Title:

Corporate Social Responsibility (CSR) meets Environmental, Social and

Governance (ESG) in Corporate Governance Commented [AK1]: Plagiarism Percentage – 6.375%

1. Introduction
It is said in Greek mythology that Theseus had a ball of string (known as ‘clews’) which he
unwound as he travelled through a labyrinth, so he would not get lost. This chapter will in turn
string together contemporary clues to help understand the labyrinth of corporate governance,
corporate social responsibility and environmental investment issues.

Understanding the importance of corporate governance and its links to other relevant concepts,
such as corporate social responsibility (CSR); environmental, social, governance (ESG);
informational governance; risk management; due diligence and compliance, are all critical to
contemporary businesses, whether domestic or international. Many of these issues actually
keep directors of public (and private) companies, and particularly those listed on a stock
exchange, awake at night.

Some of the reasons for concern are that the legal penalties for breaching the Corporations Act
2001 (Cth), as well as other legislation, are criminal (with up to five years imprisonment and
multi-million dollar fines); civil penalties and civil remedies (such as unlimited damages and
injunction).

It is truism that corporate governance has been a hot topic of debate for at least 25 years and it
is a wide concept, which covers many different disciplines from accounting, finance,
management, risk, strategy and law. This chapter has a clear legal focus and deals with the
tensions arising from an aspect of corporate governance, in the form of CSR and ESG. To help
place the issues that arise in CSR (which is closely linked to ‘stakeholder theory’ and in the
UK the ideal of the ‘enlightened shareholder’1) and the paradigm of investors (particularly
Institutional investors, such as superannuation funds) for the application of ESG.

1
Section 172 Companies Act 2006 (UK)

1
To help explain and centre these ideas, back in 2003, Professor Adams wrote an article2 entitled
“The three pillars of good corporate governance” and this linked the central concepts of linking
corporate governance with due diligence and compliance. In 2018, these ideas and concepts
were reimaged to expand the Three Pillars of Corporate Governance3 to include the impacts
of international corporate governance; information governance; CSR, ESG and up-date the
developments in due diligence and compliance. Dr Chioatto has been practically advising
clients, investors and corporations on these issues, especially ESG, for over 30 years.

To help directors of listed boards to keep focus on strategy and risks, the acronym #SEMTEX,
has been used to help focus on the top six issues that boards face in 2018. “S” is for strategy,
a key role with corporate governance and the role and function of a board. “E” is for evaluation
of risk, in a systematic approach, such as a risk register and relevant traffic light reports from
senior management.4 “M” is for multi-generational, reflecting aspects of the diversity debate5
beyond gender to age, ethnicity and technology. “T” is for technology, in a period of history
where disruption and cybercrime and vulnerability is huge. “E” is for the environment and a
major concern for the current generations, particularly around climate change and CSR. The
final “X” is the reflection of toxic culture in various industries and corporations, that are
publicly reported via social media and traditional main-stream media. Unpacking the concepts
of CSR and ESG are central to the concern of #SEMTEX.6

2. Corporate governance
Corporate governance is not a new concept. Time and again bad governance seemed to be
complicit in corporate failures, creating much fanfare and misconception about this issue.
Along with the emergence of competing theories various disciplines have all together saturated

2
Michael Adams, 2004, ‘The Three Pillars of good corporate governance’, Risk Management 8.
3
Michael Adams, 2018, ‘Three Pillars of corporate governance’, 70(6) Governance Directions 268.
4
A risk register is a method for bringing known risks into a single reporting mechanism and a calculation of high
risk matters in red; medium likelihood of occurring and level of damage (usually expressed in dollars) in amber
and low risk being shown as green. The commentary against known risks usually has mitigation and actions taken
to reduce any such identified risks by management.
5
Michael Adams, 2015, ‘Board diversity: more than a gender issue?’, 20(1) Deakin Law Review 279.
6
Michael Adams, 2018, ‘Effective governance in a changing corporate culture’, presented at Governance Institute
of Australia NSW Governance and Risk Forum, 7 th June, Sydney, NSW. Reported by Jerome Doraisamy, Lawyers
Weekly:Corporate Counsel (13/06/2018) in ‘Counsel must play role in evolving governance structure’
https://www.lawyersweekly.com.au/corporate-counsel/23430-counsel-must-play-role-in-evolving-governance-
structure

2
and obscure the debate as to the real meaning of governance. As the business world globalises,
organisational life becomes more complex and the demands on governance undertakings seem
to multiply. Corporate directors confront both structural and relational factors in governing a
large modern corporation. Globalisation of markets, the role of the World Trade Organisation
and bi-lateral and multi-national treaties, with easy communication, via the internet, have
changed perceptions on corporate governance. Thus, for a small number of global companies,
there are concepts of international corporate governance.

International corporate governance:

There is no formal definition of “international corporate governance”. However, as
corporations around the world have grown, many operate in a size and complexity that impact
as if they were sovereign states (the same as a country). This has meant that the corporation
must comply with laws and regulation in many languages, countries, currencies and other
controls. It is easy to imagine a UK incorporated company that is listed on the New York Stock
Exchange, securities exchange, with a Brazilian based board of directors, that manufacturers
product in China, through a joint venture, but also imports components from its German
subsidiary and then ends up with a consumer whom resides in Australia, opens many legal
challenges.

A real example of this type of corporation, in the Australian context, is the company BHP. As
of June 2018, BHP (Australia’s largest resources company and 2nd largest on the Australian
Securities Exchange by market capitalisation) is worth A$106.2 billion at a share price of
A$33.08. BHP (known previously as BHP Billiton or colloquially as “the big Australian”) has
been required to produce a number of annual reports and simultaneous disclosures to the UK,
USA and Australian regulators, as well as various stock exchanges. BHP is required under the
different legal systems and regulations to produce financials in different currencies, of the UK
pound sterling, USA dollars and in Australian dollars. Complying with the many countries it
mines in and sells resources is a big challenge for the governance unit and board of directors,
as well as regional executives and employees. This has led to the BHP management team
examining moving to a single share market in 2018 and beyond.

3
The meaning of corporate governance is critical to not-for-profit companies (charities); for
government entities (particularly governed-businesses, such as Australia Post) and for private7
and public listed companies on the Australian Securities Exchange (ASX).

Domestic corporate governance:

So what do we mean by ‘corporate governance’? Many have used this term like a label for
many things about corporations and how they are run. Like trendy topics it becomes the ‘blame’
and hence the ‘solution’ for many corporate ills leading collapses and under performance.

At a board level governance is concern with both structural and relational issues. Structural
concerns can be further divided into organisational configuration, board structure and
processes. Relational dimensions are dynamic and ever changing. Broadly relational
considerations categorised into leadership issues, corporate culture and corporate social
responsibilities. These two facets encapsulate the responsibilities of the board.

In September 2006, the Corporations and Markets Advisory Committee (CAMAC) produced
a report on ‘Personal liability for corporate fault’. The report expresses concern about two
major issues. First, ‘[i]ndividuals should not be penalised for misconduct by a company except
where it can be shown that they have personally assisted or been privy to that misconduct, that
is, where they were accessories.’8 Second, ‘[a] need for a more consistent, as well as a more
principled, approach to personal liability across Commonwealth, State and Territory
jurisdictions.’

Professor Farrar in 1998 commented that corporate governance is a fashionable concept that is
‘remarkably imprecise.’9 The many influences in the emergence of corporate governance as a
new field of study can make it difficult to develop analytical tools (see figure 1).10 To make
matters worse the ever-increasing number of publications by economists, organisational
theorists, lawyers, sociologists, accountants, criminologists, and even political scientists,

7
In Australia, private companies are known as proprietary limited companies (usually abbreviated “Pty Ltd”).
8
Corporations and Markets Advisory Committee, 2006, Personal Liability for Corporate Fault Report 9.
9
John Farrar, 1998, ‘Opinion, Corporate Governance’, 10(2) Bond Law Review, Special Issue: Corporate
Governance, 141.
10
Michael Adams & Angus Young, 2007, ‘Regulating corporate governors: rethinking board responsibilities and
liabilities’ 59(1) Keeping Good Companies 11.

4
laying claim to its meaning, interpretation and applications can often confuse and at times
altogether obscure the topic altogether.

Figure 1

Organisational Accounting
Growth Legislations, Rules and
Case Law and Practices
Codes
Political Debate and
Behavioural Media Attention
Psychology
Corporate
Governance Economic Climate
and Policies
Ethics and
Values Sectoral
Development

Social Norms
Technological and Culture
Innovation Regional and
International
Trends

Over the last two decades there have been several theories about governance emerging. These
theories range from agency, contractual, managerial hegemony, stewardship, resource
dependency, life cycle to institutional.11

These theories are often the product from an array of disciplines. Each discipline draws from a
bounded set of assumptions and methodology to derive at a normative set of prescriptions from
predisposed hypothesis shaped by contextual considerations. Nevertheless whichever theory
one examines, the key element is the importance of the board of directors confronting an ever-
growing list of demands and duties they ought to perform and be accountable to. The theories
also attest to the complexities in governing a corporation, which denotes there is no definitive
or ‘one size fits all’ model.

11
For an overview of corporate governance theories; see: Thomas Clarke (ed), 2004, Theories of Corporate
Governance, The Philosophical Foundations of Corporate Governance.

5
Professor Pettigrew in 1992, wrote corporate governance lacks coherence in either empirically,
methodologically or theoretically, and thus far many research seemed to be piecemeal
endeavours to try to understand and explain how the modern corporation is run. 12 Reality might
well mean that there are intermix of theories integrating into a multifaceted paradigm. Effective
governance would therefore warrant the participation of the key internal and external
stakeholders, and shaped by other influences like market expectations (see figure 2).13
Consequently corporate governance is a multi-dimensional issues,14 which could help explain
why many governance measures are articulated as principles rather than manuals.

Figure 2

Source: Magdi Iskander and Nadereh Chamlou (2000)

12
Andrew Pettigrew, 1992, ‘On studying managerial elites’ 13(1) Strategic Management Journal 163.

6
Yet principles may suffer from misinterpretation and even be misrepresented. Even if theories
can be extracted and adapted into a series of legislations, much of the expectations lie with the
stakeholders’ willingness to take action. Corporations, regulators, and other stakeholders must
be willing to act against bad governance practices.15

Another important point to note, whilst the board of directors are pivotal in governance, one
can easily be confused with the roles of the board is governance. The roles of the board like
strategic planning and risk management is part of decision-making and leadership from a
governance perspective. These operational issues would not be discussed in this paper. More
important, governance at a board level requires both structural and relational issues. The law,
both via case law, statutes and enforceable rules (such as the ASX Guidelines and Listing
Rules) provide blunt instruments to change wrong-doing and corporate behaviour rather than
to change how companies are actually to be directed and steered. Thus, there is a clear
distinction between the management or business philosophy on governance and the legal
requirements to avoid wrong-doing.

There are some accepted views on corporate governance which can be simply stated as:

 Governance refers to how companies are governed and directed emanating from
interaction between key stakeholders where individual psyche and group behaviour
would impact on decisions.
 Both domestic and international economic development also impacts on how
corporations are governed since corporations have to adapt to new economic
challenges.
 Governance tends to receive much more attention in the aftermath of corporate failures,
which can prompt legislatures to overreact by introducing new laws because of
economic and social consequences.
 The interdisciplinary nature of governance creates a multitude of influences, which has
to be taken into account.

15
See OECD Principles of Corporate Governance, OECD (1999); Ira Millstein, Michel Albert, Adrian Cadbury,
Robert Denham, Dieter Feddersen, and Nobuo Tateisi, 1998, Corporate Governance, Improving Competitiveness
and Access to Capital in Global Markets, OECD Report; and Magdi Iskander and Nadereh Chamlou, 2000,
Corporate Governance: A Framework for Implementation.

7
  Corporate governance is shaped by a number of factors both within and outside the
corporation, like organisational growth, accounting rules, legislation, politics,
economic policies, ethics, technology and social norms (also refer to figure 1).
 A key source of governance is the board of directors. At the board level governance
concerns both structural elements to ensure there is proper process and relational issues
that emerges from the interaction between key stakeholders.

In 1992, the now world famous Cadbury Report took a simple approach, proposing that
corporate governance is ‘the system by which companies are directed and controlled”. A
broader definition is found in Cochran and Wartick’s 1988 publication Corporate Governance:
A Review of the Literature, which suggest that corporate governance is “an umbrella term that
includes specific issues arising from interactions amount senior management, shareholders,
boards of directors and other corporate stakeholders”. Commented [AK2]: https://www.sibenco.com/corpo
rate-governance-in-the-digital-economy/

In 1997, the Australian Commonwealth Treasury went a little further in the context of the
Corporate Law Economic Reform Program Paper (CLERP) No.3, Directors’ Duties and
Corporate Governance, defining corporate governance as “the term used to describe the rules
and practices put in place within a company to manage information and economic incentive
problems inherent in the separation of ownership from control in large enterprises. It deals with Commented [AK3]: https://en.wikipedia.org/wiki/Corpora
te_governance
how, and to what extent, the interests of various agents involved in the company are reconciled
and what checks and incentives are put in place to ensure the managers maximise the value of
the investment made by shareholders.

In 2003, the Australian Stock (now, Securities) Exchange (ASX) released its original
Principles of Good Corporate Governance and Best Practice Recommendations, which
contained the following definition: “Corporate governance is the system by which companies
are directed and managed. It influences how the objectives of the company are set and achieved,
how risk is monitored and assessed, and how performance is optimized. Good corporate Commented [AK4]: https://www.corpgov.net/library/corp
orate-governance-defined/
governance structures encourage companies to create value (through entrepreneurism,
innovation, development and exploration) and provide accountability and control systems
commensurate with the risks involved.” This has been revised three times, with the current 3rd Commented [AK5]: https://www.scribd.com/presentation/
90101122/Corporate-Governance-Introduction
edition in 2014, but the definition has not changed. A fourth edition is being consulted during

8
2018 and is due in 2019 for adoption. Currently there is a public consultation process underway,
with the ASX Corporate Governance Council releasing a fourth draft version for comment. 16

Whilst this debate of semantics is provocative in an academic sense, it does little to develop
clarity for the commercial world. Seeking to define corporate governance is, perhaps, akin to
searching for the holy grail that does not exist. Justice Neville Owen, the Royal Commissioner,
in his final report arising from the HIH Royal Commission, hints at the futility of the search
simply stating ‘corporate governance is not a term of art’.17

His Honour’s guidance is worth remember: “I think that any attempt to impose governance
systems or structures that are overly prescriptive or specific is fraught with danger. By its very
nature corporate governance is not something where ‘one size fits all’. Even with companies Commented [AK6]: https://www.scribd.com/doc/2848784
01/wheelen-strategic-management
within a class, such as publicly listed companies, their capital base, risk profile, corporate
history, business activity and management and personnel arrangements will be varied. It would
be impracticable and undesirable to attempt to place them all within a single straitjacket of
structures and processes. A degree of flexibility and an acceptance that systems can and should
be modified to suit the particular attributes and needs of each company is necessary if the
objectives of improved corporate governance are to be achieved.”

Once there is a general agreement on what constitute corporate governance practices, the bigger
challenge is to demonstrate that good corporate governance produces actual benefits. 18 There
is overwhelming corroborative and empirical evidence of the impact of sustainability in
governance.19 There are numerous studies as to the benefits of corporate governance for global
entities, whether they be the transnational corporations or the more traditional multinational
companies. Around the globe, by far the majority of business entities are privately owned

16
https://www.asx.com.au/regulation/corporate-governance-council/review-and-submissions.htm
17
The HIH Royal Commission, 2003, ‘The Failure of HIH Insurance – Final Report’, Canberra.
18
Michael Head, Scott Mann and Simon Kozlina, 2012, Transnational Governance: Emerging Models of Global
Legal Regulation (Ashgate Publishing) and Anona Armstrong, 2004, ‘Corporate Governance Standards:
Intangibles and Their Intangible Value’ 17(1) Australian Journal of Corporate Law 97 cited in Michael Adams,
2012, ‘Global Trends in Corporate Governance’ 64(9) Keeping Good Companies 516.
19
Alice Klettner, Thomas Clarke and Michael Adams, 2010, ‘Corporate Governance Reform: An empirical study
of the changing roles and responsibilities of Australian Boards and directors’ 4(2) Australian Journal of Corporate
Law 148; a report on the implementation of the ASX Corporate Governance Principles between 2003 and 2007.

9
(and/or family businesses) with a small percentage being quoted on a local stock exchange, in
a single legal jurisdiction.20

Impressive data was produced by Claessens and Yurtoglu21 who examined the corporate
governance literature from the fields of economics, finance, management and legal scholarship
in many countries and jurisdictions over the last decade. The authors’ detailed survey of the
literature provides evidence of the importance of corporate governance at a number of
economic points.

These extensive studies provide clear evidence of a link between economic development and
corporate governance. The extensive cross-country research demonstrates that corporate
governance is central to financial development. Weak corporate governance can be seen to
prevail in financial markets that tend to function poorly by global standards.

Poor governance increases market volatility and lack of transparency, creating unfair markets.
Countries and companies that adopt best practices in corporate governance are not guaranteed
success, but provide evidence that good corporate governance improves sustainability and lays
the groundwork for long-term success.

Corporate governance has many elements, including risk management, due diligence and
compliance. It is necessary to highlight the fact that these oft-quoted terms are not merely
synonyms for one another, rather, they are three distinct, yet inextricably fused elements of
corporate governance. A business may formulate a compliance program as part of internal due
diligence, which, in turn, may have been undertaken because of the company’s commitment to
sound corporate governance.

As well as the legal duties imposed on officers of the company (of which directors make up
99%), corporate governance will also include other stakeholder interests. This has become
known in the literature, as well as by the public as the CSR element.

20
Michael Adams, 2012, ‘Global Trends in Corporate Governance’ 64(9) Keeping Good Companies 516, 518.
21
Stijn Claessens and Burcin Yurtoglu, 2012, Corporate Governance and Development – An Update (Global
Corporate Governance Forum) <http://www.ifc.org/wps/wcm/connect/
topics_ext_content/ifc_external_corporate_site/corporate+governance/publications/focus_case+studies/focus+1
0+corporate+governance+and+development+-+an+update>.

10
There is an expectation that company will be a “good corporate citizen” and will not be
unnecessarily hard on its workers (employees and contractors) or its suppliers, nor the local
community and broader environment or its customers. Investors also have concerned and they
will express them as ESG. Both ESG and CSR are less well understood than corporate
governance, but are growing in significant importance.

An example maybe an investment company that does not hold shares in a company that
manufacturers or sells alcohol or tobacco products. Many Australian universities will not hold
shares of companies that produce fossil fuels (just as coal and gas). Ethical superannuation
funds (pension funds) worth over two trillion Australian dollars have been created to avoid
investment in such products or services, which may breach ESG or CSR policies and guiding
principles. This has come under further scrutiny with the APRA prudential report on
Commonwealth Bank of Australia22 and the Hayne’s Royal Commission.23

Due diligence:
One generally associates the expression “due diligence” with the American securities law
defence of due diligence provided by the American Securities Act 1933 (Federal, USA) to those
charged with the task of investigating prospectuses issued during takeover machinations or
fundraising through debt or equities (shares).

In Australia, a similar defence is available in relation to misleading or deceptive statements

made in a prospectus under section 731 of the Corporations Act 2001 (Cth), but, curiously,
there is no such specific defence for misleading or deceptive conduct under section 18 of the
Australian Consumer Law24 (previously known as section 52 Trade Practices Act 1974 (Cth)).
The Corporations Act 2001 (Cth) also provides officers with a quasi due diligence defence
under section 180(2) (known as the “business judgement rule”) and section 189 (reliance on

22
https://www.apra.gov.au/media-centre/media-releases/apra-releases-cba-prudential-inquiry-final-report-
accepts-eu
23
https://financialservices.royalcommission.gov.au/
24
The Australian Consumer Law is a schedule to the Competition and Consumer Act 2010 (Cth), which replaced
the former Trade Practices Act 1974 (Cth).

11
others). A general due diligence defence to criminal actions is also available under Part 2.5
Division 12 of the Criminal Code Act 1995 (Cth).

However, due diligence has evolved beyond its original role as a defence. Much of the
confusion relating to due diligence results from its treatment under different statutes or in
different contexts as if each use is completely unrelated. It is now a moniker for the process of
evaluating everything from a prospectus to the assets of a potential takeover target, and more
recently a corporation’s internal legal audit process. Thus, it is no longer merely a concept
relevant to a corporation’s external transactional activities (such as investigating the veracity
of prospectuses during fundraising) the additional meaning of an internal processes (for
example, legal compliance).

It is when considering due diligence within a corporation’s internal operations that the link
between, and, indeed, the confusion relating to, due diligence and compliance programs
becomes apparent. The use of the expression ‘due diligence’ in common parlance to describe
the system implemented within a corporation of checking day-to-day legal statutory
compliance (such as intellectual property, trade practices, consumer laws,
employment/industrial relations, environmental, corporate and privacy law) is somewhat
disingenuous. Due diligence and compliance are related but not to be treated as one and the
same. It may be that a corporation, in carrying out its internal due diligence, will conduct a Commented [AK7]: https://www.sibenco.com/corporate-
governance-in-the-digital-economy/
legal risk audit, from which compliance plans will be developed in order to manage and
minimise legal risk.

However, merely determining a compliance program will not amount to due diligence per se.
Simplified internal due diligence risk model:

Step 1 = Legal risk audit

Step 2 = Compliance planning
Step 3 = Implementation compliance plan
Step 4 = Review of compliance program
Step 5 = Adapt compliance plan for due diligence reports to board
Step 6 = After one to two years a new audit of risk commenced (step 1 repeated)

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It is accurate, therefore, to say that a compliance plan may come within the broad concept of
internal due diligence. However, it is inaccurate to suggest the two are synonymous. The United
Kingdom case of Tesco Supermarkets Ltd v Nattrass [1972] AC 156 illustrates the difference
between due diligence and compliance, and how the satisfaction of the former will not
necessarily result in the same for the latter. Tesco was prosecuted when a discount sign was
left on display after the discounted stock was exhausted, and a shop assistant refused to sell at
the discounted price. Tesco had put in place a genuine management system to prevent breaches
of the law. The court was impressed by the board’s involvement, the good management
selection and training process, the regular supervision of stores by four levels of visiting
executives, the regular communications designed to secure compliance, and operating
procedures right down to ones designed to ensure shop assistants complied with the law. The
court found that Tesco’s due diligence was sound; it could not reasonably have done more.
However, notwithstanding its sound due diligence, Tesco failed to secure compliance with the
legal requirements of the law.

Within the Australian context, the Federal Court of Australia has ordered companies to
implement or review an existing trade practices compliance program. A sound example is
found in Australian Competition and Consumer Commission (ACCC) v Target Australia Pty
Ltd [2001] FCA 1326, where, having found Target to have breached the former section 52 of
the Trade Practices Act 1974, (now section 18 Australian Consumer Law 2010) the court
ordered Target to broadcast a corrective advertisement nationally on 88 television stations and
to publish correct notices in 37 newspapers across metropolitan, regional and rural Australia.
The court also issued injunctions restraining Target from advertising in the same way for four
years, ordered Target to review its trade practices compliance program, and ordered Target to
pay Commission costs of A$65,000. Commented [AK8]: http://www.oecd.org/sti/consumer/19
55404.pdf

A key aspect of the internal due diligence system, is that management and employees, have a
clear set of compliance programs, linked to their risk register and known corporate risks. This
will vary from industry to industry/profession.

13
Compliance programs:
It is to state the obvious to observe that the commercial environment has become increasingly
regulated in recent years. Compliance is demanded with a greater number of statutes,
regulations, industry standards and principles than ever before. What is more, society is
becoming more litigious25, and regulators are having their arsenal bolstered by greater powers
and a greater range of penalties.

Where the corporate (general) counsel and company secretary of the James Hardie Industries
litigation was held to be in breach of his officers’ duties under section 180(1) Corporations Act
2001 (Cth) by the High Court of Australia in Shafron v ASIC [2012] HCA 18. The roles of the
c-suite (most senior executive roles start with the letter “c”, such as CEO, CFO, CIO, COO26,
corporate counsel and company secretary) are generally legal defined as officers of a
corporation (even if they are not legally directors) and thus bound by common law and statutory
legal duties.

3. What is corporate social responsibility mean?

Before, jumping into the background to corporate social responsibility (CSR), it is important
to remember that most common law countries apply a “shareholder primacy principle”. That
is, the directors owe their legal duties under common law and equity (as well as under
legislation), to the company as a whole (represented by the shareholders). The UK in 2006
developed a principle that is wider than mere shareholders, which has become known as the
‘enlightened shareholder principle’ and enables the directors to take a wider range of
stakeholders. This has been expressed in s 172 Companies Act 2006 (UK). Thus, understanding
the basic corporate law duties of directors and the tension with taking into account other
stakeholders.

In Australia, it is worth remembering that there are approximately 2.5 million registered
companies, and each must have at least one director. Each year, ASIC, through the

25
Particularly, with the growth in class-actions by shareholders and customers/clients and litigation funding
businesses. There is a review of class actions underway in 2018 by the Australian Law Reform Commission:
Discussion Paper 85. https://www.alrc.gov.au/inquiry-categories/class-action-proceedings-and-third-party-
litigation-funders
26
chief executive officer; chief financial officer; chief information officer; chief operations officers all form the
c-suite of executives in large public companies.

14
Commonwealth Director of Public Prosecutions, successfully prosecuted about 25 directors
per annum. There are additionally increasingly important issues relating to diversity within the
boardroom, which hold the potential to add value to the corporation. The diversity might relate
to gender, culture, ethnicity and even technology!

It is worth noting that the legal term is ‘officer’ (broader than just ‘director’) and is defined in
the statutory dictionary, in s 9 Corporations Act 2001 (Cth) as:

(a) a director or secretary of the corporation; or

(b) a person:
(i) who makes, or participates in making, decisions that affect the whole, or a
substantial part, of the business of the corporation; or
(ii) who has the capacity to affect significantly the corporation's financial
standing.

The majority of officers of a corporation are the directors, but this does include the CEO,
possibly the CFO and other senior executives, depending upon the size and structure of the
corporation. In a small corporation, there is likely to be only one director, who is also the CEO.
The 2003 Royal Commission into the collapse of HIH Insurance recommended the change of
terminology from ‘executives to the more functional approach of ‘officer’.27

The Corporations Act also provides a definition of ‘director’, which is found in s 9, as:
(a) a person who:
(i) is appointed to the position of a director; or (ii) is appointed to the position
of an alternate director and is acting in that capacity; regardless of the name
that is given to their position; and
(b) unless the contrary intention appears, a person who is not validly appointed as a
director if:
(i) they act in the position of a director; or
(ii) the directors of the company or body are accustomed to act in accordance
with the person's instructions or wishes.

27
Commonwealth, 2003, The HIH Royal Commission, The failure of HIH.

15
In the vast majority of circumstances (probably over 99% of cases), it is absolutely crystal clear
who is an officer of a company, as it automatically includes every director and the company
secretary (if appointed). Even if they are not a registered director, they would be deemed to be
an officer of the company and thus bound by the same laws.

Officers of a company have very well defined legal obligations and there is a clear link to the
role of corporate governance in all entities.28 Over the last decades,29 corporate governance,
and in particular the role of officers’ duties, has come under the microscope of the Australian
courts, in all jurisdictions.30 The HIH Insurance Royal Commissioner, re-stated the need for a
commitment to education on the fiduciary principle and for greater professionalism in
governance.

The former Federal Minister, responsible for developments in this area of law, has noted that a
review into the Safe Harbour Rule (known as the Business Judgment Rule31) in the Review of
Sanctions in Corporate Law32 paper, did not expect any quick changes. This is a very true
statement, as there has been no change to this officers’ defence and few directors have ever
been able to successfully rely upon it as a defence.

The courts do not remain static in the developments of corporate law and directors’ duties. In
large part due to the wonders of the common law system of precedent. A broader meaning of
the term ‘officer’ was given in the Victorian Supreme Court case of Hodgson v Amcor,33 where
a senior manager was deemed to be an officer for the purposes of the Corporations Act.
Similarly, the more complex issue of de facto directors occurred in Grimaldi v Chameleon

28
Alice Klettner, Thomas Clarke, and Michael Adams, 2007, ‘Balancing Act – Tightrope of CorporateGovernance
Reform’ 59(10) Keeping Good Companies 648.
29
Michael Adams, 2003, ‘Are All Directors Created Equal? Reassessing the Role of the Chair in the Light of
ASIC v Rich’ 55 Keeping Good Companies 204 and Michael Adams, 2008, ‘Officers’ Duties – Are We
Keeping Up With the Changes?’ 60(8) Keeping Good Companies 344.
30
Alice Klettner, Thomas Clarke and Michael Adams, 2010, ‘Corporate Governance Reform: An Empirical Study
of the Changing Role and Responsibilities of Australian Boards and Directors’ 24 Australian Journal of
Corporate Law 148.
31
Corporations Act 2001 (Cth) s 180(2).
32
<http://www.treasury.gov.au/contentitem.asp?NavId=037&ContentID=1182>
33
[2012] VSC 94.

16
Mining NL (no 2)34 stressed the need to look beyond the formal appointment procedures to
determine whether a person owes a fiduciary duty.

Basic legal duties of officers and directors:

In April 2010, the Australian Government’s reform body for corporate law, the Corporations
and Markets Advisory Committee (CAMAC)35 published a more detailed guide for directors.36
This 2010 report outlined in detail the challenges facing directors and the various guidance to
be drawn from legislation, the case law, the regulators and the ASX Corporate Governance
Council. It provided an international comparison with the United Kingdom and North America.

There is a natural overlap between the legislation imposed by Parliament and the case law
developed over the last couple of centuries. Companies have existed since the 1600s37 but the
modern, incorporated (after 1991 referred to in Australia as “registered”) company can be
traced back to 1844.38

Australia has, for the most part, followed the corporate laws of the United Kingdom but has
only moved to registered corporations as part of the changes, in 1991, to a national system,
under what is now the Corporations Act 2001 (Cth).39

In Australia, the laws relating to officers and directors can be divided into three parts:

• Statutory duties;
• Common law duties (such as the duties of care, skill and diligence); and
• Equitable fiduciary duties (conflicts of interests and secret profits).

34
(2012) 200 FCR 296; Gemma Morgan, 2012, ‘De Facto Directors and Duties – Chameleon Mining’ 64(3)
Keeping Good Companies 222.
35
CAMAC was disbanded as a budget saving measure, and corporate law reform is part of the Commonwealth
Treasury Department or the Australian Law Reform Commission.
36
Corporations and Markets Advisory Committee, Parliament of Australia, 2919, Guidance for Directors Report.
37
The Honourable East India Company, 1600 England.
38
Joint Stock Companies Act 1844 (UK).
39
Previously, each State and Territory had its own Companies Act, which was similar in most provisions.

17
The fundamental duties, that are imposed on all officers of all registered companies, and can
be illustrated by a simple Venn diagram (Figure 3). The overlapping areas represent how the
Corporations Act reflects aspects of both the common law and equitable principles.

Figure 3: Updated Adams’ overview of officers’ duties40 (1992)

Some duties are specifically laid out in statute, such as the prohibition on insider trading, under
s 1043A. Other legal duties, such as when directors have interests in company contracts, are
both statutory (s 191) and fiduciary duties (s 182). Other positive duties include the fact that
directors must not allow the company to trade while insolvent, by virtue of s 588G. The
directors are held personally liable if this occurs. There is a similar common law duty to
consider creditors in times of financial trouble, as expressed in the High Court case of Spies v
R.41

The three circles intersect at s 185, which provides that the duties imposed by legislation are
additional to, and not exclusive from, the duties imposed at common law and in equity. Thus,
a director could be sued for all three bases of action, rather than just the Corporations Act or

40
Jason Harris, Anil Hargovan and Michael Adams, 2018, Australian Corporate Law, (LexisNexis:Butterworths,
4th edn) 438.
41
(2000) 201 CLR 603.

18
the common law/equity principles. An example of a director being held liable for all three types
of actions occurred in South Australia State Bank v Clark.42

The consequences of breaching sections 180–183 result in a civil penalty order, under s 1317E,
but these sanctions are not applied under the common law or equity. However, further criminal
liability may also arise under s 184, in relation to the types of breaches found in sections 181–
183. This is important due to the different kinds of remedies and penalties, that apply to civil,
civil penalty and criminal cases.

In 2018, the largest civil penalty of $700 million, was imposed on the Commonwealth Bank of
Australia. It is interesting to note that this huge amount was not prosecuted by the regulators
ASIC or APRA or the ACCC, but the anti-money laundering and terrorism financing agency,
known as AUSTRAC.43 CBA admitted to 54,000 contraventions of the legislation through
cash-deposits above $10,000 made through their intelligent ATM machines, without disclosing
to the government body (AUSTRAC). CBA has worked with the regulator to improve its
fraud, anti-money laundering and terrorism financing protections, to make a safer banking
institution.

It is worth noting that at common law, officers are expected to be honest and to take reasonable
care in exercising their duties. At the same time, s 181 provides that officers are required to
discharge their duties in good faith and for a proper purpose, whilst s 180(1) provides that they
must do so with reasonable care and diligence. This is comparable to the tort of negligence,
which was recognised in the corporate directors’ context in ASIC v Adler.44 The equitable
principles of avoiding conflicts of interest and not taking advantage of confidential information
are reflected in ss 182 and 183 respectively.

The High Court of Australia does not often examine corporate law cases, but one of the many
One.Tel proceedings did get considered was Rich v ASIC.45 This matter examined the

42
(1996) 66 SASR 199.
43
AUSTRAC v CBA [2018] FCA 930
44
(2002) 168 FLR 253.
45
(2004) 220 CLR 129. For a detailed discussion on this case, see Michael Adams, 2004, ‘Whether to Protect or
Punish: Legal Consequences of Contravening the Corporations Act’ 56(9) Keeping Good Companies
592.

19
importance of procedures in the area of civil penalties. The HIH Insurance cases around ASIC
v Adler46 also scrutinised in depth the civil penalty standards of directors’ duties.

In particular, whether Mr Rodney Adler acted dishonestly (a breach of s181) and the failure to
take reasonable care and diligence (a breach of s 180) by Mr Ray Williams and Mr Adler.
Unusually, a separate criminal prosecution was launched against Mr Williams47 and Mr
Adler,48 resulting in a conviction and jail sentence. This was followed by the high-profile case
of Steve Vizard, which involved the misuse of confidential information, from the boardroom
of Telstra, for personal gain.49 This case could have been brought under the insider trading
laws, but was in fact brought under the directors’ duties provision for misusing confidential
information.

Close to the HIH Insurance group of cases were the GIO cases (the hostile takeover by AMP
of GIO) which resulted in ASIC v Vines.50 In this case the three CFOs of the various GIO group
of companies, were held liable for a breach of their duties as officers of the target company.

Thus, after a number of successful enforcement against directors in the civil and criminal
courts, the regulator was challenged on a number of cases. The successful 2009 James Hardie
litigation51 resulted in an appellate court over-ruling Gzell J in a number of ways and
exonerating most of the directors held liable. The case of Morley v ASIC52 and James Hardie
Industries NV v ASIC53 was a challenging decision for the regulator.

The outcome of the final appeal was that the company (JHL) was found to have made
misleading statements to the ASX in June 2002 and failed to comply with continuous disclosure
obligations. The CFO at the time, Mr Morley, was in breach of his duty in advising the board
and thereby limited the nature of the predicted analysis of compensation. Similarly, the

46
(2002) 168 FLR 253.
47
R v Williams (2005) 216 ALR 113.
48
R v Adler [2005] NSWSC 274.
49
ASIC v Vizard (2005) 145 FCR 57.
50
[2005] NSWSC 738. For a detailed discussion of this case, see: Michael Adams, 2005, ‘Officers’ Duties Under
the Microscope’ 57(8) Keeping Good Companies 516.
51
ASIC v MacDonald (No 11) (2009) 230 FLR 1 and penalties imposed at ASIC v MacDonald (No 12) (2009)
259 ALR 116.
52
(2010) 247 FLR 140.
53
(2010) 274 ALR 85.

20
company secretary and general counsel, Mr Shafron, had part of his appeal upheld, but was
still found to be in breach of his duty to advise the board. The other non-executive directors,
including the chair, Ms Hellicar, were successful in their appeals such that the finding of
breaches of the officers’ duty in s 180 were removed (in respect of the approved minutes of the
board meeting, which became the ASX announcement on asbestos compensation). ASIC was
criticised for not calling a particular witness (an external lawyer) who was present at the
relevant board meeting of JHL.54

Then in 2012, the High Court of Australia finally ruled on the James Hardie litigation with a
clear statement, holding the non-executive directors liable in ASIC v Hellicar.55 The matter was
also remitted to the NSW Court of Appeal for the determination of the appropriate penalty for
the non-executive. But the executive director that appealed, the company secretary and general
counsel, was dismissed and the person was held to have failed to advice the CEO and board of
information from the professional advisors and the famous media release of 16th February 2001,
in Shafron v ASIC.56

The Centro litigation has raised many concerns about the ability of directors and officers to
personally equip themselves with the financial literacy and the converse ability to rely upon
others, such as an external expert or even the audit committee. The decision in ASIC v Healey57
showed that the board did not take the necessary care with the financial accounts, but accepted
their individual forthrightness and thus did not impose penalties. A separate class action has
been settled, in May 2012, against the auditors and companies for $200million, with the legal
costs at $15m and IMF litigation funders receiving $60m and leaving the shareholders to split
the remaining $125m for their losses.58

Many of the principles of law discussed above can be derived from the basic legal duties which
were borrowed, by way of an analogy to the duties owed by the trustees to the beneficiaries,

54
For more detailed discussions see Anil Hargovan, 2009, ‘Directors’ and Officers’ Duty of Care Following James
Hardie’ 61(7) Keeping Good Companies 586 and Richard Head, 2010, ‘Directors and Officers Still in
the Firing Line – A Guide to Managing Risk’ 62(1) Keeping Good Companies 57.
55
(2012) 86 ALJR 522; see Michael Adams, 2012, ‘Lessons for Non-Executives from James Hardie Litigation’
64(2) Keeping Good Companies 263.
56
(2012) 86 ALJR 584; see Anil Hargovan, 2012, ‘Raising the Bar for General Counsel and Company Secretaries
- High Court Decision in James Hardie’ 64(2) Keeping Good Companies 260.
57
(2011) 278 ALR 618.
58
Leonie Wood, 2012, ‘Funder Gets $60m from Centro Deal’ Sydney Morning Herald (Sydney) 11 May, 3.

21
from Re German Mining Co; ex parte Chippendale.59 Although the Corporations Act in many
ways codifies the common law and equitable duties, there is still an overlap even though they
have different outcomes in terms of remedies or sanctions.

Around the world, consumers and citizens are increasingly concerned about environmental
problems. Consequently, they are becoming more and more conscious of the impact their
purchasing decisions may have on the environment.60 This has led the ‘green’ market to expand
drastically over the last few years. For instance, the Australian market for sustainable products
and services has surged from $12 billion in 2007 to $21.5 billion in 2010. It is predicted that
the market will be valued at over $30 billion.61 Consequently, green marketing has become
popular as such marketing may attract environmental conscious consumers to buy green
products. Green marketing may be defined as the ‘marketers attempt to develop strategies
targeting the “environmental consumer”.’62

This is important as green marketing may be accompanied with the concept of ‘greenwash’ 63
where the manufacturer or retailer promotes the green credentials of a product but overstates
the benefits and potentially misleads the end consumer.

The 2011 introduction of the Australian Consumer Law64 (ACL) brings the laws all under one
umbrella. Today, s 18 ACL has replaced s 52 TPA. However, overlapping provisions in the
Corporations Act 2001 (Cth)65 and the Australian Securities and Investments Commission Act
2001 (Cth) (ASIC Act)66 regarding misleading and deceptive conduct in the financial service

59
(1853) 43 E.R. 415.
60
National Geographic, 2010, ‘Greendex 2010: Consumer Choice and the environment- A Worldwide Tracking
Survey’ (June), < http://images.nationalgeographic.com/wpf/media-live/file/GS_NGS_Full_Report_June10-
cb1275498709.pdf>; Bodger, A and Monks, M, 2010, ‘Getting in the Red over Green: The Risks with ‘Green’
Marketing’ 3(3) Journal of Sponsorship 284.
61
Mobium Group, 2011, ‘Green Market- State of Play- Research Project Summary- Australia’ (May), 4.
<www.mobium.com.au>
62
McDaniel S and Rylander D, 1993, ‘Strategic Green Marketing’ 10(3) Journal of Consumer Marketing 4.
63
Marina Nehme and Michael Adams, 2012, ‘Section 18 of the Australian Consumer Law and environmental
issues’ 24(1) Bond Law Review 30.
64
Schedule 2 of the Competition and Consumer Act 2010 (Cth), which came into force on 1 January 2011.
65
Corporations Act 2001 (Cth), s 1041H.
66
Australian Securities and Investments Commission Act 2001 (Cth), 12DA.

22
area continue to exist. The CSR notions, such as green marketing have become popular.67 This
approach to marketing is paralleled with the prevailing view that corporations should behave
in a socially responsible manner.68

A number of definitions for corporate social responsibility have been developed over the years.
These definitions have related to different stakeholders and have centred on some or all of the
following five dimensions:69

 The environmental dimension;

 The social dimension;
 The economic dimension;
 The stakeholder dimension; and
 The voluntariness for actions and reporting dimension.

Additionally, the related concepts such as corporate citizens70 and corporate social
performance71 have been debated since the 1950s.72 However, there is no consensus on a
definition for corporate social responsibility73 and this highlights the complexity of the concept
itself.

67
MacDaniel and Rylander.
68
Bronn P and Vrioni A, 2001, ‘Corporate Social Responsibility and Cause-Related Marketing: An Overview’ 20
International Journal of Advertising 207; Maignan I, Ferrell O and Ferrell L, 2005, ‘A Stakeholder Model for
Implementing Social Responsibility in Marketing’ 9 European Journal of Marketing 956.
69
Dahsrud A, 2008, ‘How Corporate Social Responsibility is Defined: An Analysis of 37 Definitions’ 15(1)
Corporate Social Responsibility and Environmental Management 1.
70
Matten D and Crane A, 2005, ‘Corporate Citizenship: Toward an Extended Theoretical Conceptualization’
30(1) The Academy of Management Review 166; Matten D, Crane A and Chapple W, 2003, ‘Behind the Mask:
Revealing the True Face of Corporate Citizenship’ 45 Journal of Business Ethics 109.
71
Wood D, 1991, ‘Corporate Social Performance Revisited’ 16(4) Academy of Management Review 691;
Clarkson M,1995, ‘A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance’ 20
Academy of Management Review 92.
72
Bowen H, 1953, Social Responsibilities of the Businessman (New York University Press, New York), xi;
Carroll A, 1999, ‘Corporate Social Responsibility: Evolution of a Definition Construct’ 38(3) Business and
Society, 268; Briggs R, 2011, ‘Corporate Social Responsibility and Sustainability’ in Gillis T (ed), The IABC
Handbook of Organizational Communication: A Guide to Internal Communication, Public Relations, Marketing
and Leadership (2nd ed, John Wiley and Sons, San Francisco) 79. However, it is important to note that as early
as the 1930s, the concept of corporate social responsibility has been referred to. However the publication of
Bowen’s book in 1953 led to the start of a modern era of corporate social responsibility. Carroll A, 1979, ‘A
Three- Dimensional Conceptual Model of Corporate Performance’ 4(4) The Academy of Management Review
497.
73
Corporations and Markets Advisory Committee, 2006, The Social Responsibility of Corporations Report 13.

23
Corporate social responsibility may be viewed as involving only purely voluntary acts. For
instance, Manne and Wallich defined this term as ‘a condition in which the corporation is at
least in some measure a free agent. To the extent that any of the foregoing social objectives are
imposed on the corporation by law, the corporation exercises no responsibility when it
implements them.’74 Alternatively, corporate social responsibility may also be referred to as a
business approach by which an organisation takes into account the manner in which its
activities may impact different stakeholders.75

The European Union Green Paper, for example, defined corporate social responsibility as ‘a
concept whereby companies integrate social and environmental concerns in their business
operations and in their interaction with their stakeholders on a voluntary basis’.76 Similarly, the
World Business Council for Sustainable Development states that corporate social responsibility
is ‘the continuing commitment by business to contribute to economic development while
improving the quality of life of the workforce and their families as well as of the community
and society at large.’77

Adopting the latest interpretation of this notion means that, to be a corporate social responsible
entity, a corporation has to go beyond the legal and economic requirements imposed on it.
Integrating the needs of the shareholders78, the consumers, the suppliers, the communities and
our planet may, in fact, not only be motivated by altruism but self-interest as the adoption of
such an approach may appear advantageous to the corporation. For instance, the corporation
may benefit from being perceived as a socially responsible entity because such a move

74
Manne H and Wallich H, 1973, The Modern Corporation and Social Responsibility (Washington American
Enterprise Institute for Public Policy Research, Washington) 106.
75
Corporations and Markets Advisory Committee, 13.
76
The European Commission, 2001, Promoting a European Framework for Corporate Social Responsibility,
European Union Green Paper 8; This definition has been reiterated in 2006: The European Commission, 2006
‘Implementing the Partnership for Growth and Jobs: Making Europe a Pole of Excellence on Corporate Social
Responsibility’ http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52006DC0136:EN:HTML.
77
World Business Council for Sustainable Development, ‘CSR: Meeting Changing Expectations’, 3.
http://www.wbcsd.org/DocRoot/hbdf19Txhmk3kDxBQDWW/CSRmeeting.pdf .
78
For a detailed discussion of the wide met of CSR, see: Subhabrata Bobby Banerjee, 2007, ‘Corporate Social
Responsibility: the good, the bad and the ugly’ Edward Elgar.

24
enhances its reputation.79 It is worth noting that the environmental destruction of communities
has led to debates in the International Criminal Court.80

Influence of ASX Corporate Governance Principles:

The eight principles prescribed in the 3rd edition of ASX Principles of Good Corporate
Governance. Whilst the word leadership has been repeatedly mentioned in Principle 1, it
focuses on the foundations for management and oversight.81 It is in Principle 3, that leadership
is mentioned in the context of acting ethically and responsibly. The tenant of the
recommendations was that: ‘A listed entity’s reputation is one of its most valuable assets and,
if damaged, can be one of the most difficult to restore.’

Therefore, ethical behaviour is reduced to preserve the reputation of organisations and not
because acting ethical is the ‘right thing’ to do.

The suggested contents for a code of conduct states amongst other things that, clearly states the
organisation’s expectation that all directors, senior executives and employees will:

• act in the best interests of the entity;

• act honestly and with high standards of personal integrity;
• comply with the laws and regulations that apply to the entity and its operations;
• not knowingly participate in any illegal or unethical activity;
• not enter into any arrangement or participate in any activity that would conflict with
the entity’s best interests or that would be likely to negatively affect the entity’s
reputation;
• not take advantage of the property or information of the entity or its customers for
personal gain or to cause detriment to the entity or its customers; and

79
Leap T and Loughry M, 2004, ‘The Stakeholder-Friendly Firm’ 47(2) Business Horizons 27; Bronn and Vrioni,
n 21 at 209; Greenley G and Foxall G, 1997, ‘Multiple Stakeholder Orientation in UK Companies and the
Implications for Company Performance’ 34 Journal of Management Studies 259; Kotha S, Rajgogal S and
Rindova V, 2001, ‘Reputation Building and Performance: An Empiric Analysis of the Top 50 Pure Internet
Firms’ 19(6) European Management Journal 570.
80
Steven Freeland, 2015, ‘Addressing the international destruction of the environment during warfare under the
Rome Statute of the International Criminal Court’, Intersentia.
81
ASX Corporate Governance Council, 2014, ‘ASX Principles of Good Corporate Governance, 3 rd edition’
<http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf>

25
 • not take advantage of their position or the opportunities arising therefrom for personal
gain.

On closer inspection of the above list it places the entity’s best interests as the first on the list
and ‘not knowingly engages in illegal or unethical conduct’ as the ethical standards by-line.
Further, it offers no measurements of what constitutes ‘act honestly and with high standards of
personal integrity’.

The 2016 South African King Report IV on corporate governance offers more direction and
help in how ethical leadership is part and parcel of good corporate governance. The key author
of the report, Professor Mervyn King emphasises that, ‘the overarching objective of King
Report IV is to make corporate governance more accessible and relevant to a wider range of
organisations, and to be the catalyst for a shift from a compliance-based mindset to one that
sees corporate governance as a lever for value creation.’82 One of the objectives of the King
Report IV are to promote corporate governance as integral to running an organisation and
delivering governance outcomes such as ethical culture, good performance, effective control
and legitimacy.83

This report also defined corporate governance in the following terms: ethical culture, good
performance, effective controls and legitimacy.84 Further in Principle 2 of the report it states
that, ‘The governing body should govern the ethics of the organization in a way that supports
the establishment of an ethical culture.’85 Whilst it did offer a list of recommendations to
establish an ethical culture, the solutions include institute a code of conduct and assignment of
managerial responsibilities. Such a structural approach to ethics only goes so far instituting
policies, procedures and practices. At the heart of culture is ‘people’, and shaping behaviour
requires good leadership to lead the way.

82
https://www.ensafrica.com/news/The-South-African-King-IV-Report-on-Corporate-Governance-themes-and-
variations?Id=2495&STitle=corporate%20commercial%20ENSight%20?utm_source=Mondaq&utm_medium=s
yndication&utm_campaign=View-Original

26
In 2007, Adams and Young argued that, ‘Leadership is not governance. Instead leadership
should be viewed as a facet of governance. Leadership in an organisational context can be
defined as the ability to influence others or direct the activities of a group of people towards a
common shared goal or outcomes.’86 The role of leadership is thus a yardstick for ethical
conduct aided by corporate governance principles as framework to establish good practice and
legal rules as default rules and penalty for misconduct.

The UK has taken a different approach with the enactment of section 172 Companies Act 2006
(UK). There has been a plethora of debate surrounding the approach to directorial decision
making in the scheme of corporate governance. A divergence has emerged between numerous
schools of thought as to whose interests the directors are to consider in conducting the
company’s management. The English law approach was to codified under s 172 which Commented [AK9]: https://www.scribd.com/document/28
4230299/nomnom
professes an ‘enlightened shareholder value’ approach to corporate governance. This has given
rise to scrutiny and challenge from numerous critics but most notably from proponents of the
‘stakeholder management’ stance.87 Commented [AK10]: https://www.scribd.com/document/2
84230299/nomnom

Section 172 inaugurated an ‘enlightened shareholder value’ approach so that directors, in

fulfilling their duty towards the company’ are required to ‘act in the way [they] consider, in
good faith, would be most likely to promote the success of the company for the benefit of its
members as a whole, and in doing so have regard’ to other factors insofar as they promote the
company’s interests; thus, the legislation equates the interests of the shareholders with the
company’s success.

Although other factors such as, inter alia, the company’s employees, suppliers and customers,
the long-term consequences etc. are to feature in decision making, these factors will be
subordinate to the interests of the shareholders. Thus, the intention of the provision is not to
engender a surreptitious adoption of ‘stakeholder management’, as the assertion suggests, since
the interests of other stakeholders are only instrumental to ensuring that the company is
profitable which is causatively linked to the members’ interests.88

86
Michael Adams and Angus Young, 2007, ‘Regulating corporate governors: rethinking board responsibilities
and liabilities’, 59 (1) Keeping Good Companies, 11.
87
Andrew Keay, 2011, ‘The duty to promote the success of the company: is it fit for purpose?’ 32 The Company
Lawyer 1.
88
Richard Williams, 2012, ‘Enlightened shareholder values in UK company law’, 35(1) UNSW Law Journal 360.

27
The imposition of a subjective standard by requiring ‘good faith’ appears prima facie to be
counterproductive to consistency as it does not appear to set any threshold standard for
directors. Nonetheless, the legislative guidance illustrates that compliance with s 172 is Commented [AK11]: https://www.scribd.com/document/2
84230299/nomnom
supplemented by the ‘duty of care’ embodied in statute, with an objectivity given that directors
are required to act with a degree of ‘reasonable care, skill and diligence’.

In Regentcrest v. Cohen89, Parker J articulated that a subjective standard necessitates a

consideration of what the director ‘genuinely’ and ‘honestly’ believed was conducive to
promoting the company’s success. This, in conjunction with good commercial reasons for
acting entitled the UK court to conclude that a policy to excuse the debts of the directors was
advancing the success of the company.

The courts seem reluctant to interfere with directorial decisions on the premise that corporate
entities should be largely administered by internal management save to the extent that legal
input is unavoidable. Directors are in a better position to meet the demands of the individual Commented [AK12]: https://www.scribd.com/document/2
84230299/nomnom
company in R v HM Treasury90 and the courts thus adopt a non-interventionist stance.

The view that a company is ‘organised and carried on primarily for the profit of the
[shareholders]’ has been articulated in the US decision of Dodge v. Ford Motor Co (1919)91 but Commented [AK13]: https://www.scribd.com/document/2
84230299/nomnom
the UK position is now different to Australia and the USA. Thus, s 172 can arguably be viewed
as an effective development in ensuring that the company’s success is always at the forefront
of decision making. A key question is whether Australia should adopt a similar provision to
the UK’s enlightened shareholder in s 172.

89
[2001] BCC 494
90
[2009] EWHC 3020
91
170 NW668 (Mich, 1919)

28
 4. What does ESG – environmental - social and governance mean?

Is CSR still important?

There is a growing trend in the 21st century which may be a shift away from CSR as the driver
for corporate social responsibility or perhaps a redefinition of its place in the corporate
governance framework. The trend has been two-pronged; one is the rise and rise of the
influence of institutional investors globally and in each national jurisdiction and their use of
socially responsible investment principles using the lenses of environmental, social and
governance issues, collectively known as ESG. ESG is now an accepted ‘concept’ applied by
institutional investors such as banks, pension systems, superannuation funds and fund
managers across the globe, departments in these organisations are staffed by teams of
professionals managing the wealth of beneficial members – retirees, pensioners and
superannuants valued in the trillions of dollars92.

The second prong is the shift of CSR from the voluntary governance codes of the 1990s to
corporate governance compliance becoming mandatory and set in legislation, and stock
exchange listing rules also backed by law93. Together with this shift has been the acceptance
of risk management practices as integral to corporate governance and also enshrined in
legislation such as the requirement of all Australian financial institutions to maintain risk
management systems94. Finally there is the concept of ‘sustainability’ in that the strategy and
or activity of the company must be focused beyond the short or medium term. Together these
two prongs are supported by the growing trend in the rise of the application of ESG by
institutional investors globally that has incorporated CSR into the ESG concept, as applied by
institutional investors in their assessment of their portfolio of investments in all jurisdictions
and in many ways converging a local approach to corporate governance to a global approach.

Institutional investors have a fiduciary responsibility to act in the best interests of the beneficial
or ultimate owners of the funds under their management. The shift of these funds from
investing in companies that are not only profitable but continue to have a growing trend to

92
Eccles, R. G., Kastrapeli, M. D. and Potter, S. J, 2017, How to Integrate ESG into Investment Decision Making:
Results of a Global Survey of Institutional Investors. Journal of Applied Corporate Finance, 29: 125 -133.
doi:10.1111/jacf.12267
93 Griffith, S. J, 2015, Corporate Governance in an Era of Compliance. Wm. & Mary L. Rev, 57, 2075.
94
Corporations Act 2001 (Cth), s912A, Obligations of Financial Services Licensees.

29
profits to being more concerned with how these profits are achieved and the internal
governance of the company and the company’s relationship with other stakeholders. The
exponential growth of shareholdings and subsequent influence on companies of institutional
investors demands the attention of corporate citizens far more intently than does the social
pressure of being responsible, as directors also have duties and responsibilities to be totally
responsive to their shareholders95.

Socially responsible investment principles and ESG

The term social investment is interchangeable with ethical investment. The origin of socially
responsible investment principles can be traced to the nineteenth century and religious
movements in the UK and US such as the Methodists and Quakers. These and other religious
movements have consistently sought ethical and socially responsible investment of their funds
by not compromising on their principles; for example the churches would not invest in
companies involved in gambling or the sale, distribution or manufacture of alcohol.

This same motivation has been manifested in the twentieth century where US church groups
do not invest in tobacco companies and where they do, they actively use their shareholding to
change the companies behaviour to be more socially responsible; for example the investors in
1994 forced McDonald's to ban all smoking in all its corporate owned restaurants 96.

Contemporary examples of these social and ethical investment concerns of institutional

investors include human rights violations such as poor work or employment practices and
conditions (the use of human trafficking or child labour in the corporate supply chain are
examples); production practices that impact the environment; and genetic engineering to
livestock or plants are some further examples.

Examples of ‘E S and G’:

95
Peter Iliev, Karl V. Lins, Darius P. Miller, Lukas Roth, 2015, ‘Shareholder Voting and Corporate Governance
Around the World’ (Oxford University Press on behalf of The Society for Financial Studies);
doi:10.1093/rfs/hhv008
96
Crosby M H, 2000, Religious challenge by shareholder actions: changing the behaviour of tobacco companies
and their allies. BMJ : British Medical Journal;321(7257):375-377. “In 1972 the Interfaith Center on Corporate
Responsibility was established in New York. It now comprises a coalition of around 300 Protestant, Jewish, and
Catholic institutional investors who use their investments to challenge companies on various social issues” .

30
There are a series of socially responsible investment filters that have been developed since the
later 1980s through to the most recent in 2006 - the UN Principles for Responsible Investment
(UNPRI).97 It is essential to the development of socially responsible investment that large
institutional investors are actively involved in screening potential investments as appropriate
as companies that are socially and ethically responsible and sustainable. The following are the
series of investment filters:

 Coalition for Environmentally Responsibly Economies (Ceres) (1989) is a group of

investors and advocacy groups. One of Ceres most recent publications is “the 21st
Century Corporation Roadmap for sustainability.”98
 UN Global Compact 1999 – it now has 10 principles (2004) that spans the concerns
over corruption, environmental practices and human rights and labour standards
amongst companies across the globe.99
 OECD Guidelines 1999; 2000 (multinationals); and 2004. The Guidelines are
recommendations addressed by governments to multinational enterprises. They provide
voluntary principles and standards for responsible business conduct consistent with
applicable laws100. Some critical analysis has found them impact wanting.101
 Global Reporting Initiative GRI – Sustainability 2002 – 2013. This is based on a
partnership formed between Ceres and the UN in 1999. The role of multinational
enterprises in sustainability reporting in terms of disclosure on economic, labor and
ESG indicators is captured through company-level information on sustainability
reporting from the Global Reporting Initiative. The current reporting trend is high; the
Winkler study covers 2,020 companies in 81 countries and 54 sustainability
indicators.102
 UNPRI – 2006 – This initiative was convened by the then UN Secretary general in
bringing together an international group of investors to respond to the ever increasing
application of ESG to the investment process, signatories went from the hundreds to

97
The Principles can be found online at http://unpri.org/about/
98
https://www.ceres.org/resources/reports/21st-century-corporation-ceres-roadmap-sustainability
99
See the principles at: https://www.unglobalcompact.org/what-is-gc/mission/principles
100
Zerk, J. A. (2006). Multinationals and corporate social responsibility: Limitations and opportunities in
international law(Vol. 48). Cambridge University Press.
101
Siems, M. M., & Alvarez-Macotela, O. S, 2017, The G20/OECD Principles of Corporate Governance 2015: A
Critical Assessment of Their Operation and Impact.
102
Winkler, D, 2017, How do multinationals report their economic, social, and environmental impacts? evidence
from global reporting initiative data.

31
 the thousands globally and continue to grow with not only funds signing up but also
nations, including Australia103.

ESG screening looks at the ethical behaviour of the companies that may be the target of
investment, the screening assesses the conduct of these companies such as good employment
practices or taking active steps to eliminate or reduce pollution or their carbon footprint in their
activities or that these companies do not themselves invest in proscribed industries such are
armaments. ESG screening is formulated by institutional investors into investment policies
where this screening is an integral part of the investment process and to meet the objective of
enhancing shareholder value – the institutional shareholders value. This process becomes an
extremely influential factor in changing poor corporate governance by corporations as they
seek investment capital in a competitive investment capital market.

ESG is a series of screening lenses utilized by institutional investors such as pension systems,
superannuation fund managers, investment managers, and sovereign wealth funds104 that
globally manage investments on behalf of their beneficiaries to filter those investments and
select those that are socially and ethically responsible investments in terms of their impact on
the environment, society and the quality of the governance of the company – the investment
vehicle, two examples of these globally active institutional investors using ESG, including
investment in Australian stocks, are CalPERS and Blackrock.

Impact of CalPERS ?
In 2014 CalPERS surpassed $300 billion in total fund market value. This US pension fund
serves more than 1.9 million members as a retirement system105. By comparison CalPERS total
fund market value is just over half that of the Saudi Arabian sovereign fund (SAMA) which is
the in the top 5 sovereign funds globally106. SAMA has assets of over $514 billion, according
to the Sovereign Wealth Fund Institute107. CalPERS and SAMA invest in a variety of local and

103
Lee, D. D., Fan, J. H., & Wong, V, 2018, No More Excuses! Performance of ESG Integrated Portfolios in
Australia.
104
Sovereign Wealth Funds: When countries have excess reserves, they may create investment vehicles that deploy
that money and generate returns for the nation itself. The money in such funds is invested across the globe and in
a range of asset classes.
105
https://www.calpers.ca.gov/page/home
106
https://www.swfinstitute.org/sovereign-wealth-fund-rankings/
107
Ibid.

32
international asset classes across the globe. SAMA for example made an investment of $3.5
billion in the now ubiquitous, along with Air BnB Uber Technologies.108

Impact of Blackrock ?
BlackRock, Inc. is an American global investment management corporation. BlackRock is the
world's largest asset manager with $6.3 trillion (USD) in assets under management as of
December 2017; the company took in $264 billion in new funds just in 2017 109. The size of
Blackrock is six times greater than the sovereign fund of Norway which is the largest sovereign
wealth fund in the world; Blackrock is even larger than the total of the top 5 sovereign funds
in the world that include China, Kuwait and Abu Dhabi. Norway's Sovereign Wealth Fund -
the Government Pension Fund Global has $1 trillion (USD) dollars in assets with the other top
five funds each holding just under $1 trillion (USD) dollars in assets110.

Increasing institutional investor influence:

Berle and Means identified the influence of large shareholders in the 1930s.111 The influence
was highlighted as increasing the separation between the owners (shareholders) and controllers
(directors) of the business. Today, in the second decade of the 21st century, the trend is at its
most extreme example large shareholders are institutional investors that own significant
proportions of equity in many companies across the globe with an influence on their stock
portfolios second to none, dominating across national jurisdictions. Institutional investors look
now to play a key role in corporate governance with an internationalization of their cross border
portfolios, they look at the corporate governance of the companies they hold, especially in light
of financial crises that have occurred in many parts of the world and also globally in 2008.112

The global financial crisis (the crisis) stressed the important role of good corporate governance
in reestablishing trust in the global financial markets. In statements issued by the International
Corporate Governance Network (ICGN) on the crisis, during the period 2008 to 2009 it
emphasized that institutional investors have a responsibility to generate long term value on

108
Bloomberg 2006, “Uber Receives $3.5 Billion Investment From Saudi Wealth Fund” Eric Newcomer and Glen
Carey, June 2. It’s worth noting that the Managing director of Saudi sovereign wealth fund joined the Uber board.
109
https://www.blackrock.com/corporate/about-us
110
https://www.swfinstitute.org/sovereign-wealth-fund-rankings/
111
Bendickson, J., Muldoon, J., Liguori, E., & Davis, P. E, 2016, ‘Agency theory: the times, they are a -changin’,
54(1) Management Decision, 174.
112
Ibid.

33
behalf of their members – pensioners, savers “their beneficiaries” of these multi-billion dollar
funds and fund managers. The statements focused on “taking into account governance factors
…..governance is not a parallel activity ….but integrated into the investment…..by developing
….transparency …for the institutional investor to exercise their rights in a responsible,
informed and considered way”.113

United Nations Global Compact (UN Global Compact):

The launch, in 2000, of the United Nations Global Compact as both a policy platform and a
practical framework for companies committed to sustainability and responsible business
practices based on universally accepted principles in the areas of human rights, labour,
environment and anti-corruption, and to achieve support of broader UN goals. It has 7,000
corporate signatories in 135 countries114. The UN Global Compact gave rise to another UN
initiative the UN principles for responsible investment (UNPRI).

As with CSR the UNPRI/ESG initiative is voluntary. In July 2004 in London, the Executive
Director of the United Nations Environment Programme announced plans to create a set of
neutral, global, UN-endorsed principles. In early 2005, the then United Nations Secretary-
General Kofi Annan invited a group of the world’s largest institutional investors to join a
process to develop the Principles for Responsible Investment. A 20-person investor group
drawn from institutions in 12 countries was supported by a 70-person group of experts from
the investment industry, intergovernmental organisations and civil society. The Principles were
launched in April 2006 at the New York Stock Exchange. Since then the number of signatories
has grown from 100 to over 1,800. The UNPRI’s growth has been consistent since it began in
2006.115

The objectives of the 6 UNPRI principles are to support, through ESG, an economically
efficient, sustainable global financial system for long-term value creation to benefit the
environment and society as a whole; objectives that are aligned with CSR but are backed by
the hard influence of capital investment. The UNPRI also encourages the adoption of the
UNPRI and ESG and collaboration on their implementation toward a sustainable global

113
Strenger, C, (2017), The Future of Corporate Governance. Managing for Responsibility: A Sourcebook for an
Alternative Paradigm
114
Silver, N, 2017, La grande illusion. In Finance, Society and Sustainability, Palgrave Macmillan, London, 101.
115
https://www.unpri.org/pri/about-the-pri

34
financial system by fostering good governance, integrity and accountability; and by addressing
obstacles to a sustainable financial system that lie within market practices, structures and
regulation. Commented [AK14]: https://www.unpri.org/download?ac
=10

It may seem that the UNPRI and their ESG lens is simply another example of calls for
companies to adopt CSR policies such as the EU’s request for CSR policies statements by
companies tendering for contracts or the Australian ASX requirements under the listing rules
that require companies to report their performance under environmental legislation 116, however
the focus of screening companies through ESG filters is a process that appears to achieve both
better corporate governance and corporate performance, arguably borne out by ESG reporting,
including sustainability reporting117.

5. Reporting and Voting for CSR and ESG?

The power and right to vote: impacts on corporate governance
There is a rising trend in shareholders, especially institutional shareholders exercising their
right to actively vote their shares at general meetings of shareholders, globally118. The central
and arguably the most important right a shareholder holds is the right to vote at a general
meeting of shareholders of the company; it can be seen as fundamental as a means of control
in modern corporations. The right for shareholders to vote determines who will be a director
of the company and may also give directors direction on the strategy the company may pursue
depending on the Constitution or governing rules of the company119.

In most jurisdictions of the world shareholders, especially institutional shareholders, vote at

general meetings of the companies in which they hold stock. The act of voting has coined the
term shareholder ‘activism’ 120to describe the act of voting; shareholder voting is a disruptor

116
Dumay, J., & Hossain, M. A, 2018, Sustainability risk disclosure practices of listed companies in
Australia. Australian Accounting Review.
117
Dyck, A., Lins, K. V., Roth, L., Towner, M., & Wagner, H. F. (2018). Entrenched Insiders and Corporate
Sustainability (ESG): How Much Does the “G” Matter for “E” and “S” Performance Around the World?.
118
Kraakman, R., & Hansmann, H. (2017). The end of history for corporate law. In Corporate Governance (pp.
49-78). Gower.
119
Chapter 2F - Members’ Rights and Remedies and Chapter 2G – Corporations Act 2001 (Cth)
120
Peter Iliev, Karl V. Lins, Darius P. Miller, Lukas Roth, 2015, ‘Shareholder Voting and Corporate Governance
Around the World’, Oxford University Press on behalf of The Society for Financial Studies.
doi:10.1093/rfs/hhv008

35
of potential poor corporate governance by a company121 122 123. Institutional shareholders rely
on ESG reporting to inform their voting on resolutions on agenda items at shareholder general
meetings. The use of voting by shareholders to engage in activism is considered by researchers
as vital to good corporate governance of companies globally124. In the U.S. it is compulsory for
institutional investors to vote on all company resolutions, this by extension also occurs on their
stock holdings of non – US companies internationally, significantly including their Australian
stockholdings125.

Voting by shareholders, especially institutional shareholders is an exercise of good corporate

governance in companies around the world which is supported by national laws and regulations
that allow for meaningful votes to be cast126. Shareholders vote on the resolutions of the general
meeting’s agenda which includes electing or re-electing directors and other significant items
that impact good governance. As such Institutional shareholders votes have governance-related
outcomes in influencing better corporate governance informed by ESG reporting.127128

In any jurisdiction weak shareholder protection laws and enforcement combined with low
levels of corporate disclosure result in poor corporate governance whereas strong shareholder
protection laws and enforcement together with high levels of corporate disclosure ensures both
better corporate governance and company performance for the benefit of shareholders and in
terms of ESG and responsible investment, better outcomes for the local and global
community.129

121
https://www.smh.com.au/business/directors-in-crosshairs-as-agm-season-begins-20140926-10mkr9.html
122
https://www.afr.com/business/asx-director-peter-warne-suffers-high-no-vote-20140922-jftsc
123
https://www.smh.com.au/business/adviser-urges-investors-to-shun-21st-century-fox-delisting-move-
20140304-3457j.html
124
Peter Iliev, Karl V. Lins, Darius P. Miller, Lukas Roth, 2015, ‘Shareholder Voting and Corporate Governance
Around the World’, Oxford University Press on behalf of The Society for Financial Studies;
doi:10.1093/rfs/hhv008
125
Advisers warn of surge in activism , June 2014, Australian Financial Review
126
Peter Iliev, Karl V. Lins, Darius P. Miller, Lukas Roth, 2015, ‘Shareholder Voting and Corporate Governance
Around the World’, Oxford University Press on behalf of The Society for Financial Studies;
doi:10.1093/rfs/hhv008

127 Behind the ESG boom - Australian Institute of Company Directors: Mar 23, 2018 -Was the focus on
sustainability part of the broader CSR movement?
https://aicd.companydirectors.com.au/advocacy/governance.../behind-the-esg-boom
128
http://www.companydirectors.com.au/director-resource-centre/publications/company-director-
magazine/2015-back-editions/february/opinion-global-headwinds
129
Peter Iliev, Karl V. Lins, Darius P. Miller, Lukas Roth, “Shareholder Voting and Corporate Governance
Around the World” 2015. Published by Oxford University Press on behalf of The Society for Financial Studies;
doi:10.1093/rfs/hhv008

36
ESG reporting informing shareholder voting
Institutional investors or shareholders register to vote by post however this is now increasingly
an electronic facility, and a growing trend globally, which given the early cut-offs for electronic
voting and the significant percentage of Institutional investors or shareholders ownership of
stock in companies makes the holding of the traditional ‘in-person’ general meetings redundant
as discussed by Corporations and Markets Advisory Committee (CAMAC) in their 2012 paper
of matters concerning the future of the Annual General Meeting of shareholders. 130.

Institutional investors or shareholders may vote ‘for’ or ‘against’ or abstain on the resolution
on the meeting agenda. The ‘against’ vote on the agenda item by Institutional investors or
shareholders, or abstaining from voting, may not directly relate to the substance of the item but
may be a means for Institutional shareholders to warn the company of their concerns and
influence better corporate governance131. Institutional shareholders votes are determined by
ESG reporting and across the world this research is predominantly provided by two firms:
Institutional Shareholder Services (ISS) and Glass Lewis, colloquially known as proxy
advisers, who provide ESG data reports to Institutional shareholders on all listed companies
across the globe in order for Institutional shareholders to vote at all shareholder general
meetings.132

ESG reporting occurs by the company in their Sustainability Report and their Governance
Statement and in Australia through their operating and financial review (OFR).133 In Australia
Company directors must provide better financial reporting about the key drivers of a business,
including its strategy and future prospects and the key material business risks to achieving that
strategy and future prospects. Australian Securities and Investments Commission’s Regulatory
Guide 247 gives guidance to listed entities on how to prepare the OFR section of the annual
report in compliance with the requirements of section 299A(1)(a)-(c) of the Corporations Act
2001. A key element of the ASIC’s interpretation of the Act is its expansion of the concept of

130
http://www.camac.gov.au/camac/camac.nsf/byheadline/pdfdiscussion+papers/$file/agm.pdf
131
Simon Evans Vote of no confidence: Proxy advisers come under fire Australian Financial Review, December
2013
132
Patrick Durkin ASIC reins in proxy firms ahead of lively AGM season, Australian Financial Review,
September 2017
133 Dr Ulysses Chioatto, 2014, ‘L'enfant terrible: the many challenges of adopting the RG 247 regulatory guide’,
Company Director Magazine, Australian Institute of Company Directors.

37
“prospects for future financial years” to include “material business risks” and this is informed
by ESG related issues related to the company such as mining companies creating environmental
risks in their operations or manufacturing companies creating social impact risks in their
operations and supply chains.

In Australia shareholder voting and in particular institutional shareholder voting is not

compulsory unless that institution is a member of the Financial Services Council of Australia
(FSC). The FSC has various standards which its members must adhere to; the relevant standard
in this case is Standard 13. The main purposes of Standard 13 Voting Policy, Voting Record
and Disclosure are:
(a) in relation to Australian investments, to require the formulation of an Operator’s[read
institutional investor] voting policy (including proxy voting) – [this relates to voting through
the electronic platforms of ISS the ‘proxy advisers’] for each Scheme it operates;
(b) whether or not an Operator engages the services of a voting or proxy consultant [read ‘proxy
advisers’ ]in exercising its voting rights; and
(c) to require disclosure of the above matters and details of the exercise of such voting rights
by the Operator (on an “entity and resolution level” basis) in respect of each financial year for
each Scheme it operates (“Scheme” is defined in FSC Guidance Note 5 Industry Terms and
Definitions, and includes REs of registered schemes and RSE licensees of superannuation
funds). Commented [AK15]: https://fsc.org.au/resources/standard
s/

Subject to the exceptions mentioned below, Standard 13 applies to FSC members who are
Operators of a Scheme and in that capacity have the ability to exercise voting rights in relation
to investments and assets of a Scheme they operate, to the extent to which those assets or
investments are listed on a financial market operated by an entity holding an Australian market
licence issued under Part 7.2 of Chapter 7 of the Corporations Act 2001. The Standard applies
in respect of Australian-listed investments only. An Operator is free to the extent it thinks
appropriate to extend and apply the requirements of this Standard to any other investments of
the relevant Scheme (including ex-Australian investments).134
In the UK as in the US and Europe there is a longer history to institutional shareholder active
voting at general meetings of shareholders to influence corporate governance, that is

134
https://www.fsc.org.au/resources/standards/

38
mandatory, and as such sometimes questionable as to its genuine impact on better corporate
governance. In the cases of the UK, US and Europe institutional shareholder voting is informed
by ESG issues as researched predominantly by the two global firms ISS and Glass Lewis.
Voting by US, UK and European investors has a direct impact on Australian corporate
governance despite out own unique corporate governance Principles and Recommendations135.
In the UK the peak body representing institutional investors is the National association of
Pension Funds (NAPF)136. NAPF conducted a survey in 2014137, of their members (institutional
shareholders) voting on the stocks they held internationally and found that voting rights are
consistently being exercised within the UK and that pension schemes are also increasing their
active voting in their investments outside the UK into overseas markets. The table 1 below
highlights the increase of UK pension funds voting across various jurisdictions of UK pension
funds from 2013 to 2014, this trend continues to increase.

TABLE 1 INCREASE ACROSS VARIOUS JURISDICTIONS OF UK PENSION FUNDS

VOTING FROM 2013 TO 2014.

Overseas UK From a percentage of: To a percentage of:

Pension
Investments by
jurisdiction:

US 89% 92%

Europe 85% 93%

Japan 74% 88%

Emerging 59% 85%

Markets (Asia)

UK pension funds vote on their Australian companies’ shareholdings based on ESG reporting
and issues that strongly impact and change Australian corporate behaviour in terms of social
impact, environmental concerns and in many ways import UK corporate governance standards.
If we look back to the Cadbury Report (1992) it encouraged institutional investors in “the way

135
ASX Corporate Governance Council Principles and Recommendation 3 rd Edition
136
NAPF represents over 1,300 pension schemes that provide pensions for over 17 million people with £900
billion of assets.
137
NAPF Engagement Survey 2014: Pension Fund’s Engagement with Companies

39
in which institutional investors use their power (the weight of their votes) is of fundamental
importance”; the Cadbury Report is extensively cited in Australia and its principles have found
their way into the primary standard source of corporate governance in Australia: the ASX
Corporate Governance Council’s Corporate Governance Principles and Recommendations138

In Europe institutional investors actively vote their shares based on ESG issues based on the
EU Shareholder Rights Directive (2014). The directive also requires institutional investors to
disclose how they cast their votes in general meetings of the companies concerned and an
explanation for their voting behaviour. This voting disclosure and rationale based on ESG
issues is an extremely powerful influencer of corporate behavior. The background the EU
Directive can be traced back to 2002 and the EU High-Level Group of Company Law Experts;
the 2006 Directive on Shareholder Rights; the 2007a that was enacted into each EU members
States laws and the external study commissioned by the European Commission and carried out
by Institutional Shareholder Services (Europe) into “proportionality” i.e. the relationship
between capital and control or ‘one share one vote’. Also contributing to the 2014 directive
was the 2007 OECD paper ‘Lack of Proportionality Between Ownership and Control:
Overview and Issues for Discussion’.
The growth in sustainability reports
The Australian Council of Superannuation Investors (ACSI)139, report of July 2017: Corporate
Sustainability Reporting in Australia140– found corporate sustainability reporting (including
economic, environmental, social and governance risks) is improving, but significant gaps
remain including in relation to climate-related disclosures by ASX200. The Report found that
eighty-five cents in every dollar invested in the ASX200 flows to companies that report to a
high standard. The report also found that high standards of sustainability disclosure are

138
In the UK there has been a shift from the Cadbury Report (1992) norms and rules to the UK Corporate
Governance Code (2014); the Cadbury Report (1992) provided us with the definition of corporate governance as
the “system by which companies are directed and controlled”, and voluntary adoption of governance best practices
and the “comply or explain” principle to be expressed as “if not why not” in Australia. .
139
ACSI has 38 members who are asset owners and institutional investors, collectively, they manage over $2.2
trillion in assets and own on average 10% of every ASX200 company. It was established in 2001; ACSI provides
advice on environmental, social and governance (ESG) issues to their members. ACSI members believe that ESG
risks and opportunities have a material impact on investment outcomes and that they have a responsibility to act
to enhance the long-term value of the savings entrusted to them. ACSI members seek measurable and permanent
improvements in the ESG practices and performance of the companies they invest in.
140
https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/2017-Sustainability-Report-
FINAL.pdf July 2017

40
increasing compared to 2008, with over 50% of the ASX200 now reporting to a “Leading” or
“Detailed” level (compared to 19.5% in 2008).

The report based on a review of 2016 corporate ESG disclosures and found that 92% of
ASX200 companies see the value in sustainability disclosure and reporting. An example of the
corporate reporting found in the Report is that more than half of the ASX200 (58%) reported
greenhouse gas emissions, and 44% had a policy statement or other statement acknowledging
climate change as a risk.

Corporate governance statements:

In Australia ASX listed companies issue Corporate Governance Statements (the Statement)
that include reporting on their approaches to ESG issues and sustainability. The Statement
reports on their corporate governance framework and addresses the governance standards
adopted: ASX Corporate Governance Council’s Recommendations. The Statement is approved
by the Board of Directors and also sets out the key structural elements of their corporate
governance framework.

The Australian ASX Corporate Governance Council Principles & Recommendations (3rd
Edition) published in 2014 include the Recommendation 7.4 explicitly requiring that: a listed
entity should disclose whether it has any material exposure to economic, environmental and
social sustainability risks and, if it does, how it manages or intends to manage those risks. This
is clearly in context with global reporting trends when the following international ESG
indicators are considered include:
 The Global Reporting Initiative (GRI) in 2013 with over 400 indicators on corporate
sustainability performance
 The International Integrated Reporting Council (IIRC) has issued its <IR> Framework,
with continued efforts to harmonise this framework with traditional financial reporting,
accounting standards
 The Sustainable Stock Exchanges Initiative (SSE), co-convened by the UN-supported
Principles for Responsible Investment
 The United Nations Conference on Trade and Development
 The United Nations Environment Programme Finance Initiative
 The UN Global Compact

41
In the United States, the Sustainability Accounting Standards Board (SASB) has issued
standards for 45 industries in 6 sectors. In 2016, standards for more than 80 industries in 10
sectors were issued.

ESG reporting by companies against the various standards in their Corporate Governance
Statements are commonly used as investment benchmarks by institutional investors and
engender ever greater disclosure expectations of institutional investors. Listed companies are
eager to meet investor expectations.

An example of a Corporate Governance Statement is that of Bendigo Bank which includes

how they have addressed ESG issues141 in their 20 page Statement, many Statements run to
over 100 pages. Further examples of reporting are available, in 2015 the two peak
organisations, noted above, ACSI and FSC, that represent institutional investors in Australia
issued a report as a guide to listed companies to provide better reporting to their institutional
investors: ESG “Reporting Guide for Australian Companies”142 (the ESG Report).

The ACSI and FSC ESG Report highlighted a number of companies as exemplary ESG
reporters:

Environmental

Orica’s 2014 Sustainability Report143 provides investors with details relating to:
- Instances of non-compliance with environmental license conditions
- Containment losses experienced
- Number of process safety incidents
BHP Billiton 2014 Sustainability Report144:
The report provides details of waste produced, recycled or sent to land fill and information
on water recycled and re-used including targets for the future.

141
https://www.bendigoadelaide.com.au/public/corporate_governance/pdf/Corporate-Governance-Statement.pdf
142
https://www.asx.com.au/documents/asx-compliance/acsi-fsc-esg-reporting-guide-final-2015.pdf
143
See: http://www.orica.com/Sustainability#.VaNdv_mqpBc
144
see: http://www.bhpbilliton.com/home/society/reports/Pages/Roll%20up%20Pages/2014-

42
 AGL Energy 2014 Sustainability Report145: publishes extensive equity-accounted data, on
its carbon emissions.

Social

Downer EDI Ltd reports146 year on year indicator data on workplace health and safety, along
with the absence of fines or prosecutions. Commentary provides insight into safety
governance to enhance risk management, and the responsibilities of business leaders.
Performance and the area for performance improvements going forward is discussed along
with initiatives implemented which enhance business-specific risk management. Commented [AK16]: https://www.asx.com.au/documents/
asx-compliance/acsi-fsc-esg-reporting-guide-final-2015.pdf
National Australia Bank147. Refer to NAB’s 2014 Dig Deeper Paper.

Westpac Banking Corporation is recognized by the Group of 100 as a leading practice

reporter in the Financial Services Industry sector. Westpac has reported on stakeholder
engagement in its 2014 Annual Review and Sustainability Report148.

RIO and BHP have published extensive code of conduct documents outlining their standards,
who they apply to, membership of global transparency initiatives, whistleblower policy, staff
training, reporting of breaches and so on.

145
see: http://agl2014.sustainability-report.com.au/
146
See:http://www.downergroup.com/Resources/Documents/Sustainability/ Reports/2014/2014-Sustainability-
Report_FINAL.pdf
147
See: http://cr.nab.com.au/download-centre
148
See:http://www.westpac.com.au/about-westpac/sustainability-and-community/reportingour
performance/stakeholder-impact-reports/

43
 6. Conclusion – the future of corporate governance

As this chapter has examined, the competing concepts of corporate governance, including
CSR and ESG, as well as due diligence and compliance, are challenging. The principles
are applied to all companies, but a greater focus on public companies (in particular, those
listed on a stock exchange). Some of the commentary that indicates confusion is led by the
public listed companies that have to deal with a constantly changing environment.
Specifically, there is a power-play between the board and its stakeholders, as it impacts on
employees, suppliers, local communities and the broader physical environment.
Additionally, may ordinary people, either directly as an investment or via their
superannuation fund, have mandates to invest in an ethical way. Thus, the importance of
institutional investors and trillion dollar super funds with clear mandates around fossil fuels
or gambling or sustainability are changing the future directions and strategies of
corporations.

Professor Bill Black, while at the University of Texas, wrote a guide to help corporate
governance across a range of issues, dealt with in this chapter. The 2005 book, ‘The best
way to rob a bank is to own one’, reflected on the USA savings and loans financial debacle,
but could be applied to the contemporary investigations into misconduct in the Australian
financial services industry.149

He coins the term “control fraud’ to mean when the CEO is actually the primary person
controlling the corporate governance and fraud preventions, but uses their power for their
own benefit.

Black’s top 15 lessons from an earlier financial disaster are:

1. Fraud matters and control systems pose unique risks;
2. Critical to understand fraud mechanisms, and few regulators have fraud training (not
taught in business schools);
3. Control frauds occur in waves and not random, as fit what criminologists know increase
crime (opportunistic environments, which you can control);
4. Waves of control fraud cause immense damage;

149
William Black, 2005, ‘The best way to rob a bank is to own one’, University of Texas Press.

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 5. Control fraud converts conventional restraints on abuse into aids for fraud;
6. Conflicts of interest really matter;
7. Deposit insurance was not essential to the frauds, but helped;
8. ‘Systemic capacity’ problems became endemic (and followed in the global financial
crisis’ and contemporary banking scandals in front of the Australian Royal
Commission;
9. Regulatory policy and highest political leadership is vital;
10. Ethics and social forces are critical restraints on fraud;
11. Deregulation and assets matter in the equation of fraud;
12. Why do regulatory agencies (SEC150 and in Australia, ASIC) not have a chief
criminologist, to understand white-collar crime?
13. Control frauds defeat traditional corporate governance protections;
14. Stock (shares) options increase the actual looting by control frauds (the link between
short and long term remuneration, paid as bonuses); and
15. There is a need to reinvent in the government policies that actually work and positively
act to prevent control fraud and other opportunities to exploit corporations.

As is often said, will directors and investors look back and learn the lessons of history
especially when we consider the overwhelming debacle that was the South Sea Bubble
Company, arguably the progenitor of the modern day corporate governance scandal, such
scandals continue to call for a renewed focus from age to age of better governance and
responsibility of the corporate citizen:
“During all this time the public excitement was extreme. We learn, from Coxe’s
Walpole, that the very name of a South-Sea director was thought synonymous with
every species of fraud and villainy…..there were cries of justice due to an injured
nation”
from Memoirs of Extraordinary Popular Delusions, Charles Mackay, Richard Bentley
publisher (1841) reproduced by Wordsworth Press 2006.

150
Securities and Exchange Commission, Federal body, USA.

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