Breach of Principle 7 and Failure of Risk Management System
On October 25th, 2016, a fatal accident took place at the Dreamworld leisure park located on the Queensland Gold Coast, which resulted in the death of a number of patrons while riding at the Dreamworld. This leisure park was being operated by Ardent Leisure Ltd, which is listed on the Australian Stock Exchange. As a result of this, the company was liable to follow the Corporate Governance Principles and Recommendations given by the ASX Corporate Governance Council. In particular, Principle 7, which relates to the risks being recognized and managed. The accident revealed that this principle was not adhered properly and the management was at fault for this.
In the following segments, a discussion has been carried out to specifically show the manner in which principles 7 was breached, the requisite actions which should have been taken by the Board, the failure of director duties and lastly, reviewing and improving upon the risk management framework of the company. The purpose of doing this is to present a comprehensive analysis of what should have been and what actually went down, along with the required future course of action.
Ardent Leisure Ltd, due to the reasons of being listed, publishes it adherence to the principles laid down by the ASX Corporate Governance Council for each year. Accordingly, they published this report, before the incident took place last, on 30th June 2016. The report clearly provides that a Safety, Sustainability & Environment Committee had been established for monitoring, reviewing, evaluating and making recommendations to the Board regarding the environment, occupational health and safety and sustainability. In this regard, it has been stated that the company works towards maintaining a safe environment for its employees and for the guests. So, a policy was put in place by the company for managing and recognizing the risks.
In a situation of crisis, the first step is to make contact with the victims and their families, particularly when the crisis results in a loss of life. As soon as the incident took place, the company, on the very same day, issued a statement regarding them being with the families and working closely with the emergency authorities. However, a shocking revelation was made by the CEO of the company, Deborah Thomas, where she stated that the families of the victims had not been called as the company did not know how to contact them. This shows a clear failure of the company in managing the risk which occurred.
Consequences of Failing to Comply with Principle 7
Under the 3rd edition of the ASX Corporate Governance Principles, an “if not, why not” approach has been adopted. As per this approach, the entities who fail to adopt the principles laid down in this edition have to state the reason for not adopting the same. The companies have to clear state why they have failed to comply with the recommendations given under this edition. Recommendation 7.4 particularly requires the companies to disclose if they are exposed to any material exposure, which could be social, economic or environmental sustainability risks; along with the manner in which these risks would be managed. It is crucial that when this recommendation is not followed, the annual report discloses the extent of the failure of compliance along with the reasons for this failure. Even though compliance of this recommendation is option; though, if the same is not complied with, the key stakeholders of the companies are often alienated.
In this case, Ardent Leisure Ltd had complied with the principles which have been laid down by the ASX Council. They have clearly mentioned that they have taken steps towards managing the risks. In case it is assumed that the company failed to comply with these principles, it was required to make disclosure about the same in its annual report. And the same would not be taken as a breach of the principles covered under the ASX Good Corporate Governance due to the “if not, why not” approach. However, as the compliance of these principles is not mandatory, there is no negative consequence of the same in a legal manner. Further, a disciplinary action cannot be taken by the ASX against the company and its directors, pursuant to failure of complying with the Principle 7 of the ASX principles of Good Corporate Governance. Though, for their failure in properly recognizing and managing the risk, an action can be taken pursuant to the common law, by the injured parties. As ASX is not amongst them, ASX cannot take any action against directors or company for negligence. The disciplinary actions by ASX can be taken against the regulated person only when a contravention of operating rule is undertaken, which was not present in this case.
Due to the incident which took place late last year, the incident was investigated by Workplace Health and Safety to actually find out what happened and the reasons for the same happening. The investigations could highlight the failure of the theme park in making certain that the facilities were being maintained properly and that they were safe. This gives rise to claims of compensation for the suffering and pain which the victims and their family members had to endure. And this would include the costs of support and care, the medical costs, along with the costs of the trauma which numerous people had to bear. The ones who would be found liable would have to face hefty fines, and jail terms.
Breaching Directors’ Duty of Care and Diligence
In case the company is prosecuted and is found guilty, it would have to bear a fine of $3 million, for endangering the health of different people in a reckless manner. Apart from this, the share prices of the company fell down, as the shares of the company shed 7.25 cents, which is 3.55% and the situation continued as the shares of the company continued to fall. In the days after the incident, the shares of the company dropped almost 20%. For the financial year of 2017, the visitors of the company are estimated to decline by 20% owing to this incident. The company declared a loss of $49.4 million for the period of 6 months to 31st Dec, in comparison to the previous year’s profit of $22.7 million for the same period, owing to the incident. So, the company not only had to pay compensation, it had to bear penalties, faced downfall in its share prices and even lost revenue due to the decline in footfall in its theme parks.
Based in the gravity of the incident, the significant financial harm suffered which Ardent Leisure Ltd faced still fails to be proved as a sufficient penalty. This is because a company is a separate legal entity and so, the liabilities faced by a company are different from the ones faced by its directors. Hence, it is crucial in this case that the directors of Ardent Leisure Ltd are held liable for breaching their duties set out under the Corporations Act.
Corporations Act, 2001 is the act which is applicable on all the companies in the nation. Under Part 2D.1, the act provides certain duties for the directors and officers of the companies. Under section 180 of this act, a duty of care has been imposed over the directors of the company. As per this section, the directors have to use their powers, as well as, undergo their obligations, in such a manner where care and diligence is shown, in the same manner as would have been done by a prudent individual in case they were holding the same position as the director, had the same powers and obligations and were faced with similar situations.
The failure of the directors’ duties in this case is evident from the fact that they had a strong risk management system, based on the Principles 7 of the ASX principles of Good Corporate Governance and yet the same was not effectively implemented. The directors of Ardent Leisure Ltd had the duty of care and diligence in using their powers and discharging their obligations. Based on this, they were required to ensure that a safety mechanism was in place where such incidents could be avoided, after properly being identified pursuant to the risk management techniques being used by the company. As a member of the board, they had to ensure that the operations of the company were undertaken in a safe manner. This was particularly when the theme park had patrons including children and their parents, who are more prone to harm. Merely stepping down from the position of CEO by Deborah Thomas would not prove sufficient. As the directors clearly failed in taking the requisite care and carrying out the risk management activities in a diligent manner, it is required that the directors should be made liable for their failure in fulfilling their section 180(1) duties. And as a result of these actions, the directors could be made personally liable, whereby they can be fined up to $600,000 and be jailed for a term of five years.
Reviewing and Improving Risk Management Framework
After the CEO which was present at the time of incident Deborah Thomas stepped down, another major change in the board of the company took place, where the long serving director of the company, George Venardos took the place of Chairman of the company from Neil Balnaves. Venardos was also the member of the company’s committee set up for ensuring that the principle laid down under Principle 7 of the ASX principles of Good Corporate Governance, i.e., the Safety, Sustainability & Environment Committee. This placed him right into the centre of the entire incident, or in the eye of the Dreamworld storm for that matter. He informed the investors that the safety of the patrons had been taken very seriously by the company. With the incident and him having a key role in risk management of the same, the new chairman had to take a more hands-on approach for dealing with the matter, and being proactive, instead of being reactive. And so, there was a need for working closely with the insurance claims and even for the directors’ culpability. Amidst the tragedy at Dreamworld, the company started shifting its focus towards more lucrative division of the group, which operates in US, which is Main Event Entertainment division.
However, as has been stated earlier, the company failed in managing the crisis at hand. The company was required to take steps where the board could have reviewed and improved upon the effectiveness of the risk management framework of the company, but the company failed to do so. The company shifted its focus towards other lucrative venues, instead of taking steps for improving upon its risk management framework. The things which went against the company’s risk management system were the company’s completely botched response to the incident which took place. The board and the management of the company continued to make mistakes even after the incident, which highlights the utter failure of the board in managing the risk, after it occurred.
The biggest requirement for the company was to take immediate steps towards crisis management after the incident, in which they failed miserably. After properly dealing with the incident at hand and compensating the families and providing them comfort for dealing with the accident, the company had to undertake strategic and contingency planning so as to get ahead of the curve and focus on building itself back. This would have been done if the company had reviewed its risk management system and taken steps to deal with the shortfalls found after this review. The company is yet to issue its Corporate Governance Statement for 2017 along with its Annual Report, but the publications of the company till now only show that no steps have been taken by the board of the company to review what went wrong and on the manner through which the effectiveness of the risk management system of the company could be improved.
References
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