29 Jul 2016

CU LAB: Corporate social responsibility: a new director's duty?

Directors' duties could be evolving, says Brad Wylynko.

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As we move into the second year of the implementation of Recommendation 7.4 from the ASX Corporate Governance Principles and Recommendations, it's incumbent on all directors to start to consider whether we might be seeing an evolving duty on directors of corporate social responsibility. 

Recommendation 7.4 states that a listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks.  By "environmental", what they mean is the ability of a listed entity to continue operating  in a manner that does not compromise the health of the eco-systems in which it operates over the long term. 

This principle follows on amendments to the Corporations Act about a decade ago, section 299(1)(f), which requires directors in their financial year reports to report on whether the entity's operations are subject to any particular and significant environmental regulation under the law of the Commonwealth, State or Territory, and give details of the entity's performance in relation to that environmental regulation. 

Clearly there is no legal obligation on directors today in Australia towards corporate social responsibility, but Professor Bob Baxt in the 21st edition of his seminar work on corporation law and the company directors' and officers' responsibilities devotes a whole chapter to corporate social responsibility and he makes the point that there may be two avenues where one could see this duty evolving.  The first is from the amendments to the Criminal Code that brought in a general obligation where the company must have a compliance culture.  Traditionally of course directors are only responsible to the members and shareholders of the company, but this general overlying duty in the Criminal Code, he argues, may be extending that obligation to the wider community.

Secondly, when one looks at the almost 700 pieces of legislation, State and Federal, across the country which imposes a reverse onus of proof on directors ‒ in other words, when a company breaches an environmental law or health work and health and safety law, a director has to demonstrate that they were not part of the responsibility, part of the decision-making chain that led to that breach ‒ one can see that the notion of a director's duty is getting expanded beyond just the traditional care and duty to the company. 

The UK has taken a lead in this area in amending its Corporations Act recently: section 172(1) where a director of a company must act in a way that they consider in good faith would most likely promote the interests of the company but also have regard to, amongst other things, the impact of the company's operations on the community and the environment. 

We don't have this obligation here in Australia yet, but clearly other jurisdictions are heading in that direction and we can see an evolving notion here in Australia, so it is incumbent upon all directors to consider carefully whether their obligations will extend to corporate social responsibility.