New Zealand changes to the best interests duty are a prompt for Australian directors to review this core obligation, writes Louise Petschler GAICD. 

    One of the core fiduciary duties of directors is the obligation to act in good faith in the best interests of their organisation. In Australia, this fundamental duty is set out in s181 of the Corporations Act 2001 (Cth). Boards operate in an increasingly complex environment and directors’ decisions can have a significant effect on a range of stakeholders beyond shareholders.

    For directors of New Zealand companies, these issues are in focus due to a relatively contentious private members Bill that recently passed the NZ parliament. The change adds a new subsection to the NZ Companies Act 1993 (subsection 131) to expressly state that directors “may consider matters other than the maximisation of profit (for example, environmental, social and governance matters)”.

    The Companies (Directors Duties) Amendment Bill 2021 initially included a list of five non-exhaustive ESG factors that directors could consider in decision-making, including “the principles of Te Tiriti (the Treaty of Waitangi), environmental impacts, good ethical behaviour, being a good employer and the interests of the wider community”. The list was removed in the final amendment.

    Initially introduced in 2021, the Bill gained traction after being drawn from the legislative ballot and supported by a government majority in the parliament. This was despite criticism from a range of stakeholders. Those opposing argued that the amendment was unnecessary given that prudent directors will give consideration to ESG-related matters when determining the best interests of the company. Others argued that the change did not go far enough and sought wording that directors “must” rather than “may” take ESG considerations into account.

    It is unclear at this stage whether the amendment to the NZ duty will have a real-world impact on directors’ decision-making or create future litigation risk.

    Importantly, Australian law already provides significant and appropriate discretion to directors in determining the best interests of the company, including the consideration of stakeholder interests.

    The AICD recently commissioned a landmark legal opinion by Bret Walker SC and Gerald Ng MAICD examining this duty under Australian law. The opinion confirms that Australian directors have considerable discretion in determining the best interests of the company. While shareholders’ interests are central, the opinion notes that stakeholder interests (including those of employees, customers, the environment, Traditional Owners and the broader community) are legitimate concerns of company directors, tied back to the long-term interests of the company, including avoiding reputational harm.

    The AICD has issued a practice statement for Australian directors to support members, emphasising that:

    • While shareholders’/members’ interests are central, directors can, and should, consider stakeholder interests. Doing so is often necessary to protect reputation and sustainability.
    • Directors should take a long-term view of where the company’s interests lie.

    FY24 Regulatory Priorities

    The AICD advocates for fair, fit-for-purpose and modern regulations that support diligent directors in governing for growth. Our FY24 reform priorities include:

    • Targeted cyber policies that lift national resilience
    • Balanced policy setting that supports high- quality market disclosures and practice
    • NFP regulation that promotes financial sustainability
    • Coordinated and proportionate regulation

    Modernising registers reform ceases

    Last month the government hit “stop” on the Modernising Business Registers (MBR) program after an independent review citing budget blow- outs and delays. Director IDs — an early step linked to the registers program — will remain in place.

    The MBR program was intended to create a flexible and technology-neutral business registry regime. Thirty Australian Securities and Investments Commission (ASIC) registers, including 2.6 million company records, were to move under a new function of the Australian Taxation Office (ATO), the Australian Business Registry Services (ABRS).

    An independent review by Damon Rees PSM found that the program was set to cost more than five times the initial budget of $480m and would take five years longer than estimated to complete. Five options were put to the government, including narrowing scope while still transferring functions, or keeping registers with ASIC with some targeted uplifts.

    Assistant Treasurer Stephen Jones said the government would “prioritise the stabilisation of existing registers” with business-as-usual registry operations to continue under ASIC. The government will give consideration to recommended uplift investments over coming months.

    While the AICD respects the government’s decision, it is critical that the long-standing issue of access to director personal information on registries be resolved under the new approach. Director IDs provide a clear opportunity to solve this serious concern for the AICD and our members.

    Australian directors currently have far more of their personal information available on the ASIC register than directors in other jurisdictions. This creates unacceptable privacy and cyber risks, and this information should be removed or de-identified as a priority. Linking director IDs — which verify directors and help combat phoenixing — to the companies register would allow de-identification of director personal information.

    This has been a key concern for the AICD in our engagement with Treasury and the ATO on the modernising registries program. It is vital that resolving this issue continues as a priority. We have raised this as an urgent issue with government and will keep members updated.

    Importantly, while the registry transfer is stopped, director IDs will continue to operate. Over 2.3 million director IDs have now been issued. They will remain a requirement for eligible officers under the Corporations Act 2001 (Cth) and the CATSI Act 2006 (Cth).

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    AICD Canberra delegation

    The AICD was pleased to host a series of meetings with key Commonwealth ministers, shadow ministers and senior public servants in September. Led by AICD managing director and CEO Mark Rigotti MAICD, the delegation was attended by experienced directors from the listed company, private company, NFP and public sectors.

    The meetings were an opportunity for key political decision-makers to hear from experienced directors about issues that are top of mind for boards, as well as AICD policy priorities. Thank you to the directors who made time to share their insights and expertise.

    The AICD has an active program of policy and government engagement by our policy and public affairs teams. Our approach is non-partisan and evidence-based, driven by the AICD’s mission “to be the independent and trusted voice of governance, building the capability of a community of leaders for the benefit of society”.

    This article first appeared under the headline 'Fundamental as Anything’ in the October 2023 issue of Company Director magazine.

    Practice resources — supporting good governance

    Examples of the AICD’s contemporary governance practice resources for members:

    Cyber Security Governance Principles 

    • Developed by the AICD and the Cyber Security Cooperative Research Centre, these practical principles guide boards on good practice in cyber governance, including key questions and governance red flags.

    Climate Governance

    Effective Board Minutes

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