Key points |
Corporate social responsibility equals sustainable business practices: Companies which embrace corporate social responsibility reap many benefits, such as higher levels of trust and lower rates of staff turnover. |
Role of Government: The Australian regulatory framework provides the right environment for companies to practise corporate social responsibility initiatives. |
Government initiatives: include Prime Minister’s Community Business Partnership and current work of the Corporations and Markets Advisory Committee (CAMAC) and Parliamentary Joint Committee on Corporations and Financial Services. |
21 August 2006
Good afternoon. It gives me great pleasure to be here to speak with you today.
To the Honourable Justice Austin, who invited me to address this distinguished audience, I would like to say, “Thank you.”
At the outset I want to acknowledge that the Supreme Court and the Law Society of New South Wales do a commendable job of advising the public of their rights and responsibilities. They have also been very effective at keeping the public up to date with changes to the law and the legal system.
I believe today’s conference will deepen our understanding of the interaction between directors’ duties and corporate social responsibility. On account of my portfolio responsibility for corporate law, I have a very intense interest in this issue.
Listening to the Rt. Hon. Lady Justice Arden today has provided a great opportunity for all of us to learn from a very distinguished person with an experienced perspective.
Without a doubt, corporations exert a dominant influence on all other forms of business in our economy. Virtually any decision a corporation makes will affect countless people — employees … customers … shareholders … suppliers … associates … neighbours or engaged citizens. Corporate decisions can also have broad and substantial economic and environmental impacts way beyond the company’s footprint.
This afternoon, I am going to talk about the role of corporate social responsibility in economic growth. I hope to also add something to the CSR debate from the Australian Government’s perspective.
Australian economy
As everyone here knows, and it is a widely acknowledged fact, the Australian economy is in good shape.
The latest labour force figures, released by the Australian Bureau of Statistics on 10 August, show that unemployment has dropped to 4.8per cent.
This is the lowest level of unemployment this country has experienced in 30 years.
In the last year alone, over 219,000 new jobs have been created.
Internationally, the Government’s economic achievements have not gone unnoticed.
In its Economic Survey of Australia, which was released early this month, the OECD observed that Australia’s recent macroeconomic growth has averaged around 3 per cent since 2000. And growth in real domestic incomes has averaged 4 per cent over the same period.
The OECD went on to state that:
“Australia is now one of the few OECD countries where general government net debt has been eliminated. Living standards have steadily improved since the beginning of the 1990s and now surpass all G7 countries except the United States.”
The OECD attributes our impressive economic performance to the wide-ranging reforms introduced by this Government. In the words of the OECD, these reforms: “promoted productivity growth, most notably in the second half of the 1990s.”
The OECD went on to say that: “The greater flexibility engendered by these reforms, together with the introduction of robust monetary and fiscal policy frameworks, has also bolstered the economy’s resilience to a series of major shocks over the last decade.”
The Government of course doesn’t take all the credit for the health of our economy.
We recognise that creating a better environment for business is one thing. However, the commercial performance of our corporate sector plays a major role.
By taking risks and pursuing commercial opportunities, companies contribute to the comfortable living standards Australians enjoy.
They create the employment opportunities … provide much needed goods and services … and generate wealth for company owners and shareholders.
It’s part of the Government’s role to provide the best environment for these activities – by creating a sound regulatory framework within which companies can operate.
Effective corporate regulation also fosters commerce and industry by promoting investor confidence in Australia’s companies. In turn, this facilitates the flow of capital for new projects.
Directors’ duties
Soon after it was elected, the Howard Government revisited Australia’s approach to directors’ duties.
The Government made this a key plank of the Corporate Law and Economic Reform Program — better known as CLERP — that it announced in 1997.
CLERP focused more closely on the principles-based approach to corporate regulation — an approach that has worked very well for us in Australia.
In developing and refining our corporate governance framework, the Government ensures that it is balanced and generates positive outcomes for the community.
Our corporate framework also encourages directors to act in the best interests of the company - as opposed to acting in their own interests.
Our corporate governance regulations supplement the range of market forces that effectively limit the scope for directors and managers of a corporation to act in a manner inconsistent with the interests of shareholders. For example, if the directors are making corporate decisions solely for their own benefit.
Benefits of corporate social responsibility
Since the CLERP reforms were introduced in 1999, the debate on the legal framework for company decision-making has moved on.
Other questions of corporate social responsibility have come into sharper focus. For example, questions about whose interests’ directors can, and should, take into account when making decisions.
There’s no one, universally-agreed definition of corporate social responsibility. However, it’s usually described in terms of a company considering, managing and balancing the economic, social and environmental impacts of its activities.
Personally, I see corporate social responsibility as a means for directors to serve their duties to the company, while managing the company’s overall risk.
I also see CSR as a way in which a company, by being aware of its risks, can strategically position itself ahead of its competitors, adopting business practices that maximise long-term sustainability.
Which ever way you define it, we know that a company that embraces corporate social responsibility will reap many benefits.
These benefits include:
- Better knowledge-sharing due to enhanced trust, common frames of reference, and shared goals …
- Lower transaction and administrative costs, due to high levels of trust and cooperation — both within the organisation and between the organisation and its customers and partners…
- Lower staff turnover rates, which not only cut the costs of recruiting and training new staff, but also help to retain valuable corporate knowledge…
Another benefit is a greater unity of purpose due to organisational stability and shared understanding.
There’s substantial evidence from empirical studies to back up these claims.
In 1999, Business Week magazine posed the question, “Can business meet new social, environmental and financial expectations and still win?”
An authoritative answer came four years later when researchers led by the former Australian Graduate School of Management academic, MarcOrlitzsky, published an analysis of over 30 years’ of research on the relationship between corporate social performance and corporate financial performance in the United States.
The short answer to Business Week’s question was “Yes”.
Or, as the Orlitzsky team put it, the results of their study revealed that there is “a positive association between Corporate Social Performance and Corporate Financial Performance across industries and across study contexts.'
The authors went on to state that Corporate Social Performance and Corporate Financial Performance mutually affect each other through what they referred to as a “virtuous cycle”. In that “virtuous cycle”, “financially successful companies spend more because they can afford it, but Corporate Social Performance also helps them become a bit more successful."
It’s interesting that the Orlitzsky study won the 2004 Moskowitz Prize for Socially Responsible Investing. The Moskowitz Prize is an important global award recognising outstanding quantitative research in the field of socially responsible investing.
Corporate social responsibility in our governance framework
Moving forward, the challenge for the Government is to identify and remove obstacles to the economic influences that would otherwise encourage company directors to adopt sustainable business practices.
Our regulatory framework provides an environment that is conducive to companies that wish to practise corporate social responsibility initiatives.
Flexibility is one of the strengths of Australia’s regulatory framework. Based on a mixture of regulation, co-regulation and encouragement of industry best practice; these flexible arrangements can be tailored to the circumstances of different companies.
Australia’s regulatory framework generally allows for the officers of a corporation to exercise their powers and discharge their duties in the interests of community stakeholders — provided that this is also in the best interests of the corporation.
Within these broad parameters, it’s up to the directors of individual corporations to make this assessment.
Where environmental constraints and societal pressures narrow the window of opportunity for business, pursuing corporate social responsibility can turn restrictions into opportunities, strengthening customer and employee relations and giving businesses a competitive advantage.
Australian businesses have taken up the challenge – a fact that was revealed by a survey funded by the Prime Minister’s Community Business Partnership.
The survey, entitled - Giving Australia Survey of Business, found that business giving in 2003-04 had more than doubled since 2000-01.
The report estimated that donations of money, goods and services to non-profit organisations by individuals and business total an impressive $11 billion a year.
The report also noted that 67 per cent of all businesses donated money, goods, services, and time to community and environmental projects in 2003-04.
This is very heartening news.
Investors, too, are keen to give back to the community and to the environment.
The Ethical Investment Association states that there are now nearly $7.7 billion in managed investments and super funds that identify themselves as socially responsible.
I think these examples demonstrate a well-entrenched cultural shift in corporate Australia. Corporations have always seen that a part of their role is to contribute to the economic growth and strength of our country. And, as I mentioned earlier, they are one of the key drivers behind our remarkable economic performance.
But over the last ten years or so, there has been a marked change in attitude. Corporations now embrace the idea of contributing socially and environmentally — as well as economically — to our country.
Government initiatives
As well as providing the optimum regulatory framework, the Australian Government also fosters corporate social responsibility through more direct means.
Earlier I mentioned the Prime Minister’s Community Business Partnership.
The Prime Minister established the Partnership in 1999 to help the Government develop and promote a culture of corporate and individual social responsibility.
The Partnership administers the Prime Minister’s Awards for Excellence in Community Business Partnerships. The Awards reward and recognise the significant social benefits that can accrue when business and community groups work together.
These awards have already recognised and encouraged over 1,000 partnerships.
The Government is also working to better educate and inform business about corporate social responsibility.
You have just heard from Lady Justice Arden on the UK’s review into its corporate law.
Australia recently held two public inquiries that examined how corporate social responsibility fits within Australia’s legal framework.
In March last year, I referred this issue to the Australian Government’s own Corporations and Markets Advisory Committee or CAMAC — for consideration and advice.
In particular, I asked CAMAC if the Corporations Act should be revised to clarify the extent to which directors may take into account the interests of specific classes of stakeholders or the broader community when making corporate decisions.
CAMAC released a well-regarded discussion paper last November. I expect it to issue its final report later this year.
In June2005, the Parliamentary Joint Committee on Corporations and Financial Services announced its own inquiry into corporate responsibility, with similar terms of reference to those I issued to CAMAC.
On the 21st of June this year, the Parliamentary Committee released its final report.
The report represents a valuable addition to the corporate responsibility debate in Australia and it strongly complements the Government’s own initiatives.
The PJC report covers a range of topics including directors’ duties … the role of institutional investors … sustainability reporting … and methods to encourage corporate responsibility.
The report made 29 recommendations.
Most relevant to today’s discussions, is the Committee’s acknowledgment that Australia’s current corporate governance and reporting frameworks already allow company officers to consider the interests of community stakeholders in addition to shareholders’ interests.
The report does not recommend changes to the directors’ duties provisions within the Corporations Act.
Notwithstanding the strength of this finding, the role of the Australian Government is to ensure that our corporate legislation is in line with best practice.
The Government will examine the Committee’s findings, along with the advice from CAMAC, before taking a decision on whether we need to further clarify the current regulatory framework.
We will also review whether we can undertake additional activities or indeed, new initiatives to encourage improved corporate social responsibility.
The Government will, as is the normal process, formally respond to the PJC’s recommendations in due course.
UK developments
As we have just heard, the UK Parliament is debating changes to its directors’ duty of good faith.
If I may make one observation, the main difference I see between the UK model and the current Australian approach is that our approach does not seek to further describe the factors which directors need to take into account when determining the best interests of the company.
This principle-based approach relies on company officers to make this decision.
There are merits to both approaches. I have no doubt that they will be strongly debated this afternoon!
Conclusion
In conclusion, I believe governments should play a role in encouraging companies to embrace CSR as a strategy to ensure their long-term sustainability.
Governments can facilitate, endorse and partner with business. As I have mentioned, the Government has already introduced a variety of initiatives that support this aim.
At the same time, company directors need to take into account the interests of stakeholders when making decisions in the interests of companies. Our current regulatory framework supports this goal.
The key question often posed is whether the Australian Government should or should not amend the law in this regard? In arriving at the answer to this question I believe that great care and attention must be given.
It is paramount to ensure that if changes were implemented in regard to director duties that they would actually deliver improved outcomes for all stakeholders and not in fact impede potential growth and stifle opportunities.
I believe this conference undoubtedly will enhance our understanding of all of these issues – an understanding of the interaction between company directors’ duties and corporate social responsibility that is so vital today.
Thank you.