Directors' duties: blowback from sportswashing?

How can Greg Norman and LIV Golf make us think about directors’ duties?

Our increased engagement with diverse forms media and social media brings greater scrutiny of companies. We not only rate the product or service that the company sells, but how the company behaves.

To attract socially conscious buyers and investors, many medium to large companies report on or promote their ESG (Environmental, Social and Governance) credentials.

In this setting, if a company makes an unpopular wrong-move, the consequences may be devastating. Adverse publicity can lead to plummeting share prices in listed companies. Listed and non‑listed companies alike will see a dent in the bottom line if consumers boycott the company’s business.

Dealing with the fall-out, or pre-empting it, might make practices known as sportswashing or greenwashing seem attractive. Greenwashing is spin designed to make sub-standard environmental practices look better than they are. Sportswashing is designed to make anything bad, look wholesome.

Case in point: Saudi Arabia. A country criticised for the murder of journalist Jamal Khashoggi, public beheadings and for being one of the worst places on Earth to be a woman, among other sins, is anything but wholesome.

Has Saudi Arabia attempted to “sportswash” these stubborn stains by funding a new company headed by Greg Norman, LIV Golf Investments, to conduct the Super Golf League? Many think so. Cue leading golf analyst, Brandel Chamblee (16 May on Twitter):

To those supporting LIV golf, you are ensuring in some way that the atrocities committed by MBS [Mohammed bin Salman] continue, so in some way complicit in those atrocities. Their (MBS and his thugs) tactics are many, besides sportswashing, using social media to turn citizens against one another.

Greg Norman’s credibility has been eviscerated by journalists the following comment, when interviewed about the Saudi regime’s atrocities: “Look, we’ve all made mistakes and you just want to learn from those mistakes and how you can correct them going forward”. Cue Peter FitzSimons off the long run: Greg, your support of a murderous regime is disgraceful… and so are you (Opinion in the Sydney Morning Herald published on 13 May 2022).

The first of eight tournaments will commence in June. Total prize money for the tournaments is a whopping $255 million. Has this made anyone feel better about Saudi Arabia or Greg Norman’s company?

So, does sportswashing and greenwashing increase public resentment, and therefore the risk of adverse consequences? Clearly that prospect is real – see Chamblee and FitzSimons above.

If it does, what does this mean for directors, conscious of their duties to the company and their personal liability?

Directors’ duties

Section 180(1) of the Corporations Act 2001 (Cth) imposes a statutory duty of care and diligence on company directors. It states:

A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation’s circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

This duty is owed by directors to the company. The standard is an objective standard, judged according to how a “reasonable person” would act.

But a director’s exposure to liability is cushioned by the “business judgment rule” in section 180(2). This provision provides that a director who makes a business judgment is taken to meet the requirements of s 180(1) if they:

(a) make the judgment in good faith for a proper purpose; and

(b) do not have a material personal interest in the subject matter of the judgment; and

(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d) rationally believe that the judgment is in the best interests of the corporation.

Section 181(1) imposes further duties on directors to exercise their powers in good faith in the best interests of the company and for a proper purpose.

Sections 180(1) and 181(1) are civil penalty provisions. ASIC may prosecute breaches of these provisions, upon which a court may impose pecuniary penalties and disqualify a person from acting as a director.

It is also possible that a shareholder or another director of the company will be entitled to sue a director who has contravened their directors’ duties, in the name of the company, and require the director to personally compensate the company for any losses. This is known as a derivative action.

When do directors need to take into account outside interests when considering the best interests of the company?

No law expressly obliges directors to take into account outside interests such as the environment or the wider community. However, there are times when acting in the best interests of a company, also requires acting in the best interests of such outside interests, or acting in accordance with ESG principles.

Let’s take the environment. Commentary increasingly suggests that directors might be liable for failure to act in the best interests of the company by failing to disclose whether the company’s business is exposed to environmental or climate change risk, or for failing to manage those risks. Extreme weather events might damage a company’s business.

On the flip-side, a company’s business might damage the environment. The risks that directors must manage include the risk of prosecution for infringing environmental protection legislation, and misleading the market. And they also include the risk of reputational damage for lacklustre sustainability practices. Faced with these risks, greenwashing won’t cut it.

Similarly, rainbow washing or gender washing by way of feel-good celebrations of Pride days or International Women’s Day won’t shield a company from liability if the company breaches anti‑discrimination legislation. These types of acknowledgements are important, but to a cynical public, they will only look like window dressing if the company has failed to actually provide a safe and inclusive equal opportunity workplace.

So, could directors ever be personally liable if reputational damage materially affected the interests of their company?

This hypothetical question bears consideration in the minds of all directors. Context and the individual circumstances of the company will be important, as will consideration of whether the reputational damage arose from an exercise in judgment protected by the business judgment rule.

Ultimately, tripping the wire of public opprobrium is bad for business and creates headaches, even if those headaches fall short of personal liability for directors. It’s also a missed opportunity to attract socially conscious consumers.

With several big name players not wanting to risk their PGA Tour membership and distancing themselves from Greg Norman’s Super Golf League, this might be a lesson that Greg Norman can teach us. However, one thing is clear, this issue is developing and directors will need to continue to be alive to the risks.