It's one of the most important corporate governance cases in the past 20 years, involving organised crime inside Australia's second-biggest casino. The Federal Court ruled last week that Star Entertainment Group's former chief executive and its general counsel both broke the law under the Corporations Act, but remaining board members had not.
It's one of the most important corporate governance cases in the past 20 years, involving organised crime inside Australia's second-biggest casino.
The Federal Court ruled last week that Star Entertainment Group's former chief executive and its general counsel both broke the law under the Corporations Act, but remaining board members had not.
The case is a disappointment for the regulator, the Australian Securities and Investments Commission (ASIC). It had sought to use the court case to increase the responsibilities of public company directors. ASIC is yet to decide whether it will appeal.
But even after only a partial win, ASIC's chairman Joe Longo has since declared:
nothing in this judgement has changed our appetite to hold corporate leaders to account for their governance failures.
Longo also predicted the case "will be studied by directors, executive management, and their advisers for years to come".
With around 2.5 million directors of large and small Australian companies, Longo is right: this case is essential reading.
The ASX-listed Star Entertainment Group had problems for years. In 2021, an Age/60 Minutes investigation warned the Sydney-based gaming giant:
has been enabling suspected money laundering, organised crime, large-scale fraud and foreign interference within its Australian casinos for years, even though its board was warned its anti-money-laundering controls were failing.
Among a series of official inquiries and investigations, the NSW Independent Casino Commission found Star was unsuitable to hold a casino licence. Independent administrators were put in charge.
In 2022, corporate watchdog ASIC sued 11 former directors and executives of Star. ASIC argued they had breached their legal duty of care to the company.
At the heart of this case were two questions: can a board leave it to management to handle compliance risks, especially when running something as risky as casinos?
And do non-executive directors on boards - who aren't employees, but are paid to offer part-time oversight - have the same responsibilities to act on "red flags" as someone like a chief executive?
Federal Court Justice Michael Lee's 500-page judgment described the culture within Star as:
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. Ultimately, it fell to investigative journalism and then a statutory inquiry to expose the extent of the problems.
Lee concluded Star Entertainment's former chief executive Matt Bekier and former chief legal and risk officer, Paula Martin, were liable for breaching their duty of care under section 180 of the Corporations Act.
Lee found Bekier and Martin had credible information the company was not properly managing its money-laundering risks, yet they failed to take reasonable action to address those problems over several years.
The pair will have to appear at a future hearing, where they could face millions of dollars in potential fines. ASIC has also said it will ask for Bekier and Martin to be disqualified from managing corporations for a period of time.
Two other executives were already penalised last year.
But in a setback for the regulator, the court rejected ASIC's case against the remaining non-executive directors.
The court distinguished between failures of operational management and failures of oversight by the board.
Management underplayed the significance of the risks. So it was not clear to the board that ongoing criminal behaviour was occurring.
While Lee found the non-executive directors were not "actively pressing management with difficult questions as to whether the business was being conducted ethically, lawfully, and to the highest available standard", they were not responsible for managing day-to-day business operations. The executive management team was.
Lee also warned Australian boards were being overwhelmed with "oppressive" and "heroically vast" board packs. Lee suggested AI might be able to help directors evaluate such large volumes of information. However, he stressed AI couldn't replace the need for each director to review what's presented to them as "a core function of a board".
Importantly, Lee didn't accept ASIC's argument that directors should be assumed to be aware of everything presented to them in the board papers. It was up to ASIC to prove their knowledge with evidence.
ASIC was unable to prove Star's non-executive directors were fully aware of all of the risks involved in the business. This meant they couldn't be held to be negligent for failing to act on information they didn't have.
Responding to the court's findings, ASIC chair Joe Longo said:
This judgement, in my view, is not a backwards step for directors' duties - quite the opposite in fact.
However, ASIC's argument that reasonable directors would have done more, and double-checked management decisions on key matters, has been rejected by the court.
The Star case confirms non-executive directors are entitled to rely on management to provide them with regular updates on important matters. It also reaffirms all directors need to take an active role in monitoring the management of the company.
Star's senior management was found liable for failing to keep the board properly informed of important risks. All senior company officers, at large or small Australian companies, have been put on notice.
If there are red flags that key risks aren't being managed properly, senior management has to act - then keep the board informed of their progress in a timely manner.
TheConversation.com
Author: Jason Harris - Professor of Corporate Law, University of Sydney
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