Rosemary Sainty outlines some global initiatives aimed at creating long-term value and explains why Australian directors should jump on board.
A global initiativeÂ
Rosemary Sainty outlines some global initiatives aimed at creating long-term value and explains why Australian directors should jump on board.
Governance for boards of directors is increasingly challenging. Directors must navigate a complex, interconnected business environment â whether in direct operations or as part of globally connected supply chains.
At the same time, they are under pressure to maximise shareholder value, which often leads to a short-term focus and possible negative impacts on a broader, yet critical, stakeholder group â customers, employees, the community, the environment, and investors interested in the companyâs long-term performance.
Those that get it wrong face intensifying media scrutiny in mainstream and social media â as evident in high-profile scandals in recent times around tax minimisation, climate change issues, human rights abuses in supply chains, and ongoing ethical issues in financial services.
Regulators are now calling on corporate Australia to improve culture and address the root cause of bad behaviour. This comes in the wake of a series of banking scandals, highlighting a gap between the banksâ claims to be customer-focused and their actual conduct.
Underpinning these issues are embedded beliefs and practices driven by short-term incentives, a drive for high yields and a mistaken belief that a directorâs first duty is to its shareholders (shareholder primacy). Such beliefs and practices are not limited to the Australian business environment, nor to banking and financial services.
International Momentum
In response, international collaborative efforts linked to Australia are addressing how corporate governance and the fiduciary duties of boards of directors should be positioned in the 21st century.
A new generation of initiatives is emerging, bringing the fields of corporate governance, corporate sustainability and responsible investment together. Coalitions represent stakeholders from the United Nations (UN) and transnational agencies, business and industry bodies, professional services, non-governmental organisations (NGOs), the investment community and regulators.
These coalitions are working to raise awareness, build momentum and engage senior levels in the field of corporate governance on the purpose of the corporation and sustainable development.
Particular attention is being focused on:
- Interpretations of the fiduciary duties of investors and boards, for example, the Fiduciary Duty in the 21st Century report by the UN Environment Program (UNEP), Principles of Responsible Investment (PRI) and the UN Global Compact; and the Purpose of the Corporation Project by the Cass Business School and the Frank Bold law firm.
- Re-interpretations of materiality and a shift towards a long-term approach to shareholder value creation, for example, the Integrated Reporting Framework by the International Integrated Reporting Council (IIRC); and Focusing Capital on the Long Term Initiative by McKinsey & Co and Canada Pension Plan.
- An examination of the regulatory and policy environments that enable current investment and capital market practices such as the UNEPâs Inquiry into the Design of a Sustainable Financial System and the Sustainable Stock Exchange Initiative
Although interests differ among business, investor, NGO and other participants, there is a discernible shift underway towards board engagement, and aligning the practical tailoring of governance structures around a longer-term approach to value creation for the corporation, and a more defined range of its stakeholders.
In so doing, the responsible investment and corporate sustainability movements hope to align their interests in environment, social and governance (ESG) with the corporate interests of business sustainability.
Collaborative Guidance
An ambitious âstatement campaignâ is currently being led by Harvard Business Schoolâs Professor Robert Eccles and Tim Youmans, in collaboration with the American Bar Associationâs Task Force on Sustainable Development and UN Global Compact Board Program, in coordination with the PRI and UNEP-Finance Initiative.
The purpose of the campaign is to encourage corporate boards to issue an annual âstatement of significant audiences and materialityâ in order to drive greater transparency, accountability, and a deeper engagement at board level of the material issues affecting the long-term interests of the corporation. The statement is a one-page, concise document issued annually by the board and becomes the foundation for the companyâs corporate reporting.
In support of the statement campaign, careful legal analyses of the fiduciary duty of corporate boards across G20 countries (including Australia) have been provided as legal memos from each jurisdiction. Publicly available on the American Bar Associationâs website, these form a valuable international database of legal and regulatory frameworks.
Early findings by Eccles and Youmans reveal that: âIn every jurisdiction across the world without exception, the board of directorsâ primary duty is to the corporation itself as a separate legal person. In some jurisdictions, such as the US, there is âprimacy dualityâ in that directorsâ duty to the separate corporate person is equal to directorsâ duty to shareholders. In no jurisdiction is a duty to shareholders a higher duty than to the corporate personâ.
Responsibilities to broader stakeholder interests are variable, from specifically required to passively allowed.
These findings directly challenge the myth of shareholder primacy and allow for a broader, more considered deliberation of material issues by the board.
Here the statement campaign is designed to encourage boards to identify and prioritise their most significant stakeholders (including short- and long-term investors), operating timeframes and report audiences as a basis for its materiality determinations.
Balancing short-, medium- and long-term interests of its âsignificant audiencesâ requires careful consideration, presenting boards with challenges and trade-offs.
A statement is then produced as a disclosure on how the board, looking after the interests of the corporation as a separate legal person, articulates the companyâs role in society as presented in its annual statement of significant audiences and materiality.
Of critical importance for the outcomes of the campaign is the engagement of the investor community in the boardâs materiality determinations, and the support of investor representative bodies such as the PRI and the UNEP-finance initiative.
With a template already under development, an early example of the statement has been published by the board of Swedish company Atlas Copco in its latest 2015 annual report.
A View To The Future
In Australia, many boards struggle with an increasingly crowded agenda, dominated by risk and compliance issues and a narrow interpretation of fiduciary duty, leaving little time for strategy or governance decision-making.
Short-term incentives coupled with a risk-averse environment and fear of directorsâ personal liability are pervasive. These work against the calls by Australian business leaders for innovation and long-term value creation, and regulatorsâ calls for improved ethical corporate culture.
The âstatement campaignâ and related initiatives signal both a global shift and an important opportunity in the governance of corporations, making it incumbent on Australian boards of directors to engage in and contribute to these deliberations.
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