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Focus: Corporate Governance – December 2006

The Social Responsibility of Corporations – the latest CAMAC report

In brief: Companies and their directors are unlikely to face drastic changes to the law of directors' duties to make companies more socially responsible, if (as is likely) the Federal Government accepts the latest recommendations of its Corporations and Markets Advisory Committee in its recently released report, The Social Responsibility of Corporations. Our consultant in the Corporate Governance group, Professor Bryan Horrigan(view CV), together with Senior Associate Meg Lee and Lawyer Charlie Harrison, examine CAMAC's recommendations and their implications for Australian companies.

How does it affect you?

  • How companies interact with their external stakeholders, including the community and the environment, is currently an issue of widespread interest, both in Australia and internationally. This report is the latest addition to this debate.
  • Although no major changes to the law are proposed by the report, it does recognise the importance of corporate responsibility and suggests possible ways forward for industry and government.
  • The report suggests that reporting obligations under section 299A of the Corporations Act 2001 (Cth), which require disclosure of an entity's business strategies and prospects for future financial years among other things, should be extended beyond public companies to all listed entities. Listed managed investment funds should take note.

Background

The Corporations and Markets Advisory Committee (CAMAC) was asked in March 2005 by the Parliamentary Secretary to the Federal Treasurer to consider the following questions.

  • Should the Corporations Act 2001 (Cth) 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 Corporations 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 Corporations Act require certain types of companies to report on the social and environmental impact of their activities?

The CAMAC inquiry was run separately from, but in parallel with, the Parliamentary Joint Committee on Corporations and Financial Services (the Parliamentary Committee) inquiry into corporate responsibility, which resulted in the Parliamentary Committee's mid-2006 Report, Corporate Responsibility: Managing Risk and Creating Value (the Committee Report). We reported on this inquiry in July 2006.

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Key CAMAC findings and business implications

In relation to each of the areas of inquiry, the key findings by CAMAC are set out below together with our thoughts on the likely implications for business.

Directors' duties

Like the Parliamentary Committee, CAMAC considered that amendments to directors' duties in the Corporations Act were not necessary. CAMAC felt that the current common law and statutory requirements were sufficiently flexible to enable directors to take relevant community and other stakeholder considerations into account in boardroom decision-making. This view is strengthened by CAMAC's portrayal of corporate responsibility as ideally a fluid part of a company's operations – not an 'add-on'. The CAMAC report suggests that a company will 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'.

Additionally, CAMAC felt that amendments to directors' duties might actually be counterproductive, in that the role of directors could become more difficult and their accountability to shareholders could become less certain, without any significant correlative improvement in protecting anyone's rights.

Where greater legal protection for social and environmental interests is needed, CAMAC concludes that this is best handled by specific legislation targeting that in its own right, rather than through the vehicle of enhanced directors' duties and other piecemeal changes to corporate law. In doing so, both CAMAC and the Parliamentary Committee rejected the UK approach in its new Companies Act 2006, which requires directors to consider a range of relevant employee, social, and environmental considerations in fulfilling their duties to the company and its shareholders. The UK Act also requires directors to report on that in a new business review for annual reporting purposes. All of this will be examined by the Federal Government in the light of the separate work on simplifying business regulation undertaken by its Corporate and Financial Services Regulation Review, including possible broadening of the business judgment rule for directors.

Implications for companies and their directors

In light of CAMAC's recommendations, it is currently 'business as usual' for Australian company directors in fulfilling their directors' duties, as none of the major governmental inquiries examining possible reform of the law of directors' duties are urging the Federal Government to expand directors' duties – at least for now. If, however, the Australian business community falls behind in its embrace of corporate social responsibility issues, legislative reforms along the lines of the UK regime could still be introduced.

Reporting on the social and environmental impact of company activities

CAMAC's primary position on socially responsible corporate reporting was similar to that of the Parliamentary Committee. In June 2006, the Parliamentary Committee recommended that reporting on social and environmental performance should not be made mandatory, but should be strongly encouraged. The Parliamentary Committee's members were concerned that mandatory reporting would promote a 'tick the box' culture and that corporations would be tempted to comply with the minimum standard and nothing more.

In its report, CAMAC concluded that the annual corporate reporting requirements in s299A of the Corporations Act already provide a sufficient general framework for the disclosure of environmental and social issues relevant to a company's business. CAMAC concluded:

It would be premature and counterproductive to introduce detailed legislative social and environmental reporting requirements, given that the form and content of non-financial disclosures are still evolving, internationally as well as locally.

  

However, CAMAC recommended that s299A should be extended beyond listed public companies to cover all listed entities, such as listed managed investment funds. The CAMAC report notes that non-corporate listed entities now constitute more than 10 per cent of all listed entities.

In making the above recommendations, the CAMAC report first analysed the overseas shift toward greater disclosure by corporations of their environmental and social impact. This included an analysis of the mandatory disclosure requirements that exist under the Securities and Exchange Commission regulations in the United States, the EU Accounts Modernisation Directive in Europe and the Companies Act in the UK. However, as explained above, CAMAC ultimately did not recommend a mandatory environmental and social reporting scheme. CAMAC's view was that any progress in this area could more flexibly be handled by changes to the ASX Listing Rules and the ASX Corporate Governance Council's Principles of Good Corporate Governance and Best Practice Recommendations, instead of prescriptive legislation.

Implications for companies and their directors

Businesses should assess and undertake any reporting through the prism of the requirements of s299A of the Corporations Act and how social and environmental considerations affect the business. This can be supplemented by additional regulatory requirements as they evolve and by whatever voluntary measures might also be adopted by particular businesses in particular industry sectors. In this context, it is important to note the enhanced social and environmental reporting being considered as part of the current review being undertaken by the ASX Corporate Governance Council of its principles and recommendations. In addition, pending the Federal Government's response, any listed entities that do not currently fall under the operation of s299A should begin thinking about the implications of applying the reporting requirements of s299A to them.

Initiatives to encourage responsible business practices

Here, CAMAC again came to a similar conclusion to that of the Parliamentary Committee, in that both recommended a set of government initiatives facilitating responsible business practices instead of major regulatory reform. The CAMAC report notes the key role played by government in laying down boundaries for corporate behaviour both through legislation and other means. The CAMAC report mentioned the following 'light touch' measures by which government could facilitate and encourage socially and environmentally responsible corporate behaviour:

  • ensuring that different states, different departments and different levels of government all apply similar, coherent and integrated policies on corporate social responsibility;
  • ensuring that government agencies lead by example on corporate social responsibility, both in terms of decision-making processes and disclosure;
  • encouraging and assisting the corporate sector to disseminate information and commission research relevant to corporate social responsibility performance; and
  • encouraging participation and cooperation from the corporate sector in the formulation of codes or guidelines and the development of non-government initiatives.

Many of our clients are already participants in the non-government initiatives and are signatories to industry codes of practice, such as the Enduring Value principles developed by the Minerals Council of Australia. In addition, our government clients involved in seeking tenders for major projects have the ability to select tenders that demonstrate best practice in the areas of environmental and social responsibility. Many of our clients have expressed the view that these 'light touch' approaches have the ability to impact behaviour as much as mandatory, legislative approaches and are better able to allow innovation to flourish.

Implications for companies and their directors

Both the CAMAC Report and the Parliamentary Committee Report have concluded that major reform to the law is unnecessary to encourage responsible business practices: the market is up to the task. Corporate 'peer pressure' is a strong incentive in this field. As the CAMAC report states: 'The corporate sector's own appreciation of the relevance of responsible practices to business success is likely to be the key determinant of change.' The business community is still expected to engage with, and promote, corporate responsibility – it is just that, for now, business is being given the opportunity to chart its own course in accommodating wider stakeholder considerations in boardroom decision-making, corporate strategising and risk management, and corporate disclosure and reporting. Accordingly, both action and inaction by Australian companies in this area can be expected to attract continued public, media and regulatory scrutiny.

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