What Does a Sleeping Director have in Common with The Three Wise Monkeys?

In Japan, the three monkeys – Mizaru, covering his eyes, Kikazaru covering his ears and Iwazaru covering his mouth – together represent a “see no evil, hear no evil and speak no evil” maxim.

In some cultures this adage represented wisdom. Australian culture however uses it to swipe at people who do not call out at wrongdoing happening around them.

Parents, family or friends until recent times found themselves as sleeping (or silent) directors appointed to fill a vacancy for a small corporate businesses required by law to always have a minimum two directors. Shadow directors appointed by a company to the board of a subsidiary are not sleeping directors.

Sleeping or shadow directors are commonly non executive directors who attend periodic Board meetings, read management reports on the business and finances of the business and pass resolutions or authorise management to act with Board authority.

The Australian Courts over the years have outlined certain standards expected of all Directors (without exception) that require they remain continuously informed, participate in the company business, acquire the appropriate information, make informed decisions and not delegate or rely on executive Directors to make a decision for them. They should also be wary of incidents that could negatively impact the
business. Ignorance is not a defence to negligence or breach of fiduciary duty.

The Corporations Act applies the reasonable person test requiring Directors to exercise their powers and discharge their duties with a degree of care and diligence expected of a reasonable person holding that office as a Director, or Corporate Officer and having the same responsibilities within that corporation. The reasonable person would be expected to have similar skills, time and energy devoted to the company and skills which are relevant to a reasonable understanding of the company business.

Directors must have some understanding of financial material and basic accounts (even if they are inexperienced in this area) to make an informed opinions on the company’s accounts.

Directors can rely to some extent on expert advisers but they must also make their own reasonable independent judgment and be responsible for delegating any duties.

Each case is different but there is today no place at an Australian Board room for a sleeping director and Directors must not delegate responsibility for financial accounts to the Chief Financial Officer if they have not scrutinised the accounts at first instance.