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- Treating the law as a ceiling rather than a baseline exposes boards to severe reputational damage and value destruction.
- Modern governance requires directors to actively balance short-term shareholder returns with the ethical treatment of employees, supply chains and the broader community.
- Because what is technically legal today may become heavily regulated tomorrow, boards must anchor their decision making in clear purpose and core values, rather than relying solely on current legislation.
Increasingly, boards are being judged by something more difficult than whether they exercised sound ethical judgement when the law alone did not provide the answer.
For ASX-listed Australian Ethical, investment has never been about mere legal compliance. Its approach actively directs capital toward sectors shaping a sustainable future, while restricting investments in fossil fuels, gambling, tobacco, armaments, and human rights violations.
“Boards should be asking: ‘what is ethical?’ in conjunction with ‘what is legal?’” says Steve Gibbs, chair and non-executive director.
“Our ethical charter guides not just how we invest, but how we run the business. It consists of 23 principles, all pointing towards the same purpose – investing for a better world, where money is a force for good.”
Bank Australia’s responsible banking policy means it does not lend to or invest in fossil fuels, the arms industry, gambling, tobacco or live animal exports – instead prioritising clean energy, affordable housing, not-for-profits and sustainable investments.
At global giant IKEA, the company has formalised its commitment to its Responsible Wage Practices framework that focuses on a living wage not a minimum one, says Fiona David GAICD, CEO and Founder of Fair Futures, a consultancy advising boards and executives on modern slavery governance and the just transition to net zero.
What’s good for people is good for business, she adds. “The global quit rate for IKEA operational staff dropped from 22.4 per cent in August 2022, to 17.5 per cent in April 2024.”
David, who is also deputy chair of Australia’s climate systems modelling capability ACCESS-NRI, and director of the Coolaroo Foundation, cautions: “Directors are the custodians of the company’s values and culture, and nothing breaks trust faster than behaviours that show a gap between your values on paper and your actions in the real world. In this regard, the gap between ‘minimum wage’ and ‘living wage’ really comes into sharp focus.”
When legal compliance isn’t enough
Recent governance failures have highlighted the risks of focusing too narrowly on legal permissibility.
The Banking Royal Commission’s “fees for no service” scandal became a defining example of legal compliance thinking overriding ethical decision making. Banks and wealth-management businesses charged customers ongoing advice fees, even when no financial advice was provided.
“The commission confirmed that the ‘best interests’ of the company include obligations to act responsibly and ethically towards stakeholders,” says David. “Stakeholders certainly include shareholders, but it potentially also includes your employees, customers, suppliers and the communities you operate in.”
Facebook has repeatedly faced criticism for prioritising commercial advantage over ethical considerations. The Cambridge Analytica scandal revealed how data from millions of users – including many who had never consented – was harvested through Facebook’s platform. Meanwhile, Facebook’s own “emotional contagion” experiment manipulated nearly 700,000 users’ news feeds for research purposes without their explicit informed consent.
Australian casinos have likewise faced major scandals involving both legal and ethical breaches. The Federal Court found former Star Entertainment executives, for example, had breached their legal duties by failing to appropriately address, escalate and oversee money laundering and financial crime risks.
Simon O'Connor GAICD, director of the University of Melbourne’s Sustainable Finance Hub and non-executive director of Bank Australia, says, “There are unfortunately many recent examples in the Australian and international contexts of companies focused too narrowly on maximising profits and pushing all other perceived non-core issues to the side, resulting in massive destruction of value, legal consequences, reputation damage, fines and economic losses.”
To avoid this, he believes directors need to be adept at grappling with complexity and trade-offs, including common tensions with short term versus long term, slow paybacks versus fast paybacks, as well as those issues immediately impacting the income statement and those that, if poorly managed, can translate to future negative impacts on the income statement.
Not “can we?” but “should we?”
In Australia today, most governance frameworks set the minimum expectation, says David.
“It’s up to directors to understand these frameworks in the context of changing expectations, including what ‘best interests’ of a company really means.
“For example, Australian laws on modern slavery are 10 years out of date. If you take a strict view of what these laws permit, even the Anti-Slavery Commissioner says compliance with these laws is ‘voluntary’.
“Yet I’d challenge any company director to come up with a scenario where continuing to rely on criminally exploited and abused labour is in the best interests of the company. So increasingly, the right question to ask is not, ‘can we do it?’ but ‘should we do it?’”
Gibbs agrees. “Rather than waiting for regulation to resolve difficult questions, boards can anchor their decision making to a higher standard of their own making.
“For instance, it’s not illegal for companies to expand fossil fuel production. It’s also not illegal for human rights violations to exist in supply chains. But relying on what’s legal isn’t the same as doing what’s right – and it’s not leading.”
One recent win, as part of Australian Ethical’s strategic stewardship efforts, has been shifting how the healthcare system approaches animal research from the ground up, Gibbs reveals.
“This has resulted in the development of an independent benchmark for universities on their practices, and support for alternatives, with three now in pilot.”
He adds that biodiversity is moving from a fringe concern to a material one, and boards that haven’t yet integrated the protection of nature into their decision making are already behind the curve.
O’Connor has this advice for directors: “What is technically legally defensible today may become illegal tomorrow. To consider law as stagnant and black-and-white is naive to the way law and policy evolves, and continually influences the operating environment within which we operate as directors.”
Questions directors need to ask
To achieve more ethically-based governance, directors need to move beyond the numbers and think about the impacts on people, as well as whether it is consistent with their organisation’s values and brand, says David.
The final test, assuming the decision becomes public, is will you feel proud of it and how it was made? “It should also be consistent with who you are and where you’re headed in the medium to long term.”
Says O’Connor, “Spending time ensuring that purpose is crystal-clear, as well as having a very precise view of who your critical stakeholders are, ensures that when any trade off-style decisions arise at the board table, there is a basis from which to make a clear-eyed choice.”
Beyond, or in addition to, maximising profits, directors should consider culture, employee engagement, trust in a brand, high-integrity dealings with customers, quality of product and service, he says.
Directors who want to take a stronger ethical stance should feel able to acknowledge the genuine complexity of ethical decision making, says Gibbs.
“Honesty about difficult questions is a strength, not a vulnerability. Frame ethics and performance as the same system. Directors who can demonstrate that alignment, rather than treating ethics as a cost to be managed, will find it far easier to hold a strong position when pressure builds.
“Ground your stance in process, not just conviction. Evidence-based, clearly reasoned positions are far more defensible than those driven by instinct alone.”
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