A Submission to Corporations and Markets Advisory Committee in Response to the Corporate

A SUBMISSION TO THE CORPORATIONS AND MARKETS ADVISORY COMMITTEE IN RESPONSE TO THE CORPORATE SOCIAL RESPONSIBILITY DISCUSSION PAPER

Corporate Law & Accountability Research Group

Department of Business Law and Taxation

Faculty of Business and Economics, MonashUniversity

This submission was prepared by:

Helen Anderson (Senior Lecturer)
Paula Darvas (Lecturer)
Anthony Forsyth (Senior Lecturer)
Wayne Gumley (Senior Lecturer)
Michelle Welsh (Senior Lecturer).

We incorporate by reference our earlier submission made to the Parliamentary Joint Committee on Corporations and Financial Services Inquiry into Corporate Responsibility (‘the PJC submission’). A copy of the PJC submission is attached.

This submission addresses some of the issues set out at section 3.4 of the CAMAC Corporate Social Responsibility Discussion Paper. Specifically this submission addresses the following questions:

Should the Corporations Act be revised to clarify the extent to which directors may take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?
Should the Corporations Act be revised to require directors to take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?
Does the Corporations Act need to be amended to adopt a pluralist, an elaborated shareholder benefit, or some other, approach to directors’ duties?
Should directors be required to take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?

Should the Corporations Act be revised to clarify the extent to which directors may take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?

The Corporations Act should be revised to clarify the extent to which directors mayconsider the interests of employees, the environment, creditors, consumers, and other stakeholders in the normal course of company decision-making. The Corporations Act should be revised to clarify the circumstances under which directors may take into account the interests of other stakeholders where those interests conflict with the interests of shareholders and the shareholder profit maximisation objective.

This issue is addressed in the PJC Submission at paragraph (d).

Should the Corporations Act be revised to require directors to take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?

The Corporations Act should be revised to require directors to take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions. In addition the Corporations Act should be revised to require directors to prioritise stakeholder interests over those of shareholders in certain circumstances.

It is our submission that in order to genuinely protect non-shareholder constituencies, legislation would need to be passed to mandate directors to consider non-shareholder interests in situations where there is a conflict with the interests of shareholders and the shareholder profit maximisation objective. The issue of when such interests are to be given priority is problematic. Non-shareholder cohorts are most vulnerable when the company is in financial distress and the directors are desperately seeking to keep it afloat.

Accordingly, we recommend that the duty of directors under the Corporations Act to act in good faith in the best interests of the company should be amended to enable and, in certain circumstances, require directors to consider the interests of non-shareholder stakeholders. Stakeholder interests should be given priority in situations where there is a heightened risk that those interests will suffer adverse treatment. This heightened risk arises primarily when the company is encountering financial difficulty and may, or has, become insolvent.

This issue is addressed in the PJC Submission at paragraph (d).

Does the Corporations Act need to be amended to adopt a pluralist, an elaborated shareholder benefit, or some other, approach to directors’ duties?

A pluralist approach to directors’ duties should be adopted. In certain circumstances directors should be required to serve a wider range of interests in their corporate decision making, not subordinate to, or merely as a means of achieving shareholder well-being. There will be situations where shareholder interests will be required to be sacrificed in favour of the interests of other stakeholders.

This issue is addressed in the PJC submission at paragraph (d).

Should directors be required to take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions?

Companies are powerful and have the capacity to cause damage to the interests of others, such as employees, creditors, and victims of their torts, as well as the environment. Our submission is that this power gives rise to a responsibility to take care of those parties’ interests. The public interest in regulating directors’ actions by reference to increasingly accepted standards of corporate social responsibility outweighs the potential negative effects of such regulation

This issue is addressed in the PJC submission at paragraph (b).