A FUNDAMENTAL CHANGE to directors’ duties is needed to ensure corporations are truly acting in the best interests of society as well as their shareholders, according to a corporate lawyer.
Despite the rejection of this proposal by a parliamentary committee last year, Robert Hinkley, a securitisation specialist at the Sydney office of international law firm Jones Day, told an Australasian Compliance Institute conference in November he believed a new “code for corporate citizenship” in the Corporations Act was necessary and would not be too onerous.
He said the specific area to change in the Act is section 181, which sets out the duty of directors to act in the best interests of shareholders.
To this he proposes to add “28 extra words” which say a director must also consider the environment, human rights, public health and safety, dignity of employees or the welfare of the communities in which the corporation operates.
“The modern corporation is the only institution that the law directs to go forth and to pursue its self-interest,” said Hinkley.
“This is not healthy for society, and ultimately, it threatens our future, and maybe our very existence.”
In its report on corporate social responsibility released last year, the federal Parliamentary Joint Committee on Corporations and Financial Services said there was no need for a change to the law as it agreed with the argument that existing laws already allowed companies “to pursue a strategy of enlightened self interest”, and it said many were already doing so.
It said the Corporations Act also permits directors to have regard for the interests of stakeholders other than shareholders.
Hinkler acknowledged that many companies were already choosing to voluntarily introduce sustainability measures, but he felt the results were too prone to being mere “greenwash” without any specific external obligations.
Although his suggestion would introduce a fundamental change to the law, he said it was a relatively simple alteration that wouldn’t require huge amounts of further expenditure to understand or ensure compliance, but would have a powerful effect.
“More regulation is no more likely to work now than it has for the last 200 years,” he said. “[But] outcome-based regulation; if you have this, you can have less and less volumes of legislation.”
He said this followed a principle mentioned by author Peter Senge, in The Fifth Discipline: “If you want to make a change, find the point of highest leverage, and make the simplest change that will have the greatest effect.”
The broadening of the accountability of directors to encompass the external costs of their activities he said would also solve the present difficulty in establishing who had responsibility for the actions of corporations that resulted in damage outside the firm.
“Great things can be accomplished by corporations, but the side effect is often great harm. When the harm becomes known, nobody is held responsible.” Everybody contributes to the problem, he says, but most individuals within a corporation are just doing their job, and usually acting “morally”, he said.
But to achieve the intended outcome, he said the change to basic duties of directors would require time to adjust, and he proposed about a 15-year phase in before the amendment became effective.
Leeora Black, managing director of the Australian Centre for Corporate Social Responsibility, said given the recent rejection of proposed changes to Corporations Law to incorporate CSR concepts — as well as the decision to not require specific sustainability reporting under the new ASX guidelines — it was unlikely there would be mandatory CSR requirements any time soon.
“It’s not required by law and it is not likely to be required by law,” she said. However, Black said companies should understand the risks of not choosing to take any action.
“Companies are capable of becoming more sustainable without any regulation or law,” she said, and many were now choosing to do this because of the mounting risks of not doing so, including environmental and social damage, and the damage to reputation of not taking these into account.
“What we are likely to see over the coming years is a lot of international agreement on what are appropriate normative frameworks and guidelines. Some management systems may get up as being common management systems.” This would include work now being finalised on an ISO standard for CSR.
But she said given the wide variations in the impact of company activities, there will always be company specific systems for CSR.
See Risk Management magazine. www.riskmanagementmagazine.com.au