A Theoretical and Policy Critique of the Modern Reformulation of Directors' Duties of Care

Abstract

This article examines the modern Australian case law reformulating the duties of corporate directors to act with care and diligence, including the leading decision of the New South Wales Court of Appeal in Daniels v. Anderson. This case represents, or appears to represent, a strong affirmation of the tendency of previous authorities to postulate the existence of directors' duties to be informed and to monitor corporate affairs. The article uses economic analysis to critique the principles expressed in these cases. The formulation of directors' duties that will most benefit shareholders is the test of negligence expressed in the Western Australian Supreme Court in Vrisakis v. ASC, which tests the irrationality of a decision, and thus conforms to traditional principles of gross negligence. It is argued that as articulated in the case law, the duty to be informed ignores the status of information acquisition as a business judgment, and lacks efficient limiting principles. Likewise, the limitation of the extent to which directors may rely on management that is expressed in Daniels v. Anderson ignores the likely comparative disadvantage of directors in managerial matters. The paper considers the implications of contractarianism for executive and non-executive directors, and favours relaxation of the duties of the latter.

JEL Classification: G34, G38, K22