hsf

By Timothy Stutt and Charles Pitney

Building off the AICD’s recent guide, Elevating Stakeholder Voices to the Board, the AICD and Herbert Smith Freehills recently undertook a research project analysing how broader stakeholder interests (non-shareholder) are reflected in board and board committee charters across the ASX 200. The results were surprising, with less than half of ASX 200 companies directly acknowledging broader stakeholder interests in their board and board committee charters. Significant divergence was also identified between companies of different market capitalisations across different ESG issues, such as climate change and human rights, and across different stakeholder groups (employees, suppliers, customers and the community).

Despite recognition that understanding and being responsive to broader stakeholder interests is key to managing ESG and reputational risk exposures, these drivers aren’t yet consistently reflected in the formal, documented accountabilities of ASX 200 boards.

Driving accountability

Board and board committee charters provide an important roadmap to accountabilities, as they oversee the business, its management and governance practices. They detail responsibilities around setting corporate values and strategic objectives, approving corporate reports and policies, and overseeing management.

Stakeholder governance has emerged as a key area of focus for boards needing to manage broader ESG and reputational risks. Considering the interests and perspectives of stakeholders in decision-making is fundamental to delivering corporate objectives, developing a company’s culture and creating shareholder value. Disregarding such perspectives may expose companies to significant legal and reputational risks.

The AICD and HSF reviewed ASX 200 board and board committee charters (as at end FY21) to identify the extent to which stakeholder interests are reflected in boards’ formal accountabilities. Areas of investigation included:

  • Acknowledgement of stakeholder groups and interests — including customers, suppliers, employees and communities
  • Accountability for considering ESG impact areas — including environmental impacts generally) climate change, social impact, modern slavery and human rights

Building off the AICD’s recent guide, Elevating Stakeholder Voices to the Board, the AICD and Herbert Smith Freehills recently undertook a research project analysing how broader stakeholder interests (non-shareholder) are reflected in board and board committee charters across the ASX 200. The results were surprising, with less than half of ASX 200 companies directly acknowledging broader stakeholder interests in their board and board committee charters. Significant divergence was also identified between companies of different market capitalisations across different ESG issues, such as climate change and human rights, and across different stakeholder groups (employees, suppliers, customers and the community).

Despite recognition that understanding and being responsive to broader stakeholder interests is key to managing ESG and reputational risk exposures, these drivers aren’t yet consistently reflected in the formal, documented accountabilities of ASX 200 boards.

Driving accountability

Board and board committee charters provide an important roadmap to accountabilities, as they oversee the business, its management and governance practices. They detail responsibilities around setting corporate values and strategic objectives, approving corporate reports and policies, and overseeing management.

Stakeholder governance has emerged as a key area of focus for boards needing to manage broader ESG and reputational risks. Considering the interests and perspectives of stakeholders in decision-making is fundamental to delivering corporate objectives, developing a company’s culture and creating shareholder value. Disregarding such perspectives may expose companies to significant legal and reputational risks.

The AICD and HSF reviewed ASX 200 board and board committee charters (as at end FY21) to identify the extent to which stakeholder interests are reflected in boards’ formal accountabilities. Areas of investigation included:

  • Acknowledgement of stakeholder groups and interests — including customers, suppliers, employees and communities
  • Accountability for considering ESG impact areas — including environmental impacts generally) climate change, social impact, modern slavery and human rights

This trend was present across all the key “factors” that were surveyed.

Notwithstanding the requirement that boards approve reporting entities’ modern slavery statements under the Modern Slavery Act 2018 (Cth), modern slavery hasn’t filtered into the documented responsibilities of boards — with modern slavery infrequently referenced in board charters (four per cent of ASX 200 companies).

Surprisingly, consideration of ESG factors was even lower at board committee level. This finding was notable given the role typically played by board committees in synthesising and recommending information to the board.

As set out in the Elevating Stakeholder Voices to the Board report, delegating certain functions to board or advisory committees can enable directors to understand the issues in greater detail. The report found that most commonly, where consideration of ESG factors were delegated to board committees, they tended to appear in charters of committees with audit and/ or risk functions and sustainability functions.

Adaptation of committee structures for emerging areas

There are no specific recommendations on ASX- listed companies to maintain committees with sustainability and ESG functions or innovation and technology related functions. However, these types of committees may be beneficial in addressing emerging risks and opportunities, and obtaining stakeholder input from a broader range of sources. Accordingly, the research also reviewed the extent to which these emerging areas of opportunity and risk were impacting committee structures.

ESG and sustainability committees

Sustainability and ESG committees are relatively common in the ASX 200, with roughly a third of ASX 200 companies and 40 per cent of ASX 100 companies maintaining a committee of this kind.

The rate of sustainability and ESG committees within the ASX 20 and ASX 50 cohorts are slightly lower than the ASX 100. However, looking at board charters across those companies there are still higher levels of incidence for sustainability- related topics being considered at board level — overall, the topics are still being actively considered.

Analysing the board charters for the ASX 100–200 group, it appears there is less focus on sustainability and ESG in general, with fewer committees and less sustainability-related references in charters.

Innovation and technology

Innovation and technology committees are fairly uncommon across the ASX 200 at present. At this stage, only three of the ASX 20 (15 per cent) and 15 of the ASX 200 (eight per cent) maintain innovation and technology committees. Despite this, in the longer term, we anticipate this will become an increasing area of focus for boards given the rise of data security threats and the need for technological innovation to ensure competitiveness and operational sustainability, including in addressing ESG risks.

Room for improvement

While stakeholder interests and ESG impact areas are formally reflected in some board and board committee charters across the ASX 200, practices are inconsistent and don’t suggest these governance documents are being used to drive accountability on these issues.

The research has identified several areas for improvement with respect to:

• Acknowledging stakeholder groups and interests in board charters, recognising that the board is the principal decision-making body for each company • More regularly incorporating ESG impact areas into board committees’ accountabilities, having regard to their role in supporting the board with analysis and recommendations on key issues for decision — if not exercising delegated decision- making authority themselves.

To an extent, the findings of the research may reflect that companies are still grappling with the rapidly evolving landscape for ESG regulation and accountability, and developing their governance framework to be more responsive to these issues. However, given increasing internal and external expectations across the spectrum of ESG risks, it seems prudent for boards to review and update their core governance documents with a broader set of stakeholders and internal and external business impacts in mind.

Timothy Stutt is a partner at Herbert Smith Freehills. Charles Pitney is a solicitor in the corporate practice of Herbert Smith Freehills.