercial activity. In the past, the courts may have been viewed by some sectors of society as being rather ostrich-like in this respect,28 but the judgments increasingly indicate the courts’ awareness of factual aspects of the business world. This is in line with changing community expectations. Where once courts maintained a certain aloofness, today’s society is far more sophisticated and its’ members expect the courts to take into account commercial realities. The third principle, the “non-prescriptive principle”, indicates the disinclination of the courts to set down precise rules and regulations within which companies conduct their business affairs. At the turn of the last century, Lord MacNaghten described the approach thus:

“… I do not think it desirable for any tribunal… to formulate precise rules for the guidance or embarrassment of business men in the conduct of business affairs. There never has been, and I think there never will be, much difficulty in dealing with any particular case on its own facts and circumstances; and, speaking for myself, I rather doubt the wisdom of attempting to do more”.29

However, recent amendments to the corporations law reflect the willingness of Parliaments to increasingly regulate in some areas. In particular, this is evident with the recent CLERP 9 reforms, which I will discuss in further detail a little later on when comparing the varying approaches of the US, the UK and Australia in the context of the regulation versus self-regulation debate.

26 The Hon. Justice David Malcolm AC, op. cit. at 15. 27 Shuttleworth v Cox Brothers & Co (1927) 2 KB 9 at 23-24; as cited in Ibid. 28 See for instance the calls for a “more commercial” interpretation of legislation. Baxt, R National corporate law - two steps forward, one step back! (1995) 23 Australian Business Law Review 148 at 149; as cited in The Hon. Justice David Malcolm AC, op. cit. at 15. 29 Dovey v Corey [1901] AC 477 at 488; as cited in Ibid. at 16.

Page 7

3. Morality and Corporate Law In my opening remarks I noted that morality and ethics are intimately entwined with the observance of laws; that it is critical to have laws which are not only generally accepted but ones which are followed in spirit. In other words, the law must reflect community morality and ethical standards.30 3a. Legal Fiction of the Corporation as Person Relevant to this, a few months ago in the business pages of a very well-known Melbourne newspaper, I read the following contemplations of a journalist:

“Why is it that executives can, as many of those involved in corporate scandals often are, be moral, intelligent principled human beings in their private lives but feel it is acceptable to act immorally, even illegally, in their roles as corporate officers?”31

It is a question which is being asked by many in the business community at the moment, particularly in light of recent events. The number of investigations the ACCC has announced on its books into cartel behaviour (about 40) is on the rise. Some major cases involving ASIC pursuant to recent CLERP reforms which may also have senior management thinking about their company’s obligations include ASIC v Southcorp Limited.32 Southcorp was a Federal Court case and the first decision since the introduction of civil penalties for breach of continuous disclosure obligations, under section 674(2) of the Corporations Act. The personal-corporate morality argument leads us to ask another key question: just what is it about the corporation that causes people to act in ways they would not in their private lives? To put that in context: why do we see individuals who would not contemplate robbing a bank by hold-up nevertheless engaging in bold, calculated fraud and dishonesty on a major scale? To answer those questions, I believe that it is necessary to revisit the fundamental conception of the corporation as it is premised in law. To begin with, when speaking about corporations, one must not forget that the corporation is a social institution.33 But it is also a legal institution, one whose existence and capacity to operate depends on the law.34 Centuries ago the corporation had been conceived as instruments of government authority, reliant on government bodies to found them and enable them to operate.35 Yet, by the end of the nineteenth century a new logic was formulated in the common law world and 30 The Hon. Justice David Malcolm AC, op. cit. Relevantly, in that speech His Honour stated: “the degree of acceptance and observance of the law is closely linked with the acceptance and observance of the basic moral or ethical values reflected in the law”. 31 Stephen Bartholomeusz, “Morality and the Cartels”, The Age, 14/12/05. 32 ASIC v Southcorp Limited (2003) 203 ALR 627. 33 The notion of the corporation was first explored by Peter Drucker in his seminal 1946 work, Concept of the Corporation. 34 Joel Bakan, The Corporation: The Pathological Pursuit of Profit and Power (2004) 1. 35 The long-defunct British East India Company comes to mind as providing a good example of this form of company in history. For centuries, it operated as a company committed to the pursuit of profit and yet, its representatives also often received official status as envoys of the British Empire (possessing at times from the seventeenth up until the nineteenth centuries for instance, rights to coin currency, exercise jurisdiction over British subjects, and declare war on non-Christian powers).

Page 8

adopted in many other countries that was to have far-reaching consequences: the notion that the corporation be created as a natural entity analogous to human beings.36 In short, the corporation was from then on able to gain separate personality. Along with distinct personality was developed the crucial principle of limited liability.37 Later, also in the United States (and first of all in an early twentieth century case called Dodge v Ford)38 came the principle that directors have a legal duty to put shareholders’ interests above all others and no legal authority to serve any other interests. This is now known as the “best interests of the company” principle and it is entrenched in Australian law. The keystone of this formulation is the duty of directors to preserve and enhance shareholder value - in other words, to make the company money. The “best interests of the company” principle acts to entrench the law’s intolerance of social responsibility - except where it is employed in the service of the corporate self-interest. Lord Bowen in the nineteenth century English case Hutton v West Cork Railway Company neatly encapsulates this principle i.e. that social responsibility of corporations can only be tolerated where it is in fact in the body corporate’s self-interest:

“The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company...”.39

An amusing quote, which puts in a nutshell the “best interests of the company” principle as practised at its most extreme, is a joke aimed at board members and CEO’s:

“If you find an executive who wants to take on social responsibilities, fire him. Fast!”40

It raises the question: if the law itself is so intolerant of the social responsibility of companies, how can it then ask corporate wrongdoers to otherwise learn responsibility and also expect to influence the community’s moral decisions and behaviour? That is certainly a difficult question and one I wish merely to raise but do not attempt to answer here today. 3b. Regulation versus Self-Regulation 36 Joel Bakan, op. cit. at 16. The case which gave legal recognition to the corporation as a separate legal person was the House of Lords case Salmon v Salmon & Co Ltd [1897] AC 22. 37 John Farrar is critical of the reasoning in Salmon v Salmon & Co Ltd [1897] AC 22, which recognized the concept of separate personality, later leading to the notion of limited liability. He states that the analysis was “... not fully developed in terms of principle and policy and, combined with limited liability, it has led to abuse, particularly through its later extension to corporate groups, which has led to a system of limited liability within limited liability, a consequence never intended by the legislature”. See Farrar, Corporate Governance in Australia and New Zealand (2003) at 463; see also chapter 3, “The Concept of the Corporation”. 38 Dodge v Ford (1919) 204 Mich. 459, 170 NW 668. 39 Hutton v West Cork Railway Company (1883) 23 Chancery Division 654 at 673, per Lord Bowen. 40 Attrib. Peter Drucker in Bakan, op. cit. at 35.

Page 9

As to the question of the courts’ consideration of matters that might more properly be considered as firmly placed in the realm of morality, Lord Steyn observed the following, “[t]he law and morality are inextricably interwoven. To a large extent the law is simply formulated and declared morality.”41 But can the law ensure corporate morality? Some critics suggest that the government with its most recent corporate law reform – the CLERP 9 provisions – is in regulatory overdrive, with the claim that such reform makes business more difficult.42 On this view is the argument that the law can never promote the level of morality that the community demands and expects.43 This position is particularly typical of the proponents of self-regulation. Others suggest that the law is the only answer, that regulation is in fact a necessity. Most people would agree that some regulation is required; the question is therefore the extent to which the government should be permitted to regulate and businesses to self-regulate. In other words, just how do we maintain a satisfactory balance for the protection of investors on the one side (i.e. regulations are required) with the freedom of business to operate on the other (which requires increased powers of self-regulation)? In any case, sitting behind the regulation versus self-regulation debate is the fact that trends tending to favour one side over the other are often a reflection of changing community morals and expectations. The authorities often find that they must maintain a tricky balance between maintaining an appropriate level of regulation whilst at the same time appearing to stay in touch with community (and in particular corporate) values and expectations. The current mood in the post-Enron, post-HIH era would appear to go against self-regulation – reflecting a change in community standards on the corporate governance issue. Symbolic of the present era is the appearance of what might be called the “corporate Zorros”. In particular, Elliot Spitzer of the United States is one such famous figure, hailed as somewhat of a hero to the American people. He champions the David’s – that is, your average investor with generally only modest means of support - against the corporate Goliath’s. The fame of this “self-styled people’s lawyer” is said to be such that:

“… even a mention in the media, which he uses with great skill, that he is eyeing a particular industry causes panic. Stock prices plunge, chief executives cower and crisis management consultants cancel their vacations”.44

Although he is undoubtedly credited with exposing some of the most serious abuses in many industries, some see Spitzer as playing a role in what many now see as a

41 Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1996] 4 All ER 769, 790. 42 Hugh Morgan AC (President, Business Council of Australia), Civil Society, The Corporation and Regulation, Address to the Committee for Economic Development of Australia delivered in Melbourne on Monday 22 March 2004. 43 i.e. See the view that the law is but a “moral minimum”; notion that the law in general can only legislate morality to a certain extent. See P Madsen and JM Shafritz, Essentials of Government Ethics (1992). 44 Excerpt from the Financial Times (author not noted), “A Lawyer Who Means Business”, The Australian, 27/12/04.

Page 10

“regulatory overreaction”, the impact of which has been felt well beyond north American borders.45 Espousing perhaps the opposite view to Spitzer was however HIH Royal Commissioner Justice Owens who observed that “any attempt to impose governance systems or structures that are overly prescriptive or specific is fraught with danger”.46 Such judicial observations would appear to lend weight to the argument that determination by the courts affords greater flexibility to the consideration of corporate governance matters – if self-regulation measures fail – rather than the imposition of additional legislation. Indeed, according to some, we must be wary about taking an overly legalistic approach to regulation which would go so far as to “dissipate voluntary responsibility”, or in other words, “the will to comply with reasonable regulatory objectives”.47 On this view, legalistic regulation can act to give essentially compliant companies a “positive disposition” to resist or reduce efforts to comply with the intent of the law.48 Still worse, for enterprise with little apparent willingness to be responsible to begin with, some commentators suggest that “command and control” legalistic regulation can invite evasion through loopholes and encourage “creative compliance”.49 Where either of these situations occurs, one has the problematic situation discussed in the introduction, where there is an ever-widening gap between the set-down law and the principled reasoning which must accompany adherence to the law. Whether or not the current regulatory environment is coming up to this state of affairs is debatable. Only time will tell if the regulatory pendulum in this instance has indeed swung “too far”, as some claim.50 The present issue therefore incites the question: with respect to the regulation versus self-regulation debate, are we striking the right balance here in Australia? Just how do other systems similar to ours maintain this balance (and does the balance struck appropriately reflect community morals and standards?) With this in mind, I thought it might be useful to briefly review the US and the UK regulatory environments, and compare the systems they have in place with the Australian approach.

45 Ibid. 46 The Hon. Justice Neville Owen, The HIH Royal Commission, The Failure of HIH Insurance (2003) vol 1 at 105. 47 Christine Parker, The Open Corporation: Effective Self-Regulation and Democracy (2002) at 9. 48 Ibid. at 10. 49 Ibid. 50 One would think that the pre-Enron trend for self-regulation in relation to much corporate governance activity made little provision for judicial involvement in this regard. And yet, an interesting side issue to this debate is the fact that self-regulation plays a larger role for the courts than one would initially have thought. For instance, where determining the standard of care of (for example) auditors, the courts of some common law countries have made reference to self-regulation (note since the CLERP 9 reforms in Australia, which I will discuss in further detail later, that accounting standards have received legislative backing). Notably also in ASIC v Rich (2003) 21 ACLC 450, Austin J considered contemporary community expectations in appraising the standard of care of a company chairman. See John Farrar, “Corporate Governance and the Judges”, op. cit. at 66. In other words, self-regulation plays a role with respect to the courts, enabling them to stay “in touch” with community morals, standards and expectations and factor these into the law themselves.

Page 11

3c. Regulatory Approaches between the US, UK and Australia (CLERP 9) Compared The USA and The UK The US would appear to take a highly prescriptive “black letter law” approach with the recent changes to the Sarbanes-Oxley Act and the NYSE listing rules. The reaction of the US regulatory authorities was swift in the wake of Enron and WorldCom. Critics of the US response claim that the unanimous passing of changes through Congress to Sarbanes-Oxley were not at all well thought-out and constituted an extreme “knee-jerk” reaction to the corporate collapses.51 In relation to the United Kingdom, the response has been somewhat more measured. It has continued the “comply or explain” approach.52 For instance, according to Rule 12.43A of the London Stock Exchange Listing Rules,53 a company is required to include in its annual report and accounts a narrative statement of how it has applied the principles set out in a revised Combined Code (principles of good governance in conjunction with a code of best practice).54 The company must explain any non-compliant actions. In this way, it may be seen that the “comply or explain” approach adopted in the UK is more flexible than that employed in the United States. Australia: CLERP 9 Australia’s approach may perhaps be viewed as sitting somewhere between these two countries. Whilst we are more pro-regulatory than the UK, we are also decidedly less prescriptive in our approach than the US. The CLERP 9 reforms indicate however the inclination of Australian authorities to be more cautious, with less trust placed in the corporation’s ability to self-regulate than previously. Since 1993, the Federal Government has been systematically reviewing and reforming Australia’s corporate law.55 These reforms have occurred within a context that recognizes corporate governance as an important consideration for the direction and control of companies, as against a backdrop of increased community angst over 51 Criticism as gathered from general news reports at the time the changes to the Act were passed by Congress. 52 See Elizabeth Johnstone, Alan Cameron & John O’Grady, Transformation of the Corporate Governance Landscape: Towards a New Era of Accountability? (2004) found at www.bdw.com as at 03 February 2005. 53 Following the de-mutualization of the London stock exchange in 1999, control of the listing rules - and with them the “comply or explain” enforcement of the Combined Code - was transferred to the Financial Services Authority (FSA), an independent non-governmental body given statutory powers by the Financial Services and Markets Act 2000 (UK). The listing rules can be found at www.fsa.gov.uk. 54 The “Combined Code” is also known as the “Hampel Code” as it was produced by the Hampel Committee in 1995 to review the implementation of the earlier “Code of Best Practice” (the “Cadbury Code”, a suggested reform made by the Cadbury Committee which was adopted by the LSE in 1992). This Combined Code has since been revised (and is also known as the “2003 FRC Code”). It was published by the Financial Reporting Council in 2003 and pertained to reporting periods beginning on or after 1 November 2003. 55 This process commenced with the Corporate Law Simplification Program under the Keating Government and the subsequent Corporate Law Reform Act 1994 (Cth) and continued with the establishment of the CLERP initiated by the Howard Government in 1997. See Harold Ford, Robert Austin and Ian Ramsay, An Introduction to the CLERP Act 1999: Australia’s New Company Law 1999 (2000) [4.1]; Harold Ford, Robert Austin and Ian Ramsay, Ford’s Principles of Corporations Law (11th ed, 2003) [10.010]; Explanatory Memorandum, Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Bill 2003 (Cth) 1.1.

Page 12

the various high-profile corporate collapses that have occurred within Australia and internationally. Many of the changes implemented by CLERP 9 concern audit reform, particularly in relation to audit oversight and audit independence. However the legislation also entails changes to the continuous disclosure regime. Perhaps, most controversially,56 ASIC can now issue infringement notices directly to companies that breach continuous disclosure requirements. Other reforms initiated by CLERP 9 include the requirement that company annual reports include a “Remuneration Report” outlining the remuneration received by its directors and key senior executives, as well as the contentious introduction of a non-binding vote by shareholders on executive remuneration.57 Despite the changes as a result of CLERP 9, there is still a substantial amount of self-regulation in this country. What ought to be made clear here is that different countries maintain different responses which are a reflection of moral standards and values particular to those nations. Obviously, despite international forums on corporate governance topics, we are not yet global in this respect. Given that, whilst it is useful to know what other countries are doing in relation to corporate governance and maintenance of the regulatory environment, it should be remembered that as yet no one approach works best in a universal context.

4. Corporate Governance and the Courts: Some Contemporary Issues I now turn to examining some of the particular issues thrown up in relation to corporate governance and the courts in recent years. They include (but are not limited to) case management and timeliness, insider trading, the resources of the regulator as opposed to those of the corporations, and the issue of sentencing and sanctions. 4a. Case Management and Timeliness The dangers in conducting manageable prosecutions are particularly acute in cases involving a complex amount of detail. R v Wilson & Grimwade,58 a long and drawn-out corporate fraud case, provides a stark example of this. R v Wilson and Grimwade was in fact a retrial in the County Court of Victoria, the first trial having been aborted in the Supreme Court of Victoria after 33 weeks when it was almost concluded.59 At the retrial, the two accused, Wilson and Grimwade, were 56 See, for example Allens Arthur Robinson, CLERP 9 – Overview http://aar.com.au/corpgov/clerp/index.htm> at 1 February 2005. 57 For example, the Business Council of Australia opined that affording “greater shareholder power over board decisions” in this way was “the thin edge of the wedge”: Marcus Priest, “Auditors: we don’t need any more laws”, Australian Financial Review (Melbourne), 12 March 2004 at 3. 58 R v Wilson & Grimwade [1995] 1 VR 163. 59 The abortion of the first trial was triggered by the death of Sir Andrew Grimwade’s wife on 29 March 1990 during the period of Grimwade’s unfinished cross-examination. The trial judge, McDonald J, explained that he was satisfied given medical evidence that Grimwade was in no fit state to continue giving evidence at that time. His Honour further stated: “Having regard to the time lost to date since Sir Andrew Grimwade commenced to give evidence, and having regard to the time which I consider is required to be able to have him resume evidence free from an impairment, I am of the view that the continuity and balance of the trial will be lost to such an extent to be destructive of the jury’s capacity to properly perform its task within this trial. I have come to this conclusion after very

Page 13

each charged with 19 counts of fraudulently inducing the investment of moneys contrary to s191 of the Crimes Act 1958 (Vic). The case was a high profile one in this State at the time owing to the large amount of moneys invested in to a trust called the “Jet Corporation Australia Trust” and the involvement of the well-known businessman Sir Andrew Grimwade. It could have been no surprise at the time that the convictions were overturned on appeal. The retrial itself proceeded over a period of almost two years, beginning in January 1991 with the jury finally giving verdict in December 1992.60 It occupied 294 sitting days in total. The presentation of evidence and the addresses of counsel were prolonged and disconnected. There were moreover frequent gaps in the court’s sitting. The circumstances of the case which led to the disjointed nature of the trial were commented on by the Court of Criminal Appeal as “desperately fragmented” with “continuity seriously lacking”.61 It is moreover a serious matter that the conduct complained of occurred in 1981 – but it was thirteen years before judgment was finally handed down by the Court of Criminal Appeal quashing the convictions at retrial. Although some of the reasons given for the many adjournments - for example the illnesses of, variously, the retrial judge, counsel, members of the jury and some of the key witnesses - were understandable given the length of the trial and sheer “human necessity”, these factors all combined to ensure that the retrial became nothing short of calamitous. Given the time over which the trial ran, it was concluded that the verdict convicting the accused could not have been reached upon a proper consideration of the evidence. The considerations of this case which led to the overturning of the convictions of Wilson and Grimwade must be viewed as exceptional.62 However, they illustrate the dangers of constant breaks in the trial and the need for a trial judge well able to recognise tactics employed by counsel which put pressure on the system. 63 The lessons inherent in this case for the courts and the justice system are therefore obvious. However, for those who sit outside the court system and who may view the quashing of the convictions of Wilson and Grimwade with some bewilderment given the verdict at the retrial, the following should also be noted. Where the facts of a case are so abnormal so as to prevent the fair trial of an accused, there are overriding principles of fairness which may supersede the expectations of the general public that the accused be punished for any alleged wrongdoing. These principles are in place to ensure the fairness of all trials, particularly where individuals are accused of a crime by the Crown. I reiterate: all individuals have the right to receive a fair trial; this is a basic precept of the rule of law. It should be noted, however, that in the few

anxious consideration being very well aware of the time and resources that have been spent to date in the conduct of the trial. For the reasons that I have expressed, I have come to the conclusion that there exists a necessity in the circumstances to discharge this jury without verdict”. See Ibid. at 169. 60 The (re-)trial exceeded 22 months in duration. 61 R v Wilson & Grimwade, op. cit., at 170. 62 However, Brooking JA in Director of Public Prosecutions Reference No. 2 of 1996 [1998] 3 VR 241, made clear his concern at that time that the comments made in Wilson & Grimwade regarding the dangers of lengthy trials were increasingly not being heeded. 63 Ibid. at 180.

Page 14

cases where convictions are overturned due to unsafe or unsound verdicts that it is increasingly the case that sanctions may be pursued in the civil jurisdiction. 4b. Insider Trading Insider trading can be difficult for the courts to enforce for the reason that it can be difficult to prove under the current law.64 According to academic John Farrar:

“Insider trading represents the dirty washing of corporate governance and influences public opinion about the efficacy of the present system”.65

Some people go as far as questioning why insider trading is an offence at all, since it seems - at least on the face of it - to sit comfortably with the capitalist notion of making a profit at the expense of another and rewarding the use of entrepreneurial skill.66 Just ask Martha Stewart, the well-known US celebrity currently serving time in a US penitentiary for the offence of insider trading and who, like many found guilty of this crime, continue to profess their disbelief at having somehow gone wrong. Insider trading is considered an offence in this country and many others, commonly where it involves a breach of fiduciary duty, or where there has been a misappropriation of corporate information, or where knowledge of price information is viewed as inherently unfair given that there should be equal access to information for all market participants. Nevertheless, a significant problem with providing an overview of insider trading is the fact that very few prosecutions have proceeded in this jurisdiction. Several reasons are given for this. Firstly, (and most commonly) the difficulties associated with proof.67 This has to do with a general reluctance within the finance industry to provide evidence68 - and as explained above, in any case people often simply do not know that they have been the victims of insider trading, or that they have been responsible for this type of misconduct. It is also difficult to prove in court since it may be explained by other factors, such as instinct or research carried out.69 The costs associated with pursuing potential offenders are another reason. As well, in the past, the vagueness in the legal definition and delays in the legal system were also blamed as contributing to the paucity of insider trading prosecutions.70 A case which aptly demonstrated the particular problems raised by the insider trading cases, and in particular these last two factors (i.e. problems with the legal definition as well as the prospect of prejudice to the defendants caused by lengthy trial), was a case heard in the Supreme Court of Victoria before McDonald J, R v Evans and Doyle.71

64 Compounding the problem, regulated disclosure may not be efficient. 65 John Farrar, Corporate Governance in Australia and New Zealand, op. cit. at 253. 66 Ibid. 67 R. Tomasic, Casino Capitalism? Insider trading in Australia (1991), see Chapter 10. 68 According to R. Tomasic, Ibid.: “The difficulties of proving various elements of insider trading were illustrated by a Melbourne broker who said that ‘there is a problem of proof ... Brokers who are aware of insider trading going on would be reluctant to be witnesses for these reasons and for fear of losing clients. Brokers will not complain about each other if insider trading is going on’”. 69 Ibid. 70 Ibid. 71 R v Evans and Doyle [1999] VSC 488.

Page 15

In that case, two businessmen were prosecuted by the DPP for insider trading but they were found not guilty of the charges brought against them by ASIC.72 At the time of the alleged insider trading, Doyle worked as a dealer for the stock broker JB Were and Evans was finance director of MPI Pty Ltd, a company involved in the exploration of minerals, including nickel. The prosecution alleged that the inside information possessed by Evans and Doyle was that Evans’ company, MPI Ltd, had discovered high grade nickel sulphide on one of its mining leases in Western Australia. The mining lease adjoined areas in which Mt Kersey Mining NL had mining leases or had applied for mining leases. The prosecution alleged that Evans instructed his broker to purchase shares in Mt Kersey Mining NL at a time when Doyle knew or ought reasonably to have known that the information possessed by him was not generally available.73 The case itself centred on the meaning of “agreement” in s1002G of the then Corporations Law. Specifically, whether at the time when Evans instructed his broker Doyle, in a telephone call occurring between 2.00 pm and 2.07pm on the relevant day, there existed at that point an “agreement” to purchase shares as required by section 1002G(2)(a).74 The information about the discovery only became public knowledge following the conversation later that day. The upshot was that the court ruled that the instructions from Evans to Doyle at 2.00 pm and 2.07 pm to purchase shares in Mt Kersey, although constituting an agency contract or agreement between these two, did not constitute an agreement for the purposes of section 1002G(2).75 McDonald J concluded this for the reason that Evan’s instructions to Doyle were not sufficient to constitute an “agreement” under the Act – this, he surmised, would only be the case if and when a trade or agreement was concluded with the selling broker.76 Relevantly, although at the time the broker Doyle was under instructions to purchase, Evans had not yet as a result formally entered into an agreement to purchase. Although Evans involved problems associated with interpreting the meaning of the words contained in the legislation, these cases also encounter hurdles in that they can be lengthy because they are so complex. Doyle and Evans may have in spite of everything been found guilty of insider trading if the trial judge, McDonald J, had allowed the prosecution to amend its case to allege that the agreements to purchase the Mt Kersey shares were entered into when the purchases were actually made on the Exchange. This was disallowed on the basis of the prejudice that this would cause the defendants following a lengthy trial.77 Hence, several more issues are common in cases of this kind – i.e. the length of the trials owing to their complexity78 72 There are now a plethora of statutory provisions directly and indirectly relating to insider trading. The main ones however are contained in the Corporations Act 2001, see particularly Division 3 of Part 7.10 (ss1042A-1043O). Note also that in the year Evans was heard, 1999, the old Corporations Law was in force – which, for reasons not relevant to this discussion has been since replaced with the Corporations Act 2001 (Cth). 73 R v Evans and Doyle, op. cit. 74 Ibid. 75 Ibid. 76 Ibid. 77 Ibid. 78 As well, in criminal prosecutions of insider trading, a relevant issue is that juries may encounter difficulties comprehending the complexity of the evidence presented to them. See the section on sanctions and sentencing, where I refer to this issue in more detail.

Page 16

and the attendant duty of the court to ensure that parties do not suffer injustice as a result. 4c. The Resources of the Regulator/Plaintiff79 vs that of the Corporations There are two particular issues which immediately spring to mind when discussing the issue of funding with respect to corporate law matters. First of all, it should be remembered that a court may only consider cases that come before it for determination. It follows that if the regulator or plaintiff individuals are not well resourced, then the courts obviously will be unable to participate in the enforcement process. A second difficulty occurs where a matter reaches court but there is the threat of community perception of lack of justice, for instance where the plaintiff or regulator themselves suffer from lack of funds but find themselves up against a large multinational sitting on top of limitless cash reserves. In relation to the first point, where lack of resources makes it less likely that (for instance) the regulator will expose and pursue legal proceedings against corporate wrongdoers, the decision whether to take action upon the occasion of illegal or unethical activity may rest with the internal board of directors. Where this occurs, there exists the danger that companies will refuse to expose unflattering internal situations for fear of publicity, with the situation remaining either unresolved or “covered up”. Lack of resources of the regulator were apparently an issue in relation to the HIH disaster. At the time, this apparently led the Royal Commission to attempt public exposure by releasing information to the media.80 However, it should be noted that attempts such as these cause an immediate danger that the public may view the regulator as lacking in resources. This in turn could lead to a growing awareness in the community that there is a possibility of avoiding detection for crimes or other corporate misconduct as a result. Hence, it is essential that the regulators – primarily ASIC, the ASX and the ACCC for our purposes81 - demonstrate adequate resources and funding. In relation to the second point, matters may reach the courts but sections of the community perceive injustice for the reason that the plaintiff or regulator is out-resourced by the defendant company. Although not involving corporate governance issues, a UK case which springs to mind is McDonald’s Corporation v Steel (or “McLibel” as it is popularly labelled in the press),82 where one party was far out-resourced by a massive corporate and events unfolding in court called into question the business practices and ethics of a globally recognized brand. Presently, this case

79 Where a plaintiff is an individual in corporate governance cases, they will usually be a shareholder or other type of investor wishing to enforce a duty they claim the company or director(s) owe them. 80 This is the view of The Hon. Justice David Malcolm AC, op. cit. at 17. 81 Other market regulators include the Australian Prudential Regulatory Agency (APRA) and the Reserve Bank of Australia (RBA). 82 McDonald’s Corporation & Anor v Steel & Anor [1997] EWHC QB 366 (summary of the trial judgment, read in open court 19th June 1997). The decision later went to the Appellate Court, which left most of the trial court’s judgment intact (See Steel & Anor v McDonald’s Corporation & Anor [1999] EWCA Civ 1144). That court did however differ with the court at first instance on the application of the law to some of the allegedly defamatory statements.

Page 17

is before the European Court of Human Rights. The two defendants, who were found to have defamed McDonald’s and possessed only very modest means of support throughout the trial, argue that their rights to a fair trial were violated because the British court system did not make legal help available to them.83 Where there is a massive discrepancy in resources between the parties, there is not just the issue of whether a fair trial has been had. There is also the problem associated with the media’s interpretation of events – or “trial by media” as one might say. The press will often sympathise with the underdog, little “David”, over the corporate “Goliath”, as the media portrayals in this case certainly bear out.84 Where there is such widespread coverage of a case, there is also the question of whether potential members of juries in criminal proceedings have been somehow influenced to one point of view or other before the trial has even commenced. Of course, the issue of adequate resources for the court system to be able to support the government’s push for more criminal prosecutions is also critical at this point in time. I will talk about this more in my concluding remarks after I have examined the effectiveness of current and proposed sanctions, the government’s proposals for reform, and the impact penalty reform can be expected to have not just on the court system, but also on corporate actors and whether they can somehow help deter potential wrongdoing. 4d. Sanctions and Sentencing Breach of directors’ duties or breach of company duties has long attracted civil penalties. It seems that Australia was the first jurisdiction to criminalise breaches of director’s duties in the late 1970s.85 The reasoning behind this step is fairly clear. As most civil sanctions were (and remain) pecuniary in nature, historically the penalties were also aimed at the company – which, as I have already noted, have no “soul” and are therefore unable to feel punished in the way humans can, defeating the remedial purpose of the provisions. In any case, it was found that companies were easily able to pay the fines ordered. Not only that, there was a feeling of dissatisfaction with civil remedies in that the real offenders, often the directors, went unpursued and likewise unpunished. The outcome could have been that directors were taking greater risks on behalf of the company and were gambling against fines and shareholder litigation in order to obtain greater profits for the company.

83 Seven days after I delivered this speech, on 17th February 2005, the European Court of Human Rights ruled that the two defendants at trial, Helen Steel and David Morris, were denied their rights to free speech and a fair hearing. The UK government was ordered to pay compensation of more than £56,000 to the pair, plus legal costs. It should be noted that legal aid was not available for actions in libel at the time of the case, although the UK law was changed in 2000 to allow funding in “exceptional” circumstances. The ruling may have ramifications for the way in which legal aid funding is granted in that country, and as a result, an impact on the British legal system as a whole. 84 Andrew Darby, “The Long Road to Justice”, The Age, 27/01/05. See also Howard Sounes, “We Gave Up Everything to Fight the McAccused”, The Daily Mirror, 27/06/97; Howard Sounes, “Fees Would Have Bought a Big Mac For Everyone in Norway”, The Daily Mirror, 27/06/97; Frances Gibb, “McLibel Decision Fails to Silence the Small Fries”, The Times, 19/06/97. 85 John Farrar, Corporate Governance in Australia and New Zealand, op. cit. at 212.

Page 18

Criminal sanctions now apply in company law, but only where normal tests of criminality also apply. The federal government has of late indicated its desire to toughen its stance even further since CLERP 9 in relation to both the availability of criminal sanctions against executives and the imposition of far heavier fines. This was the gist of the Treasurer Peter Costello’s announcement just last week on proposals to reform the law on cartels.86 The government proposes to not only increase fines for such anti-competitive behaviour, it is drawing up plans to give the ACCC the power to prosecute cartels with the DPP. Sometimes the regulator faces a choice of jurisdiction. In the Elliott “Water Wheel” case for instance, ASIC had the option of pursuing sanctions against Elliott and his colleague, Plymin, in the civil or the criminal jurisdictions. It elected to choose the former. Although John Elliott had been unsuccessfully prosecuted in the criminal jurisdiction in the past in proceedings initiated by the predecessor to ASIC, the NCSC,87 as with insider trading, it remains the case that complex evidentiary hurdles make criminal prosecution of insolvent trading more difficult to pursue than in the civil jurisdiction. As Brooking JA commented in the earlier Court of Appeal case which considered the criminal trial proceedings against Elliott and others in 1998:

“Nowadays actual or contemplated criminal proceedings spawn civil proceedings, and as a result quasi-criminal cases, civil in form but really concerned with criminal liability, which were unknown not so long ago, now occupy our lists”.88

His Honour made these comments back in 1998. Now, recent actions of both the ACCC and ASIC indicate their determination to take a tough approach and reverse the trend, prosecuting offenders in the criminal jurisdiction where possible. Also of particular note and signifying the government’s determination to put executives on trial, in recent weeks the government has announced its intention of introducing jail terms for directors and far tougher fines for companies caught price fixing with rival firms.89 It would appear that the proposed reforms, which aim to increase the ability of the Australian Competition and Consumer Commission (ACCC) to break illicit cartels, were the result of recommendations of the Dawson Committee which reviewed the effectiveness of the Trade Practices Act90and urged the use of criminal sanctions for such anti-competitive behaviour. It brings to mind a 86 New measures unveiled 02/02/05 by Treasurer Peter Costello included proposals for five-year jail terms and $10 million fines for business people and companies for colluding over prices. 87 The NCSC was in fact overwhelmed with cases at the time, so in a latter dated 16 November 1999, it appears that Mr Henry Bosch, then Chairman of the NCSC, invited the National Crime Authority (NCA) to investigate the case. The NCA accepted and codenamed their investigation “Operation Albert”. See Andrew Palmer, “R v Elliott” 21 Melbourne University Law Review 331 at 332. As for the judgment in that case, see R v Elliott (1996) 28/02/1996, 10/04/1996, 06/05/1996, 22/08/1996 (Unreported). This was the case where John Elliott was acquitted by a judge of theft, conspiracy to defraud, giving false and misleading evidence to the NCA and false accounting. A jury was not empanelled. 88 Director of Public Prosecutions Reference No. 2 of 1996, op. cit. at para. [5] per Brooking JA. 89 Toni O’Loughlin, “Costello Backs Jail Sentences for Executives”, The Australian Financial Review, 02/02/05 at 1. 90 i.e. the Trade Practices Act 1974 (Cth).

Page 19

catchphrase I noted recently in the press: “Fines are payable, but jail sentences are sobering”.91 But some observers doubt whether the spectre of jail sentences is sobering news at all for prospective offenders. In 1999, three academics at Melbourne University conducted a useful appraisal on the effectiveness of the penalty sanctions under the previous Corporations Law.92 They discovered that very few cases used the new legislative criminal provisions inserted into the Corporations Law as a part of the first CLERP reforms back in 1992 – and in fact at that stage, at least six years after the implemented changes, none had been brought in New South Wales and only fourteen nationally.93 Reasons given for the lack of prosecutions included misgivings about the management of cases by the courts. This is an interesting issue, particularly with respect to the ability of jurors to understand the deep complexity of many corporate law cases. Other reasons included the availability of viable alternative remedies94 and the inconvenience and delays arising from the need to liaise with the Department of Public Prosecutions (DPP) over important enforcement matters.95 On the other hand, supporters of the government’s new proposals claim that criminal sanctions are needed if cartels are to be broken. Currently, cartel behaviour constitutes a massive added cost which is more often than not passed on to innocent consumers. In the past, Justice Finkelstein has said that it is time for the ACCC to “stop thinking of cartel members as upstanding citizens” who “do not deserve to be penalised or penalised heavily”.96 He also stated that:

“There is often more moral culpability in the case of a well-educated, well-off executive who chooses to defraud his customers than in many of the minor criminal offences that are committed by addicts, the psychologically disturbed and the desperate”.97

Other supporters of the government stance also contend that some of the proposed reforms, such as the increase in fines to potentially $10 million or 10% of a company’s turnover, will bring penalties into line with that of the United States, where corporate fines for price fixing have ranged from between as much as $100 and $500 million in recent times.98 Whatever the case may be, it should be remembered that (as noted above) the availability of sanctions as carried into law by the legislature does not automatically signify that they will be used effectively – if at all. For this reason, in-depth surveys on the overall effectiveness of the present penalty regime in 91 Fred Brenchley, “Cartels Compelled to Come Clean”, The Australian Financial Review, 02/02/05 at 4. 92 Helen Bird, Dr George Gilligan and Professor Ian Ramsay, Regulating Directors’ Duties: How Effective are the Civil Penalty Sanctions in the Australian Corporations Law? Survey conducted for the Centre for Corporate Law and Securities Regulation, University of Melbourne, Melbourne 1999. 93 Ibid. 94 i.e. ASIC’s power to disqualify directors from managing companies under the old s206F of the Corporations Law. 95 Ibid. 96 Toni O’Loughlin, “Price Fixers ‘worse than criminals’”, The Australian Financial Review, 25/11/04 at 14. 97 Quote by Justice Raymond Finkelstein, as reported in Ibid. 98 Toni O’Loughlin, “Costello Backs Jail Sentences for Executives”, op. cit. at 4.

Page 20

the Corporations Act in addition to a fully informed examination of the proposed impact of the proposed penalty sanctions on the courts and corporate behaviour would appear to be called for. A relevant point on the sanctions and sentencing issue is the fact that ASIC would now appear to be turning its attention to the prevention of corporate crime, with the emphasis now on surveillance rather than punishment.99 Such a move is to be applauded. After all, exposing the problem and requiring people to work towards correcting it is far preferable to expert analysis from on top of the proverbial smoking ruin!

5. Conclusion: The Courts and Changing Community Behaviour Chief Justices have regularly spoken of the need for more resources for their courts.100 The reality to be faced, from a judicial administrative perspective, is that corporate criminal prosecutions and civil enforcement procedures are to be disposed of, desirably, in a timely way. Unfortunately, due process takes time itself. It also consumes resources. Recent experience in the State of Victoria (in an entirely different but nevertheless prosecution context) has demonstrated that if courts articulate their needs there is a prospect of a political response. Recently, in Victoria, there were a number of well publicized criminal cases related to allegations of gangland killings and police corruption. There was a political response by the allocation of additional, significant resources for investigation and prosecution. Of course, investigation and prosecution are but two of the arms of law enforcement: the third arm remains the courts. It is a simple trinity to comprehend. Thus, if a government of the day wants to enforce the law (whether civil or criminal) it needs to demonstrate political will by commitment of resources across the enforcement spectrum. So to return to our main question: how do the courts change community attitudes and behaviour in a more perfect world - where they have the appropriate resources, sufficient time for everything that needs doing and so on? One way is to quite simply, successfully prove that wrongdoers will be brought to justice. This happens in most cases already - but as several of the cases discussed here today prove, the system could be enhanced. An aspect that the courts could perhaps emphasise is the interrelationship between ethics and law. In relation to this, Justice Owen in the HIH Royal Commission report noted that each corporate individual should be made very conscious of their moral choices:

“In an ideal world the protagonists would begin the process by asking: is this right? That would be the first question, rather than: how far can the prescriptive dictates be stretched? The end of the process must, of course, be

99 The Hon. Justice David Malcolm, op. cit. at 18. 100 For the comments of various heads of jurisdiction throughout the world on the court resources issue, see my paper: “What Separation of Powers?” The Lucinda Lecture delivered at Monash University, Melbourne on Tuesday 21 September 2004. The speech can be accessed online at the Supreme Court of Victoria website: http://www.supremecourt.vic.gov.au/CA256CC60028922C/page/Publications-Speeches?OpenDocument&1=70-Publications~&2=20-Speeches~&3=~.

Page 21

in accord with the prescriptive dictates, but it will have been informed by a consideration of whether it is morally right”. 101

Of course, when evaluating the role of the courts in changing community behaviour, it is also important to understand that the issue is not a one-way street. By this I mean that one must note the changing regulatory environment with its mix of legal and self-regulation and the responses of the courts themselves to emerging community concerns. It is necessary therefore to continue to evaluate not only the changing role of the courts but also to evaluate the way in which community perceptions and conduct may impact as a result. In this way, we may be better equipped to handle the rapid changes and increasing complexity of the corporate governance world.

---

101 The Hon. Justice Neville Owen, op. cit. (Vol. 1) at lxiv.