What are the implications for directors’ duties?
The Australian Government’s Corporations and Markets Advisory Committee (CAMAC) published its report on ‘The Social Responsibility of Corporations’ on 12 December 2006.
In conjunction with the recent report ‘Corporate responsibility: Managing risk and creating value’ published by the Parliamentary Joint Committee on Corporations and Financial Services (PJC) in June 2006, CAMAC’s report provides useful guidance in assessing the likely regulatory and policy measures that may be implemented by the Australian Government in response to the growing focus on ‘corporate social responsibility’ (CSR) within the business community and the public at large.
The growing interest in CSR stems from widely-held concerns regarding sustainability in the era of globalisation, as well as the increased focus on corporate governance generally, itself prompted by a series of high-profile corporate collapses and scandals in Australia and elsewhere.
While acknowledging that issues of social responsibility fall within the broader debate concerning corporate governance, which has itself prompted a number of recent reform proposals, CAMAC did not propose significant changes to the Corporations Act 2001 (Cth) (Act) in response to CSR considerations. In particular, CAMAC concluded that the existing legislative framework of directors’ duties (being the duties imposed on directors and in some cases other officers under Part 2D.2 of the Act) is satisfactory, as it permits directors to take the interests of non-shareholder stakeholders and the broader community into account in corporate decision-making, to the degree appropriate. This accords with the PJC’s view.
CAMAC considered that corporate decision-makers should have an interest in managing external impacts of the company’s business in relation to social and environmental matters that may impinge on its success. However, CAMAC rejected the view that a company should be required to have regard to a range of social and environmental considerations irrespective of the relevance of those matters to the company’s business and its impacts, on the basis that this would be a distraction from its business activities for no real gain. In advancing what it termed the ‘business approach’ to CSR, CAMAC argued that:
[A] company will be seen to be socially responsible if it operates in an open and accountable manner, uses its resources for productive ends, complies with relevant regulatory requirements and acknowledges and takes responsibility for the consequences of its actions. For some companies, this will require them to engage with particular social and environmental issues. [at page iv]
CAMAC’s ‘business approach’ to CSR and its ‘light touch’ view of government’s role in regulating corporate decision-making, activity and disclosure, and facilitating CSR by Australian companies, may disappoint not-for-profits and other stakeholder groups. CAMAC’s position can also be seen as a rejection of calls for widespread reform, viewing them as a disproportionate, ‘knee-jerk’ response to recent scandals, including the James Hardie scandal.
CAMAC’s position may also disappoint corporate officers who are seeking greater clarification about the interests they can and cannot take into account in corporate decision-making, how those interests should be balanced or prioritised and the relative weight that should be given to short-term and longerterm considerations.
Although it currently appears unlikely that the Australian Government will implement significant reforms to the Act in response to the CSR debate, these two inquiries have nonetheless legitimised claims that ‘CSR’ is a multi-faceted but meaningful concept, and that companies are likely to benefit if they integrate CSR into their core business and strategy, and are likely to suffer if they do not. In response, directors should carefully review their company’s operations and existing CSR activities, identify key non-shareholder stakeholders and the existing methods of liaising with them, identify the forms of nonfinancial reporting that the company currently engages in and consider the other opportunities that the growing focus on CSR may offer.
Background to the report
CAMAC’s report was prepared in response to terms of reference dated March 2005 requesting that CAMAC consider and provide advice regarding the issue of CSR and directors’ duties. The terms of reference identified the following matters:
- Should the Act be revised to clarify the extent to which directors may take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?
- Should the Act be revised to require directors to take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?
- Should Australian companies be encouraged to adopt socially and environmentally responsible business practices and if so, how?
- Should the Act require certain types of companies to report on the social and environmental impact of their activities?
This update predominantly focuses on the first two matters considered by CAMAC.
CAMAC released its ‘Corporate Social Responsibility Discussion Paper’ in November 2005 and received 61 submissions from a broad range of respondents, including large listed companies, academics and researchers, professional advisors, professional bodies and not-for-profit entities. The CAMAC inquiry was held concurrently with the inquiry into ‘Corporate responsibility and Triple-Bottom-Line reporting’ held by the PJC under terms of reference dated 23 June 2005.
Should the existing legislative framework of directors’ duties be clarified or changed?
CAMAC concluded that the established formulation of directors’ duties in Australia is sufficiently clear and permits directors to take the interests of non-shareholder stakeholders and the broader community into account, to the degree appropriate. In particular, CAMAC noted that:
Careful consideration needs to be given to whether any proposals for further change will strengthen, rather than impair, the accountability of corporations and those who conduct their affairs. [at page 15]
CAMAC rejected the proposal that the Act be amended to require directors to take such interests into account in corporate decision-making, on the basis that it would not assist directors in understanding their responsibilities or making corporate decisions, but may instead undermine effective corporate governance by making directors less accountable to shareholders. In CAMAC’s view, accountability to shareholders remains the touchstone of directors’ duties, but does not preclude the directors’ having regard to other interests, values or goals, to the degree relevant to the company’s business and interests.
Finally, CAMAC also observed that where the market is not regarded as adequately responding to the social and environmental impacts of business activity, specific legislation will be a far more effective response than amendments to the Act with respect to the duties of directors and other corporate officers. In addition, the mischief in question may not result solely from corporate conduct.
Rejection of UK Companies Act 2006 approach to CSR and directors’ duties
CAMAC’s view is a clear rejection of the ‘elaborated shareholder benefit approach’, as exemplified in section 172 of the new UK Companies Act 2006. This provision imposes a duty on a director to act in the way that he or she considers, ‘in good faith’, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, a director must have regard ‘amongst other matters’ to 6 specified factors.
Many critics have argued that it would be disastrous for corporate decision-makers, in particular directors, if the UK model was adopted in Australia in response to the CSR debate. Among other concerns, it is claimed that this model would impede efficient and effective corporate decision-making, create significant uncertainty for directors, impact negatively on existing corporate governance standards and increase the risk of claims by the specified non-shareholder stakeholders.
The PJC did not support the adoption of the UK approach, and subsequent comments by the Parliamentary Secretary to the Treasurer appear to suggest that the Australian Government shares this view. In similarly rejecting the appropriateness of the UK model for Australian company law, CAMAC noted that:
[CAMAC] is not persuaded that the elaboration of interests that, where relevant, can already be taken into account would improve the quality of corporate decision-making in any practical way. A nonexhaustive catalogue of interests to be taken into account serves little useful purpose for directors and affords them no guidance on how various interests are to be weighed, prioritised or reconciled. [at page 111]
Should Australian companies be encouraged to adopt socially and environmentally responsible business practices, and if so, how?
CAMAC considered that government’s principal role lies in providing the public policy settings within which companies operate, including legislation imposing boundaries on corporate behaviour, with regulatory agencies also playing a key role in compliance and enforcement.
CAMAC also outlined a number of ‘light touch’ means by which the Australian Government could promote appropriate engagement by companies with the broader social and environmental context in which they operate. This includes setting an example for the private sector through the governance and disclosure standards that it imposes on the public sector. It is noteworthy that the PJC made similar recommendations regarding voluntary sustainability reporting and green procurement policies for governmental agencies.
Should certain types of companies be required to report on the social and environmental impact of their activities?
CAMAC noted that ‘transparency is a cornerstone of responsibility in the operation of corporate businesses’, and that the form and nature of corporate reporting continues to evolve, with many corporations adopting voluntary disclosure guidelines in one form or another.
CAMAC recommended that the reporting obligations in section 299A of the Act, which requires the disclosure of relevant non-financial information by listed companies, be extended to all listed entities. However, CAMAC rejected the proposal that the Act be further amended at this stage to mandate reporting by companies (or certain classes of companies) on the social and environmental impacts of their activities. CAMAC also recommended against extending the existing statutory regimes that impose liability on companies and corporate officers for providing false, misleading or deceptive statements to specifically address the disclosure of non-financial information by companies.
In the case of listed entities, CAMAC also noted the ASX’s ability to respond to changes in the market’s information requirements in a more flexible manner than legislation through its Listing Rules, Principles of Good Corporate Governance and Best Practice Recommendations (ASX Principles) and disclosure guidelines. It is noteworthy that the ASX Corporate Governance Council is currently seeking submissions regarding the potential for ‘sustainability/corporate responsibility’ disclosure by listed entities (whether voluntary disclosure or as part of the ‘if not, why not’ regime). The Council’s decision is expected in 2007, and it will be interesting to see whether the Council ultimately proposes a disclosure regime that is more extensive than those endorsed by CAMAC and the PJC.
Other comments of interest
While acknowledging that the activities of large private corporations are highly visible, CAMAC observed that issues of social responsibility are not confined to business corporations, but may also arise for other entities - including public sector bodies and not-for-profit organisations - to the degree that their activities have social and/or environmental impacts.
In canvassing the various means of responding to concerns regarding the social and environmental impact of corporate activity, CAMAC noted that a company’s members could vote to include a ‘social responsibility’ charter or similar set of guidelines in their company’s constitution if they so desired. Rather than unduly restricting corporate decision-making, such an approach could potentially give directors greater comfort in taking the relevant non-shareholder stakeholders’ interests into account going forward.
What should directors do now?
Like the PJC, CAMAC considered that the integration of CSR in core business and strategy, over and above mere technical compliance with legislation regarding social or environmental matters, is likely to benefit companies:
[A] well managed company will generally see it as being in its own commercial interests, in terms of enhancing corporate value or opportunity, or managing risks to its business, to assess and, where appropriate, respond to the impact of its activities on the environmental and social context in which it operates. Companies that fail to do so appropriately may jeopardise their commercial future. [at page 78]
In this regard, CAMAC commended the approach set out in the ASX Principles whereby social and environmental matters may be treated as ‘material business risks’.
Prior to the Australian Government formally responding to both reports, directors should consider the following:
- Who are the key non-shareholder stakeholders of my company? What level of dialogue currently exists between my company and these stakeholders? What form does it take?
- To what extent does my company engage in acts of ‘corporate responsibility’ above and beyond strict legal compliance? Who or what determines the nature of these activities, and their scope? Is there a unitary ‘CSR’ and sustainability strategy which is understood and supported by the board, management, staff and non-shareholder stakeholders? Are any systems in place to monitor the impact of these activities on the company’s performance (in dollar terms or otherwise)?
- To what extent does my company currently report on the sustainability of its operations and its key sustainability risks? What framework or guidelines are used? Does the reporting extend to the activities of entities which are owned or controlled by my company? Is there any independent assessment of such reports? If my company does not currently engage in such reporting, what strategies are in place to implement an appropriate reporting framework if required in response to regulatory change or market expectations?
- What opportunities does the growing interest in CSR offer my company? How could these opportunities be best identified and captured?
Prudent companies will have systems in place to monitor and promote legal compliance. But companies that show leadership by looking beyond strict legal compliance to focus on issues such as internal and supply chain environmental and social sustainability, zero waste, water and energy efficiency, climate change and social justice and equity issues may stand to benefit over the medium to long term, if not also the short term. For example, a greater focus on CSR and stakeholder engagement generally may provide competitive advantage, and may also assist in minimising or even avoiding future problems in this area (eg activism by shareholders and other stakeholders).
Companies and government agencies that wish to develop or refine a CSR or sustainability strategy should begin by engaging with internal and external stakeholders to identify areas for improvement. DLA Phillips Fox has assisted numerous clients with this process. We are trained in stakeholder engagement by AccountAbility in London. AccountAbility has developed internationally accepted Stakeholder Engagement Guidelines and a practical manual which we can guide you through to develop in-house and specific stakeholder engagement policies and solutions.
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