IPO Insurance Limited: Director Duties and Financial Report Analysis

This report provides an in-depth analysis of the duties of executive and non-executive directors at IPO Insurance Limited, focusing on Peter and Jane. It explores their responsibilities under the Corporations Act 2001 and ASX guidelines, highlighting potential breaches of their duty of care in adopting the 2016 financial report. The report examines the roles of executive directors (like Peter, who is also CFO) and non-executive directors (like Jane) and their involvement in the audit committee. It discusses how Peter's actions, such as hiding crucial financial data to facilitate a merger, and Jane's failure to independently assess the financial information, potentially violated their obligations to the company and its shareholders. The analysis draws upon relevant legal precedents and the principles of corporate governance to assess the directors' actions and their impact on IPO Insurance Limited's financial performance. The report concludes with a discussion of the consequences of these breaches and the importance of independent oversight and diligent financial reporting.

INTRODUCTION
Good corporate governance in Australia prominently supports a board which is independent
in nature, specifically with regards the companies which are listed in the ASX. As per the
ASX Corporate Governance Principles and Recommendations 1, more than 50 percent of the
members in the board should not be dependent or related in any way. If the board thinks that
it would not follow the said recommendation, then it will have to state the reason behind the
said decision1. The theory which talks behind the said statement is that the directors should
not be prejudiced by anybody or such linkages in any manner which would intervene with the
implementation of their imaginative and autonomous judgement. As directors of IPO
Insurance Limited, both Peter and Jane are legally bound and accountable to the company
under the common law, fiduciary duties and statute law. There responsibility comprises of
performing the duties in such a manner so as to ensure that there does not exist any conflict of
interest, they perform their duties with care and diligence and for a purpose which is best
suited for the health of the company and last but not the least, to use the position they hold
and data they possess in a proper manner. Although a board can very well have a mix of
executive and non-executive directors as there lies no such proof that a board with
independent directors will only perform to the best interest of the company2.
WHAT IS THE DUTY OF AN EXECUTIVE DIRECTOR (PETER IN THIS CASE)
WITH REGARDS A COMPANY LISTED IN THE ASX
Executive directors are to perform dual functions, one of a senior executive such as CFO and
the other of a board member. In the eyes of law, even if they are employees of a company on
a full time basis yet they have to comply with the basic duties and responsibilities entrusted
on the directors. The same is a common phenomena in companies which are listed in the
stock exchange or even those whose scale of operations are large3.
The role of an executive director and so that of Peter was a confusing one. The board of
directors is a committee which is appointed to work in a manner which would be in the best
1 Corporate Governance Principles and Recommendations, (2nd ed), ASX Corporate Governance Council, Sydney, 2010
2 R Baxt, Duties and Responsibilities of Directors and Officers (20th ed), Australian Institute of Company Directors, Sydney, 2012
3 Directors - What are my duties as a director? Australian Securities and Investment Commission
<http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/#3>

interest of the shareholders. Generally, it is the CEO who is a part of the executive team of
the board but there may be times when the CFO is also appointed as one. Further to this, there
are certain duties of being a part of the board which are not apt for an executive director to
perform, such as a CFO serving on the audit committee.
In Australia, an executive director holds a fiduciary duty towards the company. As per
Section 181(1) of the Corporations Act 2001, a director is expected to perform his duties in
good faith which is best for the health of the company. Thus Peter should perform his duties
as an executive director with due care and diligence, honestly and must not mis-utilize the
power of his position as a CFO4. As per the court case of Vines, the CFO who is also acting
as an executive director, is expected to elevate issues for discussion with the board5. Last but
not the least, it is the duty of a director to ensure that the financial records are maintained
adequately and all the transactions are recorded transparently and correctly, else it would lead
to contravention of the Corporations Act 2001.
WHAT IS THE DUTY OF A NON-EXECUTIVE DIRECTOR (JANE IN THIS CASE)
WITH REGARDS A COMPANY LISTED IN THE ASX
As per the Corporations Act 2001, a non-executive director is a person who is not an
employee of the company. However, a non-executive director is not similar to an independent
director as the latter not even has any relations with the company but for being a director
unlike the former. But even then some of the basic duties which govern the executive
directors, does govern the non-executive directors as well. The UK’s Higgs Review details
non-executive directors’ as “custodians of the governance process.6”
The main elements of the role and responsibility of a non-executive director includes
development of strategy for the proposals, monitoring of the performance of the management
as to how successful it has been in meeting up with the aims and objectives of the corporation
and how honest is the financial information being disclosed in the statements. A non-
executive director also is generally a part of various other sub-committees such as Jane being
4 Corporations Act (2001) (Cth) s 181(1)
5 Vines was the CFO and executive director of GIO Group. See (2003) 48 ACSR 291 for the judgment and [2007] NSWCA 75 for the April
2007 decision in the NSW Court of Appeal.
6 Higgs D, Review of the Role and Effectivenss of Non-Executive Directors, Department of Trade and Industry, London, 2003, p 11.

a part of the audit committee. Further as per the Listing Rule 12.7, an audit committee further
should only comprise of directors who are not executive in nature7. Thus Jane is rightly
appointed to be a part of the audit committee.
HOW HAVE PETER AND JANE BREACHED THEIR DUTY OF CARE TO IPO IN
ADOPTING ITS 2016 FINANCIAL REPORT?
As is understood from above, both the executive and non-executive director i.e. Peter and
Jane have breached their duty of care to IPO while adopting the 2016 financial report due to
which their share prices suffered and so the shareholders’ also had to face a huge loss. First
and foremost, Peter being a CFO of IPO cannot be a part of the audit committee, although his
appointment as an executive director is right. Holding of a position which one is not
permitted to is in contravention of the Act8. Further, Peter being into the operations of the
management has an additional duty to ensure that the books of accounts reveals the correct
information, but Belinda the assessor who is also related to Peter does not disclose the actual
claims which the company has to meet towards the flood loss. Peter also agreed to the same
so as to give a rosy picture which would help in the merger with BMP. Thus Peter in this case
has breached his duty of care and diligence towards the shareholders of IPO. He has not
performed his functions which would best fit the purpose of the company by hiding the main
data which would show the true picture of the profitability9.
Secondly, being a non-executive director, Jane should have at least acted independently and
not accept the financial information. Neither has any provisioning been done nor has the
claims been accounted for properly in the financials. Jane although had raised an eyebrow
when the financials were presented, yet the same was endorsed by Jane. He ultimately
believed Peter without probing into the matter. Thus being a non-executive director, Jane
failed to exercise due care and diligence while agreeing to whatever Peter had to present in
the financial report. Until and unless proper evidences were checked, Jane should not have
7 Geoffrey,Flint “Non-Executive Directors’ General Law Duty of Care and Delegation of Duty: But do we need a Common Law Duty of
Care?” (1997) 9 Bond Law Review196 <http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1132&context=blr>
8 General Duties of Directors(January 2013) Australian Institute of Company Directors <http://aicd.companydirectors.com.au/resources/all-
sectors/roles-duties-and-responsibilities/general-duties-of-directors>
9 Tim, Lester and Joanna Yoon, Corporate governance and directors' duties in Australia: overview(January 1, 2017)
<https://uk.practicallaw.thomsonreuters.com/1-502-9743?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1>

accepted the same even if it was agreed upon by other directors. By not qualifying his
opinion to the financial report presented by Peter, Jane as a non-executive director breached
his duty of care by not acting successfully as a custodian to the governance process10.
10 Role of non-Executive directors(2016) <https://www.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/
pdf/05446-1-11-mem-director-tools-bc-non-executive-directors_a4_web.ashx>

BIBLIOGRAPHY
Corporations Act (2001) (Cth)
Corporate Governance Principles and Recommendations, (2nd ed), ASX Corporate
Governance Council, Sydney, 2010
Directors - What are my duties as a director? Australian Securities and Investment
Commission <http://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/
directors-what-are-my-duties-as-a-director/#3>
Flint, Geoffrey, “Non-Executive Directors’ General Law Duty of Care and Delegation of
Duty: But do we need a Common Law Duty of Care?” (1997) 9 Bond Law Review196
<http://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1132&context=blr>
Higgs D, Review of the Role and Effectivenss of Non-Executive Directors, Department of
Trade and Industry, London, 2003, p 11.
Lester, Tim and Joanna Yoon, Corporate governance and directors' duties in Australia:
overview(January 1, 2017) <https://uk.practicallaw.thomsonreuters.com/1-502-9743?
transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1>
R Baxt, Duties and Responsibilities of Directors and Officers (20th ed), Australian Institute
of Company Directors, Sydney, 2012
Role of non-Executive directors(2016)
<https://www.companydirectors.com.au/~/media/cd2/resources/director-resources/director-
tools/pdf/05446-1-11-mem-director-tools-bc-non-executive-directors_a4_web.ashx>
General Duties of Directors(January 2013) Australian Institute of Company Directors
<http://aicd.companydirectors.com.au/resources/all-sectors/roles-duties-and-responsibilities/
general-duties-of-directors>
Vines was the CFO and executive director of GIO Group. See (2003) 48 ACSR 291 for the
judgment and [2007] NSWCA 75 for the April 2007 decision in the NSW Court of Appeal.