Leading directors urge debate on making corporate responsibility a director’s duty

Governance Institute of Australia today launched a discussion paper inviting public comment on whether the time-honoured corporations law principle that shareholder interests are paramount in business decision-making must change as community expectations demand higher levels of corporate responsibility. 

“With corporate responsibility concerns looming larger than ever on issues such as fracking, corporate tax minimisation, fast food retailing, poker machine business and more, it’s timely to rethink how we tackle the dilemma of corporate and community interests colliding,” said Tim Sheehy, Governance Institute’s chief executive. 

“Community groups are questioning the ‘shareholders first’ focus of the corporations law as a deficient governance model that puts short-term private interests ahead of the public good. On the other hand, investors argue it’s legitimate for shareholders to prevail as a companies’ regime that rewards shareholders for taking investment risks is good for the economy.

“Balancing shareholders’ and the public’s interests will always be a delicate exercise when companies undertake activities with high community impact. The central question is: who should make the ultimate call on which party’s interests take priority — directors or the government?” Mr Sheehy commented.

The discussion paper raises several options for tackling this dilemma including amending the Corporations Act to adopt expanded directors’ duties similar to the UK Companies Act. 

“UK law requires directors to consider the interests of a broad range of stakeholders beyond just shareholders — including employees, customers, the environment and the community, in order to foster a longer-term perspective in business decision-making. This approach puts the onus on directors to judge whether shareholder profit or corporate responsibility should prevail when deciding what activities are in the best interests of the company,” Mr Sheehy said. 

Other alternatives canvassed in the paper include options where the government protects the community’s interests and introduces legislation to limit types of corporate conduct, or amends the Corporations Act to direct directors to prioritise other stakeholder interests in particular circumstances.

“Finally, there is of course the ‘do nothing’ option. The Corporations & Markets Advisory Committee (CAMAC) and Parliamentary Joint Committee on Corporations and Financial Services both conducted corporate responsibility inquiries back in 2006. They concluded that there was no need to change directors’ duties to explicitly accommodate non-shareholder interests.

“Today, more than ever, Australian companies and their directors are coming up against community expectations that directly clash with short-term goals of maximising profit. This is played out in a raft of current controversies where company decisions unleash significant environmental impacts, affect the health and wellbeing of the community, reduce local or rural employment, or where powerful corporations adopt unfair but not necessarily illegal commercial practices. 

“With mounting community expectations that companies become more focused on the ‘common good’ and a growing awareness of the need for companies to take a longer-term view, it’s timely to re-open the debate on whether shareholders should still be ‘king’”, Mr Sheehy said. 

Governance Institute’s discussion paper: Shareholder primacy: Is there a need for change? was launched by respected chairman Rod McGeoch, director Sky City Entertainment Group Ltd and Ramsay Health Care Ltd, and chairman Vantage Private Equity Group Ltd; Tony D’Aloisio, Chairman Iress Ltd and President Winemakers Federation of Australia; and Dr Leeora Black, managing director, Australian Centre for Corporate Social Responsibility. 

Submissions from the public close on Friday 5 December, 2014. The discussion paper is available at www.governanceinstitute.com.au/shareholderprimacy.

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Notes to the Editor

Governance Institute’s discussion paper: Shareholder primacy: Is there a need for change? seeks public feedback on the following questions:

  1. Is there a view that there is no need for a change to the corporations law, as it currently allows directors to take account of the interests of stakeholders other than shareholders?
  2. Is there a need for a change to the corporations law, and should the equivalent of s 172 in the UK (permissive clause) be introduced to expand directors’ duties so that they should have regard to the interests of stakeholders other than shareholders in promoting the best interests of the company? 
  3. Is there a need for a change to the corporations law, and should an explicit clause be introduced to expand directors’ duties so that they must take account of the interests of stakeholders other than shareholders?
  4. Is there a role for the government to play in protecting the interests of stakeholders — not through amendment to the corporations law, but through other forms of social policy?

For further information contact Su Lin Ho at CallidusPR on (02) 9262 9295/ 0421 616 617, Viv Hardy (02) 9283 4113/ 0411 208 951or Tim Sheehy on (02) 9223 5744/ 0419 490 594.

About Governance Institute of Australia

Governance Institute of Australia is the only independent professional association with a sole focus on the practice of governance. We provide the best education and support for practising chartered secretaries, governance advisers and risk managers to drive responsible performance in their organisations.

MR/2014/20

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