(percussive instrumental music)
-: You sit on the board of Telstra,
Australia's largest telecommunications company.
The topic for discussion is whether to purchase
51% of KeyCorp limited, and a decision is made
to go ahead with this.
(bell dings)
When a large purchase like this happens,
it usually leads to a significant share price
rise for the company being purchased.
What's your next step after signing a resolution
to approve the acquisition?
If you thought that you should
quickly buy shares in KeyCorp Limited,
before Telstra makes the acquisition
so that you could reap a handsome profit,
then you can consider yourself to be in
the same category as Steve Vizard.
That's right, the board member of Telstra
took advantage of this information,
and organised for the purchase of $250,000
worth of shares in KeyCorp the following day.
A week later, Telstra announced the deal, and the
share price of KeyCorp rocketed up from $12.80 to $15.79.
So was this action ethical, or legal?
Obviously not.
Directors are agents, and according to agency theory,
they are self interested.
Therefore, we have ethical guidelines and legal rules
in place to ensure that this type of negative,
selfish behaviour is prevented.
Director's duties exist that prohibit this type of activity.
These duties include a duty to act with care and diligence,
the duty to act in the best interest of the corporation,
rather than in your own best interests,
and the duty to not improperly use
your position, or information.
In Australia, these duties are captured in
sections 180, 181, 182 and 183 of the Corporations Act.
These are civil obligations, and in addition to this,
Section 184 deals with the breaches of director's duties
that are reckless or dishonest,
and these are treated as criminal offences.
The duty to act with care and diligence
is based on what a reasonable person
would do in the same circumstances.
This doesn't mean you can't make mistakes or take risks,
but it does mean you can't act flippantly,
and have no regard for the outcome.
(buzzer sounds)
The Centro case provides a clear example of directors
not taking enough care and being found guilty as a result.
Here, the directors signed off on financial reports
that incorrectly classified approximately
$2 billion worth of short term liabilities
as non-current, making the liquidity position
look much stronger than it really was.
And they also failed to disclose nearly $2 billion
worth of guarantees in an associated company.
When the judge found these directors were in breach
of their duty, he explained that there was no
suggestion that each director had acted dishonestly.
But, they failed to take all reasonable steps required
of them, and they did not exercise the degree of care
and diligence the law requires of them.
Therefore, they breached Section 180
of the Corporations Act.
The duty to act in the best interest of the corporation,
and to act for a proper purpose,
are focused on ensuring directors do not place
their own self interest ahead of the company.
Sections 182 and 183 focus on the misuse of your position,
or of information gained as a result of your position
to either gain an advantage,
or to cause harm to the organisation.
From the Vizard case, we can clearly see
that sitting on the board of Telstra
provided the relevant information
relating to the planned share purchases.
To organise the purchase of shares to take advantage of this
is clearly an example of attempting to gain advantage.
Further proof of this occurred when Vizard
organised for some of the shares he purchased in mid-July
to be sold two weeks later,
making a profit of over $38,000.
Other examples of this type of share trading
were also discovered, and highlighted that this
insider trading behaviour was not just a one off event.
The judge imposed pecuniary penalties
totalling $390,000 and a ten year banning order.
As a final twist, due to the share market crash
that occurred in the same year, Vizard actually ended up
losing money on his attempts
to profit from inside information.
To spite this, the breaches of law occurred
because they focused on attempting to gain a benefit
rather than on demonstrating that
a benefit itself was actually achieved.
To recap, directors are agents of organisations.
And because agents are self interested,
and have significant power and control over
valuable resources, we need rules and laws in place
to protect the principles or owners
from any negative behaviours.
Director's duties are laws that require the agents
to act in the best interest of the company,
avoid misusing information or their position
for their own gain, and to act with an
appropriate level of skill, care and diligence.