AICD has issued an important new legal opinion and governance practice statement on directors’ duties, writes Louise Petschler GAICD. ESG disclosures and NFP governance are also in review.
Directors’ duties: guidance on “best interests” duty
The AICD has released important new guidance on the obligation of directors to act in the best interests of the organisations that they govern (see Best Interests Duty feature on page 16).
As part of AICD’s Governance & Policy Leadership focus, we are committed to supporting members in dealing with emerging and current governance issues. Along with our policy work on governance law reform and regulation, this is an important commitment flowing from the AICD’s Forward Governance Agenda consultation in 2019.
AICD’s recent contemporary practice reports cover topics such as boardroom ethics, governance of culture, effective virtual AGMs and quality board minutes (see Practice resources breakout). At the heart all of these issues are directors’ duties, and the evolving shareholder/ member, stakeholder and community expectations of Australian boards and directors.
As a fiduciary, the overriding duty of a director is the obligation of undivided loyalty. The core statutory duties of directors are contained in sections 180–83 of the Corporations Act 2001. Australian directors must exercise their powers and discharge their duties with care and diligence, in good faith in the best interests of the corporation, and for a proper purpose.
The question of how (and how well) directors discharge their duty to act in good faith in the best interests of their corporation has been raised in recent governance inquiries. This has prompted debate about legal interpretation of the duty, the time horizon over which best interests should be assessed, and stakeholder considerations relevant to the judgement directors must apply.
To provide greater clarity the AICD commissioned barristers Bret Walker AO SC and Gerald Ng MAICD to examine interpretations of the best interests duty by Australian courts. We have developed a new AICD Practice Statement to support director understanding.
Acting in the best interests of the company means directors should focus on long-term sustainable value creation, not short-term profit maximisation. While the interests of shareholders and members are central — a guiding compass and key to application by the courts — directors can and should consider stakeholder impacts in applying their judgement and discharging their duties. And as our interviews with experienced directors accompanying the statement explain, this is a critical area of judgement and focus for all Australian directors.
Over coming months, the AICD will be engaging with legal experts and directors on the Walker-Ng Opinion and providing further insights for members. The practice statement and Walker-Ng opinion are supported by insights from experienced directors on how they approach these judgement calls, available on the AICD website (aicd.com.au).
Members can access the AICD’s Director Tool: General Duties of Directors for an overview of all core duties, with the Practice Statement providing a “deep dive” on best interests.
ESG disclosures in listed companies
A recent review by KPMG provides fresh insights into the quality and standards of disclosure of Australia’s listed companies. KPMG’s review considered the adoption of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (fourth edition, taking effect from 1 July 2020). The reports, released in June, are based on a sample of almost 600 listed companies across the ASX 200, ASX 201–300 and ASX 501.
The KPMG review found a high level of adoption of the ASX Principles and Recommendations, with more than 95 per cent of companies in the sample adhering to the revised “if not, why not” disclosure rules. On diversity and ESG risks, however, the results suggest improvement is needed.
Diversity disclosures are strong among the largest listed entities, but less complete in smaller capitalised companies. While the number of women on boards has increased, figures for senior roles remain low and static. On ESG, more than a quarter of the sample companies reported that they did not face any material environmental or social risks.
KPMG has questioned these disclosures, noting that its sector analysis shows some “out of step” with other companies in the same industry reporting material risks. “While two-thirds reported material exposure to environmental and social risks, others need to reconsider their assessments in the current climate and look at approaches taken by peers,” the review said.
Separately, the AICD has been working with stakeholders to comment on draft international standards on sustainability, climate and ESG reporting. This global push and framework will be a key issue for boards and directors, with climate reporting a high-priority area for investors.
NFP Governance Study — share your views
Governance of NFP organisations remains in the community and policy spotlight. NFPs in the care sector, supporting vulnerable people and providing care to the community, face continued demands and stresses from COVID-19 and challenges on quality of care and sector standards.
The AICD is seeking NFP director views as part of our annual NFP Governance and Performance Study survey, which opens on 15 August.
We encourage all NFP members to share their insights to inform this annual snapshot of governance performance and current issues across Australia’s diverse NFP and charities sector.
The AICD also recently announced 200 recipients of our 2022 NFP Scholarship Program. This provides access for directors and aspiring directors of small charities and NFPs across Australia to AICD’s Governance Foundations for Not-for-Profit Directors.
Since 2017, the AICD has delivered more than 900 scholarships to NFP sector leaders to enable them to access governance education in order to build capabilities and govern their organisations more effectively.
Practice resources — supporting good governance
Examples of the AICD’s contemporary governance practice resources for members:
Effective Board Minutes
- AICD joint statement with the Governance Institute draws on lessons from the Financial Services Commission
NFP Governance Principles
Ethics in the Boardroom
Director duties and liability
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