The corporate watchdog’s departing chairman Joe Longo says corporate boards are now on notice despite the regulator’s defeat in the Federal Court, which found Star Entertainment directors were not liable for the governance disaster that has taken the casino operator to the brink of collapse.
He argues the Australian Securities and Investments Commission’s legal action was necessary due to the “widespread community concern” about what happened at Star, which remains unfit to hold its casino licences due to money-laundering breaches and criminal association.
Longo, who has yet to decide whether the regulator will appeal the Federal Court judgment, says Justice Michael Lee’s judgment last week has helped to clarify the role of corporate boards and spelt out to directors what is expected of them.
“This judgment is not a backwards step for directors’ duties – quite the opposite, in fact,” he says in a speech he’s set to deliver to the Australian Institute of Company Directors (AICD) on Tuesday.
“I think it will be studied by directors, executive management, and their advisers for years to come.”
Longo also warns corporate Australia that the outcome has not dulled the corporate watchdog’s appetite for further legal action – provided there is a reasonable basis for it.
“Nothing in this judgment has changed our appetite to hold corporate leaders to account for their governance failures. We will also continue to look for cases where we can define the line of responsibility for directors,” he says, according to the speech provided to media ahead of its delivery.
Last week, former Star chief executive Matt Bekier was found to have breached his duties as a director of the embattled casino operator, and three of his senior executives have also been found guilty of breaches. But Justice Lee cleared the board for failing to pierce the “dysfunctional and unethical” culture at the company.
“The ‘culture’ that prevailed 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,” the judgment reads.
But while the judgment found the directors were let down by the management team, Justice Lee took issue with the “more self-congratulatory submissions” from the directors’ lawyers. The evidence “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”, he observed.
This reflects Justice Lee’s disquiet over Star lying to China UnionPay CUP, a Chinese financial institution, after it raised concerns with Star executives that fund transfers via its cards – totalling $900 million – for “hotel expenses” were being ploughed into gambling.
“It appears not a single person within the management of Star, or its board, ever paused to reflect and ask the question as to whether the approach adopted by Star [to] facilitate the use of the cards in this way was moral or ethical in the circumstances,” his judgment reads.
Justice Lee noted that the wrongdoing was only exposed by this masthead’s reporting with 60 Minutes, which began in 2021 and was spearheaded by investigative reporter Nick McKenzie. “Ultimately, it fell to investigative journalism, and then a statutory inquiry, to expose the extent of the problems,” he said.
Longo is not the only one who thinks the judgment provides significant clarity on director obligations.
“The real lesson from the Star decision is that the modern duty of care is not just about the decisions boards make,” said Andrew Lumsden, a partner at law firm Corrs Chambers Westgarth. “It is increasingly about whether the board has designed a governance system capable of ensuring that the right risks reach it in time.
“The case illustrates the distinction between failures in management and failures in board oversight. Non-executive directors are not guarantors of corporate compliance, but they must position themselves to receive and interrogate the information necessary to supervise management.”
But corporate governance expert Helen Bird expressed concern over the fact that the judgment doesn’t give directors a duty to inquire beyond what they’re told by management, and raised one particular incident mentioned in the judgment.
“How is it possible that you could have a conversation about a major issue such as money-laundering compliance and not have the report in front of you?” she asked.
Not having this information meant the board were not required to inquire further, she said.
Star still faces a fine in the hundreds of millions of dollars for contraventions of Australia’s money-laundering laws, which could lead to the casino operator’s financial collapse despite a rescue last year.
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Colin Kruger is a senior business reporter for the Sydney Morning Herald and The Age.Connect via email.
