Corporate Law

The following post is by student contributor, Leigh Howard.

The statutory business judgment rule was implanted into the Corporations Act in 1999 by the instigation of the ‘CLERP’ reform, and has been the subject of both controversy and accolade ever since.  It’s present-day form derives from the United States, where it was developed as a common law doctrine and had considerable influence, particularly in the State of Delaware (for a history of the rule, see Redmond, “Safe Harbours or Sleepy Hollows: Does Australia Need a Statutory Business Judgment Rule?” in Ramsay (ed.) Corporate Governance and the Duties of Company Directors, 1997 p. 185). The Australian manifestation sits alongside the duty to discharge powers with the care and diligence of a reasonable person under s 180. It operates as a defence to any business judgment that that is made in good faith and for a proper purpose, so long as the director has no material personal interest and a belief the judgement is in the best interests of the corporation (see s 180(2) of the Act). Adversaries to the rule fear that the rule could operate as a safe harbour for negligent directors otherwise deserving of scrutiny under the duty of care and diligence. However, law makers on both sides of the Parliament believe that the rule in its present form does not go far enough.

Admin's note: With the current attention that executive salaries are receiving, not least in the wake of the large layoffs last week at Pacific Brands, we are re-running a post from last November by David Wishart, dealing with this issue.

The best frauds are those that are legal.  You cannot get caught for them.

By ‘fraud’ I mean here illegitimate gain or reward, preferably huge.  ‘Illegitimate’ means without moral justification.  By now you will know what I am talking about.  That says a lot in itself.  But just to be absolutely clear, this essay is about excessive rewards for corporate officials.

What is said to justify rewards worth millions of dollars?  Four justifications are commonly deployed.  These are: the reward is deserved, that shareholders have consented to it, it is compensation for risk-taking, and that the market sets the price.  Looking at each in turn, as I do below, none is persuasive.  Hence I would argue that high rewards for corporate officials are illegitimate and a fraud on society.

The best frauds are those that are legal.  You cannot get caught for them.

By ‘fraud’ I mean here illegitimate gain or reward, preferably huge.  ‘Illegitimate’ means without moral justification.  By now you will know what I am talking about.  That says a lot in itself.  But just to be absolutely clear, this essay is about excessive rewards for corporate officials.

What is said to justify rewards worth millions of dollars?  Four justifications are commonly deployed.  These are: the reward is deserved, that shareholders have consented to it, it is compensation for risk-taking, and that the market sets the price.  Looking at each in turn, as I do below, none is persuasive.  Hence I would argue that high rewards for corporate officials are illegitimate and a fraud on society.