Rules and regulations - or red tape? Perception is everything for directors

What is red tape for one company might be a saving grace for another - but a new survey of directors show a high proportion believe it affects their company’s profitability. Flickr/eblaser

Which one of the following from last century’s corporate office is still around – blotting paper, carbon paper, telex machines, dictation machines, Sellotape, red tape?

Well there is some Sellotape to be found but the far and away winner is red tape – and it is still causing problems.

The Australian Institute of Company Directors has just released its 84 page “Director Sentiment Index: Research Findings for the second half of 2012”. The survey indicates that directors are largely unhappy with the rules and regulations that govern them, including “red tape”.

The overall director sentiment as measured by the survey was, as in the first half of the year, pessimistic, but more so.

When compliance standards are evolving constantly to meet consumer expectations it is essential that directors be disenfranchised from the classically negative view of red tape. It is after all a basic component of the obligations directors agree to take on upon election to office.

In the broadest sense the proactivity required under their duty of care and diligence in s180 Corporations Act assumes that the base layer of management – the administrative, form-filling, document lodging duties – be carried out effectively.

The Business Sentiment Index indicates that more than 40% of directors believe that legal judgments negatively affect their business decision making and willingness to continue on a board, and more than half believe that legal judgments negatively affect their willingness to accept new board appointments. Presumably they mean judgments in ASIC’s favour.

Current governance requirements were considered onerous by 57% of the respondents and 44% believe that director liability and compliance requirements negatively impact their willingness to serve on a board. The survey, of 540 respondents, also found that red tape consumed around 26% of the directors’ commitments and that 39% of respondents considered red tape a significant impediment to productivity.

For 92% of respondents, administration costs, complying with regulations, and understanding obligations formed the aspects of red tape having the most impact on business and 22% of directors considered too much regulation and red tape to be one of the top three current economic challenges. The Director Sentiment Index does not define red tape.

One person’s red tape is another’s saving grace, and whereas the understanding of the concept of red tape in general is fairly well understood, what it actually entails requires a particular familiarity with the circumstances.

In a simple sense red tape gets in the way – so is anything that gets in the way red tape? What gets in the way of directors? This will depend on who they see as their stakeholders.

There is a fine line between regulation that requires lodgement, reporting, and record keeping (in the Corporations Act or under employment and industrial legislation) and regulation that requires attention to substantive matters of safety, health, or in relation to the Corporations Act, solvency (s 588G and s 436A), diligent decision-making (s 180), time-critical periods (statutory demands).

Standards of corporate governance, particularly in relation to listed companies, go beyond issues of personal integrity and focus on the implementation of mechanisms that deliver a “checks and balances” approach.

Several of the ASX Corporate Governance Principles and Recommendations could be seen to cover red tape (however it is defined), particularly Principle 1 – Lay solid foundations for management and oversight; and Principle 4 – Safeguard integrity in financial reporting.

So when does the law become simply red tape? For example the Centro decision certainly creates the need for a more detailed approach to financial statements – would directors see this as merely more red tape?

There is also the recent James Hardie sentencing decision in the Supreme Court of Appeal, where Justice Barrett opened up issues in relation to how boards should proceed to their decisions – so that consultation is not the beginning and end of deliberations, but merely a starting point from which individual board members can then form their own views and decide accordingly upon a vote. In other words, not the adoption of an informal collegiate approach.

At paragraph 11 of the judgment, Justice Barrett sets out that:

“The culmination of the process must be such that it possible to see (and to record) that each member, by a process of voting, actively supports the proposition before the meeting or actively opposes that proposition; or that the member refrains from both support and opposition.”

This is obviously important guidance and good governance, but how would directors view this guidance – as red tape? Clearly the manner in which boards decide affects stakeholders, and good governance process and accountability are essential.

There is also going to be a difference regarding the impact of red tape between executive and non-executive directors. It would be expected, and most investors would hope, that non-executives are spared thinking about, for instance, lodgement issues. Executives and management would handle delegation of these matters.

Words are often used imprecisely, particularly if the imprecision can carry some extra message. The Directors Sentiment Index suggests that approximately a quarter of directors see complying with regulations and understanding obligations, that is “red tape”, as restrictive of their role as profit-makers.

When this statistic is combined with the directors’ negative view of legal decision-making it is possible to discern the extent of the disincentive arising from the impact of the law. The danger is that everything becomes the dreaded red tape and directors’ outlook and attitude to important regulatory issues lumps all regulation together.

Red tape is a pervasive and damaging bureaucratic malady. Yet it is also an important function of the checks and balances necessary for good corporate governance. What is important is that directors don’t perceive critical regulatory obligations as red tape and as a result dismiss their importance.