Essential Director Update – what directors need to know

The AICD’s annual Essential Director Update (EDU) was launched in Canberra on 26 September with themes ranging from what’s in store for the future, to generative AI, data, human and social capital, greenwashing, climate reporting and stakeholders in the business community. Register now for an EDU event in your local area.

When the world is moving so quickly, what directors knew yesterday doesn't necessarily stand them in good stead for what they’re dealing with now, much less what they will need to deal with in the future. In his introduction to the first of this year’s Essential Director Updates (EDU), Tony Fraser MAICD, AICD ACT state manager, said this is emerging as a major concern for AICD members — and one this series of events aims to address.

Across eight capital cities and seven regional centres, members attending the EDU will have a chance to gain insights and information to help them to stay at the forefront of governance activities.

In Canberra, the first presenter was Jacqueline Chow GAICD, a non-executive director of Boral Ltd, Charter Hall Group, Coles Group and NIB Holdings Ltd. She spoke about three forms of capital currently top of mind for directors — data capital, human capital and social capital.

The second presenter, Bruce Cowley FAICD, is an experienced director who worked as a corporate lawyer at MinterEllison for almost 40 years. His topics included greenwashing, climate reporting and stakeholders in the business community.

Data capital

Jaqueline Chow made the point that data now sits alongside financial, human, social and natural capital as central to economic value creation.

“As company directors, we have a duty not only to protect the downside of losing that data, but also the duty to harness the data for the upside of innovation and growth,” she said. “The governance of data capital is central to how organisations approach generative AI, cybersecurity and the associated data privacy protections. These areas are interrelated, and they continually rank as a top priority in Australian boardrooms.”

Chow said that while there’s evidence generative AI has increased productivity by between 40–70 per cent, it has also introduced new harms that, as yet, are unregulated in Australia. She suggested five safeguards boards can put in place around the application of AI, which also enable productivity, innovation and growth.

1. Be clear about who is the executive sponsor.
2. Create an AI strategy that defines both the economic value creation and stakeholder expectations.
3. Establish the governance systems, the privacy, the data management, the reporting, the ways of working.
4. Invest in AI capacity and capability to coalesce and mobilise the organisation.
5. Adopt a human-centred culture around the use of AI.

Cybersecurity

Chow reiterated that if you haven’t yet experienced a cyber attack, it’s a matter of when it will happen rather than if. An organisation’s most crucial digital assets — the so-called “crown jewels” — need to be protected from theft but, at the same time, their value must be unlocked to provide customers with frictionless, responsive and personalised customer service.

“Finding that balance is going to be down to the risk appetite of your board,” she said. However, cybersecurity measures can be bafflingly technical.

“If you find yourself flummoxed by technical jargon, it’s likely the rest of the organisation is flummoxed too,” she said. “That's not conducive to building cyber resilience or effective board governance, because the behavioural risk controls of our own employees are just as critical as the technology risk controls. To that end, I strongly recommend you tap into the Cyber Security Governance Principles developed by the Cybersecurity Cooperative Research Centre, in collaboration with the AICD. This lists really practical tips for us as directors with contemporary and relevant case studies.”

Social capital

Chow believes directors are feeling a growing expectation for their organisation to take a leadership stance on social, political or cultural issues.

“You may personally have conviction on a social issue, but we can’t use our organisation as a platform to externalise our individual views,” she said.

The past few decades have seen an increasing focus on the role of stakeholders in the governance of Australian organisations of all sizes. This reflects changing community expectations — and, as Chow pointed out, raises the central question of how directors should balance and prioritise the interests of non-shareholder stakeholders to maximise the long-term value of the company. How do directors keep cool heads about often emotionally charged social and cultural issues so as to apply an effective governance oversight?

She presented four considerations.

1. If you take a position, make sure the issue is core to business operations.
2. Ensure management has a clear stakeholder strategy and engagement plan in place so a topical social issue can be prosecuted against that existing strategy and plan.
3. Stay well educated on the topic.
4. Apply a risk lens to determine whether or not you should take a position, then have risk mitigation measures in place.

“The AICD’s Elevating stakeholder voices to the board provides comprehensive guidance on these issues of stakeholder governance,” she said.

Greenwashing

Speaking from Brisbane, Bruce Cowley began by addressing the problem of greenwashing.

“Both ASIC (Australian Securities and Investments Commission) and the ACCC (Australian Competition and Consumer Commission) have significantly increased their regulatory focus on greenwashing, including ASIC’s high-profile actions against a number of prominent superannuation trustees,” he said.

"Although there’s no new law prohibiting what is really little more than the offence of misleading and deceptive conduct, the issue has taken on some prominence because, in the current environment, there’s considerable pressure on companies to promote their products and services as being climate-friendly.”

He added that statements with the potential to expose the company to prosecution for greenwashing can appear everywhere — from ASX announcements and annual reports to interviews, websites, social media and advertising. Making a commitment to achieve a net zero carbon position in accordance with the Paris protocols can also introduce risk because, by law, a company must have reasonable grounds for making any forward-looking statements.

“Directors do need to take care about committing companies to net zero unless they have a clear pathway and a reasonable basis for that ambition,” said Cowley. “While it’s true that no directors have so far been prosecuted for greenwashing, there has been a plethora of recent case law in which directors were held liable by the courts for breaching their duty of care and diligence, or allowing their companies to act in a way which resulted in a breach of the Corporations Act2001 or some other law. That being so, it’s not unreasonable to assume that, if directors of a company make misleading statements about climate change in breach of the law, they may in the not-too-distant future be found to have breached their duty of care.”

Climate reporting

Cowley described mandatory climate reporting as a major issue boards will have to confront in the very near future.

“Joe Longo, the ASIC chair, has referred to the proposed changes as a generational change,” he said. “And at the AICD Climate Governance Forum earlier this year, David Thodey AO FAICD, chair of Xero, emphasised the need for the board to actively engage with management on climate reporting and not just delegate responsibility.”

When they’re adopted, the new standards will require companies to report all material information about sustainability-related and climate-related risks and opportunities.

“There’s going to be quite a lot for boards to do to ensure that the necessary tasks are complied with in a timely way,” said Cowley. “Furthermore, most of us will need to undertake a degree of upskilling in order to do this effectively.”

Interests of stakeholders

Under Section 181 of the Corporations Act 2001, directors have a duty to act in the best interest of the company in good faith and for proper purpose.

“Historically, that has broadly meant acting in the best interests of shareholders, unless the company was insolvent or nearing insolvency,” said Cowley. “The people we refer to today as stakeholders didn’t get much of a look-in.”

However, in his report on the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, Commissioner Kenneth Hayne AC KC suggested directors consider stakeholder interest in the decision-making process because, over the longer term, the interests of shareholders and stakeholders tend to converge.

“To be clear, this is not in any way suggesting that directors owe any duty to stakeholders, but rather that, in determining what’s in the best interests of the company, it’s prudent for them to take stakeholder interests into account,” said Cowley.

Employees, customers, suppliers, creditors, regulators and other stakeholders are bound to have divergent interests.

“The real challenge is to try to balance all the competing stakeholder interests to reach a decision that will ensure long-term sustainability and prosperity for the company and its shareholders,” said Cowley. “The AICD has produced a very helpful practice statement — Directors’ “best interests” duty in practice — which makes a good starting point.”