Should the law step in to provide clarity for directors in their consideration of broader stakeholder concerns? Recent developments across the Tasman may give some indication of future direction, writes Professor Pamela Hanrahan.

    Every board decision has the potential to impact on a range of corporate stakeholders, including the company’s shareholders. Directors’ fundamental fiduciary duty to act in the interests of the company includes balancing different stakeholders’ concerns in determining where those interests lie.

    All stakeholders’ interests matter in this equation. The final report of the Victorian Royal Commission into Crown Resorts, released in October 2021, commented that since the 1980s, “the objective of corporate governance has moved away from the narrow interests of shareholders and financiers to those of the stakeholder. From this perspective, corporate governance is concerned not only with the relationship between the corporation and its shareholders and financiers, but also its relationship with other stakeholders. The stakeholders are those groups without whose support the corporation would cease to exist. They include employees, customers, suppliers, banks and, where appropriate, government and governmental agencies.”

    Commissioner Ray Finkelstein AO QC noted that many civil society organisations now contend that “a corporation (and, therefore, corporate governance) should also have regard to the role the corporation plays in society at large”. He said that “many nations have adopted this broad approach to corporate governance”, referring to the G20/OECD Principles of Corporate Governance (2017). The OECD principles include that a corporate governance framework should “recognise the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders in creating wealth, jobs and sustainable, financially sound enterprises”.

    Remaining relevant

    This raises the question whether corporate governance and corporate law are aligned on this point. In July 2021, the Institute of Directors in New Zealand published a discussion paper arguing the law should provide greater clarity for directors “in relation to which stakeholders they can/should legitimately have regard to, to what extent, and whether they can/should give priority to others over the stated preferences of shareholders”. The paper concluded that “to stay relevant and at the forefront of governance globally, it is now a timely opportunity for the government to review the framework for directors’ duties” in the Companies Act 1993 (NZ) in this light. A bill currently before NZ parliament would explicitly allow (not require) stakeholders to be considered by directors in discharging their duty.

    Since 2006, the company law of the UK has provided that a director “must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to:

    (a) the likely consequences of any decision in the long term; (b) the interests of the company’s employees; (c) the need to foster the company’s business relationships with suppliers, customers and others; (d) the impact of the company’s operations on the community and the environment; (e) the desirability of the company maintaining a reputation for high standards of business conduct; and (f) the need to act fairly as between members of the company”.

    Australian directors have a duty to exercise their powers and discharge their duties in good faith in the best interests of the company. As the High Court said in Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968), the directors are those “in whom are vested the right and the duty of deciding where the company’s interests lie and how they are to be served”.

    Shareholder concerns

    Ordinarily, a solvent company’s interests coincide with those of its shareholders — but this is not the same as saying that directors must act in the best interests of shareholders. As Justice Owen said in Bell Group Ltd (inliq) v Westpac Banking Corp (No 9) (2008), equating the corporation’s interests with those of the shareholders “ignores the range of other interests that might... legitimately be considered”. The directors’ duty “may (and usually will) include a consideration of the interests of shareholders. But it does not follow that in determining the content of the duty to act in the interests of the company, the concerns of shareholders are the only ones to which attention need be directed or that the legitimate interests of other groups can safely be ignored”.

    Australian law gives boards plenty of room to balance the interests of all stakeholders, including shareholders, in deciding where a solvent company’s interests lie. In 2006, the Corporations and Markets Advisory Committee (CAMAC) inquiry into corporate social responsibility concluded directors “have considerable discretion concerning the interests they may take into account in corporate decision-making, provided their purpose is to act in the interests of the company as a whole, interpreted as the financial well-being of the shareholders as a general body”.

    CAMAC went on to say “the environmental and social matters referred to in the debate on corporate social responsibility are really factors that directors should already be taking into account in determining what is in the best interests of their corporation in its particular circumstances”. It said the “common law and statutory requirements on directors and others to act in the interests of their companies... are sufficiently broad to enable corporate decision-makers to take into account the environmental and other social impacts of their decisions, including changes in societal expectations about the role of companies and how they should conduct their affairs”.

    Often, what is good for other stakeholders also benefits shareholders. In the final report of the banking Royal Commission in 2019, Commissioner Kenneth Hayne AC QC observed “the longer the period of reference, the more likely it is that the interests of shareholders, customers, employees and all associated with any corporation will be seen as converging on the corporation’s continued long-term financial advantage. And long-term financial advantage will more likely follow if the entity conducts its business according to proper standards, treats its employees well and seeks to provide financial results to shareholders that, in the long run, are better than other investments of broadly similar risk”. On this view, if ESG matters are being handled in a way inimical to shareholder interests, they’re probably being handled poorly.

    But allowing boards to consider the broader impact of corporate actions is not the same as requiring them to do so. As Professor Paul Redmond argued in a submission to the 2005 Parliamentary Joint Committee on Corporations and Financial Services Inquiry into corporate responsibility, “the goals of corporate social responsibility, as the voluntary assumption of higher standards of corporate conduct, are laudable, but are no substitute for legal regulation to protect vulnerable interests or achieve wider social goals or legal norms to express or shape corporate purpose”.

    The NZ discussion paper puts the question whether directors should be required to consider broader stakeholder interests — and protected if they do so — squarely on the table.

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