One of the goals of implementing effective corporate governance is to reduce the likelihood of unintentional non-compliance. This includes reducing potential misconduct by directors and officers, including senior executives. However as a practical matter, it is important to understand that, while effective corporate governance can make it much harder to hide misconduct by directors and officers, deliberate misconduct may still occur.

There is a vast array of guidance available on effective corporate governance, including the ASX Principles (see ASX Principles and Recommendations) and these guidance notes. Implementing effective corporate governance is a clear way for company secretaries and general counsel to ensure that directors and officers of the company do not inadvertently breach their duties and obligations. There is comparatively less guidance available on practical measures to identify deliberate misconduct. The purpose of these guidance notes is to set out in a general way the more notable types of misconduct by directors and officers, and measures to identify such misconduct.

A distinction is purposely made between preventing deliberate misconduct and identifying deliberate misconduct. While it is clearly within the ambit of company secretaries and general counsel to implement measures to prevent and identify misconduct, there is always the potential for a director or officer to attempt to engage in deliberate misconduct, regardless of any measures in place. The civil and criminal sanctions set out in the Corporations Act 2001 (Cth) and elsewhere are intended to deter directors and officers from engaging in deliberate misconduct.

In general, individuals involved in the management of a company have more opportunity, and are thus potentially more likely, to be involved in deliberate misconduct than non-executive directors. Consequently, as a starting point, the single best measure to identify misconduct is for an appropriately structured board, including the company secretary, to actively understand the company and its business, and to be alert for circumstances where there may be increased opportunity for misconduct. Company secretaries and legal in-house counsel are often the gatekeepers responsible for ensuring that adequate internal controls are in place.

The Corporations Act 2001 (Cth) (Corporations Act) imposes multiple obligations on directors and officers. In addition to the general duties covered in Directors' duties, the Corporations Act specifically imposes several other kinds of duties and obligations, including those related to:

• continuous disclosure;

• insider trading;

• financial reporting

• insolvent trading; and

• related party transactions.

Breach of such obligations may amount to criminal conduct under various state and federal laws. Close attention is required to avoid inadvertent breach, and strict monitoring for intentional breach must also be in place.

See What is misconduct?

Misconduct by directors and officers has the potential to greatly impact a company, with consequences flowing far beyond personal consequences of the director or officer involved in the misconduct.

There are two main categories of consequences that may flow from misconduct, namely:

• costs of complying with ASIC investigations, producing documents, attending compulsory examinations and complex litigation; and

• reputational damage to the company, the board and the individual directors if proceedings are commenced, charges laid, or the investigation becomes public.

See Consequences of misconduct by directors and officers

The overall trend in regards to directors and officers is towards increased scrutiny. The standard that directors and officers are held to is subjective and dependent on both the person’s knowledge and experience and the role that they hold.

There are various situations in which particular vigilance is required in regards to the company’s financials and strategy.

See Recent developments and signals for increased scrutiny.

A starting point towards corporate governance is ensuring that a company complies with ASX Principles 1 and 2.

Another key corporate governance measure in respect of preventing misconduct is the establishment of risk oversight and management and internal control, in accordance with ASX Principle 7.

There are various measures that can be put in place to prevent the following types of misconduct, including:

• failure to comply with continuous disclosure requirements and insider trading;

• financial reporting and insolvent trading; and

• related party transactions.

See Corporate governance tools to prevent misconduct.

There are two main defences to alleged misconduct by directors and officers, namely:

• reliance; and

• the business judgment rule.

See Defences to alleged misconduct.