The Unintended Consequences of Boardroom Shrinks (Australia Financial Review)
Jones Day Partners Tim L’Estrange and Michael Lishman, both based in the Firm’s Melbourne Office, outline legal and governance considerations, as well as unintended consequences, with the AISC’s post-royal commission request to put psychologists in the boardroom.
Should corporate Australia be concerned about ASIC’s post-Royal Commission request of companies to put psychologists in the boardroom? In a word, yes.
No doubt time will tell, but in the meantime there are significant legal and governance issues to consider.
While many companies will be keen to curry favour with the corporate regulator right now, boards need to seriously consider whether it is in the interests of shareholders to allow a psychologist into the boardroom. There are two main issues: will the presence of the psychologist alter the normal vigorous consideration of important matters and has the company thought through the various legal questions this raises? Both issues are problematic.
If psychologists are to become a permanent feature of boardrooms, who are they to be appointed by and who are they to report to? It is hard to see a workable model. The current approach would see the psychologist appointed by and reporting to ASIC. Is the psychologist an agent of ASIC? What is the confidentiality obligation of the psychologist? Are there limits to what the psychologist will give opinions on? What are the consequences if he or she does report on matters concerning directors personally (such as whether the directors exhibit "machiavellian, narcissistic or sub-clinical psychopathic tendencies" as reported in the AFR)?
In particular, what happens to the psychologist’s notes of the board meetings attended by them? What about any reports prepared by the psychologist or drafts of those reports? There is the real prospect that these records might not only be used by ASIC or other regulators in subsequent enforcement actions, but that they may be subpoenaed by plaintiff class action firms or other litigation opponents in years to come. It is also possible that ASIC could receive Freedom of Information requests requiring the production of such records, or they might be produced by ASIC as part of Senate Estimates hearings.
This applies equally to the materials produced by the psychologist already appointed by ASIC as part of its current corporate governance review. While ASIC have said the psychologist they have currently appointed is required to keep his or her work confidential and will only produce a single, anonymised report, there remains a question as to the status of notes, draft reports and other documents prepared as part of the appointment. It is not apparent whether there is any restriction on ASIC’s ability to use those records in subsequent investigations and actions, and as a general rule contractual confidentiality would not preclude those documents being subpoenaed in Court proceedings.
The concern about the records that might be kept by a psychologist will be heightened if they are provided with board papers, including papers that may be highly sensitive or subject to legal professional privilege. What protections will these documents have if provided to the psychologist and might privilege be waived? On the other hand, how can the psychologist meaningful assess the board practices without access to those papers so as to understand what is being discussed?
The appointment of a psychologist to attend board meetings may raise questions as to ASIC’s knowledge and position. Will ASIC be taken to have known of matters reported to the board and be criticised subsequently for not taking action in relation to matters that later come to light? Over time, will the fact that the psychologist’s report sits on ASIC’s files act as a fetter to further inquiry or the commencement of proceedings? Is that in the public interest?
The presence of a psychologist in the boardroom may have other unintended, practical consequences (side-effects of the course of treatment if you will). It may push more discussions between directors to outside of the boardroom and stifle the robustness and extent of debate at board meetings. Directors may naturally be concerned about debating matters at board meetings in a landscape where any single comment might be isolated and parsed in a future Royal Commission or Inquiry, or regulatory action. This may also contribute to any hesitation by senior, qualified individuals in taking on director positions following the Royal Commission.
There is also an argument that ASIC is in effect enacting new directors’ duties by suggesting that there should be a psychological evaluation of people in the course of performing their duties. There already are protections in the Corporations Act and general law to ensure that directors fulfill their duties. Psychologists should not be that enforcement mechanism and indeed aren’t equipped to do so. At the end of the day it is shareholders who should chose to elect or vote out directors.
Given the current regulatory environment, and ASIC’s "why not litigate" mandate, there may be a reluctance among boards to push back against this proposal from ASIC, but any push to embed psychologists in boardrooms around Australia warrants a more rigorous and transparent debate.
Messrs. L’Estrange and Lishman are partners in the Melbourne office of the global law firm Jones Day. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated.
Reprinted with permission from the June 25, 2019 issue of the Australia Financial Review (subscription required). Further duplication without permission is prohibited. All rights reserved.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.