Mandate of the Special Representative of the Secretary- General (SRSG) on the Issue of Human Rights and Transnational Corporations and other Business Enterprises CORPORATE LAW TOOLS PROJECT JURISDICTION: AUSTRALIA FIRM: ALLENS ARTHUR ROBINSON DATE: SEPTEMBER 2009
This report was submitted to the SRSG as part of his corporate law tools project, as explained in his press release of 23 March 2009: http://www.reports-and-materials.org/Corporate-law-firms-advise-Ruggie- 23-Mar-2009.pdf. It is the sole work of Allens Arthur Robinson and does not necessarily represent the SRSG’s views. The SRSG is grateful to Allens Arthur Robinson for providing this report and for participating in the corporate law tools project.
If you have any questions about this report, please contact Rachel Nicolson, Senior Associate at Allens Arthur Robinson, at [email protected]. If you have questions more generally about the corporate law tools project, please contact Vanessa Zimmerman, (Legal Advisor to the SRSG), at [email protected]. BRIEF FOR THE CORPORATE LAW TOOLS PROJECT: Australia
Prepared for Professor John Ruggie United Nations Special Representative of the Secretary General for Business and Human Rights
25 September 2009
Please Note: Allens Arthur Robinson (AAR) has prepared this brief for the Corporate Law Tools Project for the exclusive use of the United Nations Special Representative of the Secretary General for Business and Human Rights (UNSRSG). This brief is not intended to constitute any form of legal advice or recommendation otherwise than in accordance with the instructions provided to AAR by the UNSRSG. As a result, this report should not be relied on by any person other than the UNSRSG and AAR has no liability whatsoever to any party who acts (or decides not to act) in reliance on this brief in any way.
For further information regarding the content of this brief please contact:
Craig Phillips – Partner Rachel Nicolson – Senior Associate [email protected] [email protected] Tel +61 3 9613 8951 Tel +61 3 9613 8300
renm A0112319423v6 305861270 24.9.2009 Page ii Table of Contents Executive Summary 2 Setting the Legal Landscape 4 Regulatory Framework 7 Incorporation and Listing 9 Directors' Duties 11 Reporting 15 Stakeholder Engagement 19 Other Issues of Corporate Governance 23
renm A0112319423v6 305861270 24.9.2009 Page (i) Corporate Law Tools Project: Australia
Executive Summary
1. Setting the Legal Landscape
Australia is a common law jurisdiction with a federal system of government. Companies are subject to obligations arising under state and federal legislation which encourage the protection of human rights. These include corporate liability for criminal offences such as war crimes and crimes against humanity and potential liability under environment, health, safety, discrimination and privacy legislation. In addition, the State of Victoria and the Australian Capital Territory (ACT) have enacted human rights legislation which may bind some corporations exercising governmental functions.
2. Regulatory Framework
Corporate and securities matters are governed primarily by federal laws. The principal corporate regulator is the Australian Securities and Investments Commission (ASIC) and the principal stock exchange is the Australian Securities Exchange (ASX).
3. Incorporation and Listing
Australian law recognises the notions of 'limited liability' and 'separate legal personality'. Generally incorporation and listing have not been linked to a duty to society, although certain reporting obligations follow from listing. The ASX does not have a responsible investment index but certain voluntary indexes exist.
4. Directors' Duties
Directors' duties, generally owed to the company, include the duty to exercise reasonable care and diligence and to act in good faith in the best interests of the company. These duties encompass the avoidance of legal risk and damage to reputation. While directors are not required to specifically consider the company's impacts on non-shareholders, an 'enlightened self-interest' approach may be taken under existing corporations law. Such an approach would permit directors, in considering the best interests of the company, to have regard to the human rights impacts of the company's operations. The concept of 'best interests of the company' allows directors considerable discretion in deciding how to consider these impacts. It is arguable that the human rights impacts of the conduct of the company or a subsidiary, supplier or business partner, wherever that occurs, could affect the standing or reputation of the company and, consequently, investor or public confidence in its business, and may therefore be a relevant consideration. Directors may also breach their duties if their decisions cause the company to breach laws, including those protecting the rights of non-members. Breach of the duties may attract a range of civil and criminal sanctions and claims.
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5. Reporting
Listed companies are subject to 'continuous disclosure' and periodic reporting obligations. Information that materially affects the value of the company and the performance and risk profile of the company must be reported. This may include the human rights impacts of operations and may extend outside Australia or to relationships with third parties. Certain voluntary aspects of the reporting regime incorporate social and environmental impacts. Periodic reports must be verified by an independent auditor. Breach of reporting obligations can result in criminal and civil penalties.
6. Stakeholder Engagement
Shareholder proposals may deal with impacts upon non-members. Generally non- shareholders are unable to address companies' annual general meetings (AGM). Institutional investors may make investment decisions based on maximisation of financial returns and are not required to consider human rights impacts except where this is a specific requirement of their investment mandate.
7. Other Issues of Corporate Governance
Listed companies must comply with the ASX Listing Rules, which regulate admission, suspension and removal from the list, disclosure and corporate governance. A number of sector-specific voluntary codes have been adopted by Australian companies, such as the Australian Minerals Industry Framework for Sustainable Development (Enduring Value) and the Credit Union CSR Toolkit. CSR Guidelines aimed at non-listed companies have also been produced. There are no laws addressing the representation of particular constituencies or demographic groups on company boards.
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Setting the Legal Landscape
1. Briefly explain the broader legal landscape regarding business and human rights.
1.1 Corporate social responsibility (CSR) has been debated in Australia since the 1970s. However, in the wake of a number of high profile corporate collapses, overseas and in Australia, debate in Australia regarding CSR has increased in the last decade.1 In 2006, two Federal Government inquiries examined the issue of business and human rights and discussed whether the existing legal framework should be changed to require companies to incorporate CSR considerations into their operations.2 Neither report from these inquiries recommended substantial amendments to Australian corporate law; instead, both reports stated that many Australian corporations had already adopted an 'enlightened self- interest' approach in complying with their legal obligations and carrying out their operations.3 In 2008, a Senate motion noted the work of the UNSRSG and called on the Australian Government to take various measures aimed at increasing the extent to which Australian companies, transnational corporations and other business enterprises respect human rights.4
1.2 Currently there is no legislation in Australia that specifically or comprehensively addresses the issue of business and human rights. Rather, corporations are subject to corporate governance obligations under the Corporations Act 2001 (Cth) (the Corporations Act) and related legislation and are required to comply with a range of legislative measures that protect, or are relevant to, human rights. 1.3 Corporations are subject to various obligations arising under state and federal legislative instruments, policies and guidelines that protect human rights or otherwise encourage companies to develop a corporate culture that is respectful of human rights. It should be noted that although Australia is a signatory to the six major United Nations human rights treaties,5 it has not fully incorporated the substance of those treaties into domestic law. Some aspects of particular treaties have, however, been enacted into domestic legislation. These statutes are dealt with in the following paragraphs insofar as they relate to corporate governance and human rights.
1 P Darvas, 'Grounding the Social Responsibility of Companies in the Language of Human Rights: A Survey of the Issues' (2007) 20 Australian Journal of Corporate Law 129.
2 Parliamentary Joint Committee on Corporations and Financial Services, Corporate responsibility: Managing risk and creating value (June 2006) (PJC Report) and Corporations and Markets Advisory Committee, The social responsibility of corporations (December 2006) (CAMAC Report).
3 PJC Report, p 63; CAMAC Report, p 7.
4 Senate Official Hansard (no. 6 2008) 23 June 2008, pp. 3037 – 3038, http://www.aph.gov.au/HANSARD/senate/dailys/ds230608.pdf, (18 September 2009).
5 International Convention on the Elimination of All Forms of Racial Discrimination; International Covenant on Civil and Political Rights; International Covenant on Economic, Social and Cultural Rights; Convention on the Elimination of All Forms of Discrimination Against Women; Convention Against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment; and Convention on the Rights of the Child. renm A0112319423v6 305861270 24.9.2009 Page 4 Australia
(a) Criminal Code 1.4 Part 2.5 of the Criminal Code Act 1995 (Cth) (the Criminal Code) extends liability for all offences within the Criminal Code to corporations. In determining whether a company possessed the requisite intention, knowledge or recklessness to commit an offence, a court must consider whether the offence was expressly, tacitly or impliedly authorised.6 Authorisation or permission to commit an offence may be established by proving that 'a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance with the relevant provision' of the Criminal Code or that 'the body corporate failed to create and maintain a corporate culture that required compliance' with the Criminal Code.7 1.5 The International Criminal Court (Consequential Amendments) Act 2002 (Cth) was enacted by Australia as part of the ratification of the Rome Statute8 and amended the Criminal Code to include the crimes of genocide, crimes against humanity and war crimes. 1.6 There has not been any prosecution of a corporation for a human rights related criminal offence under the Criminal Code. (b) Environment, health and safety laws
1.7 Corporations are subject to extensive regulation under federal and state environmental, health and safety laws. In addition to state legislation, in 2006, federal legislation was introduced to encourage companies to identify and implement energy saving opportunities in carrying out their business operations.9 The Federal Government has also announced that it intends to introduce an emissions trading scheme by July 2010. (c) Privacy 1.8 The Privacy Act 1988 (Cth) (Privacy Act) was extended to cover the private sector in 2001, protecting individuals from corporate invasions of personal privacy.10 An individual is able to complain to the Privacy Commissioner if he or she believes there has been a breach of a National Privacy Principle in relation to personal information. Determinations by the Privacy Commissioner can be enforced in court.
1.9 The Privacy Act is currently undergoing review following the release of an Australian Law Reform Commission report in 2008.11 Proposed reforms include the introduction of a
6 Criminal Code Act 1995 (Cth) (the Criminal Code), s 12.3(1).
7 Criminal Code, s 12.3(2)(c) and (d).
8 Rome Statue of the International Criminal Court 1998 (U.N. Doc. A/CONF.183/9*).
9 See the Energy Efficiency Opportunities Act 2006 (Cth) and the National Greenhouse and Energy Reporting Act 2007 (Cth).
10 Initially, the Act applied exclusively to the Commonwealth public sector. Public sector agencies were required to comply with the Information Privacy Principles (IPPs), which are similar, but not identical, to the OECD Guidelines. The Act was amended shortly after its enactment to deal with government data-matching activities and the activities of credit providers and also was extended to cover the Australian Capital Territory public sector. In 2000, amendments to the Privacy Act established a separate set of privacy principles, known as the National Privacy Principles (NPPs), which apply to the private sector. 'See ALRC Report 108: For Your Information: Australian Privacy Law and Practice, Volume 1, Part A(1).
11 ALRC Report 108: For Your Information: Australian Privacy Law and Practice. renm A0112319423v6 305861270 24.9.2009 Page 5 Australia
statutory cause of action for invasion of privacy, the introduction of a unified set of privacy principles to apply to both the public and private sector and the removal of certain exemptions. (d) Discrimination and equal opportunity
1.10 A number of workplace, discrimination and equal opportunity statutes also operate to promote a corporate culture within organisations that is respectful of the human rights of stakeholders. For example, the Racial Discrimination Act 1975 (Cth) and the Human Rights and Equal Opportunity Commission Act 1986 (Cth) prohibit discrimination by employers on the basis of race, colour, national or ethic origin, sex, marital status, pregnancy or family responsibilities and a corporation may be vicariously liable for acts of employees that contravene these provisions. Discrimination laws are of particular relevance to Australian corporations in the area of employment. 1.11 The Equal Opportunity for Women in the Workplace Act 1999 (Cth) requires private sector companies with 100 or more people to establish a workplace programme to remove the barriers to women entering and advancing in their organisation and to report regularly to the Equal Opportunity for Women in the Workplace Agency on the effectiveness of that programme. (e) Rights of indigenous peoples
1.12 Corporations must recognise native title rights in respect of indigenous land. A regime for agreements to use indigenous land exists under the Native Title Act 1993 (Cth). A number of Australian mining companies have entered into such agreements, which have addressed issues including land use, cultural recognition and even the development of indigenous business opportunities. (f) Human rights laws
1.13 The State of Victoria and the ACT have enacted Charters of Human Rights which protect civil and political rights and which may promote business practices that are respectful of human rights in certain corporations. Under the Charter of Human Rights and Responsibilities Act 2006 (Vic) (Victorian Charter) and the Human Rights Act 2004 (ACT) (ACT Act), a 'public authority' must act in a manner that is compatible with human rights and give proper consideration to human rights when making decisions. A 'public authority' is defined to include entities whose functions are 'of a public nature', which includes a number of corporations operating in Victoria and the ACT that perform services traditionally provided by the State, such as public transport or provision of gas, electricity or water. In addition, the ACT Act contains a unique provision allowing entities that are not public authorities to elect to be subject to the obligations of public authorities. No corporation has opted in to date.12 1.14 It should be noted that these instruments may also have indirect application to corporate conduct. For example, corporations contracting with Government may be required to acknowledge and comply with the public authority obligations under the applicable human rights instrument. Another indirect effect stems from the requirement noted above that
12 Paul Maley, 'Business opts out of human rights act', The Australian (16 January 2009). renm A0112319423v6 305861270 24.9.2009 Page 6 Australia
public authorities give proper consideration to protected rights when making decisions. For example, a public authority must give proper consideration to relevant, protected rights when deciding whether to grant a statutory lease or licence to a corporation. 1.15 Neither the Victorian Charter nor the ACT Act provide for damages to be granted as a remedy for breach and, in the case of the Victorian Charter, the provisions do not provide a separately enforceable right to a remedy.
1.16 Both instruments require courts and tribunals to interpret laws in a way that is compatible with protected rights, including those laws which affect corporations. 1.17 In December 2008, the Federal Government launched a national public consultation about the promotion and protection of human rights. A National Human Rights Committee is currently examining submissions on the adoption of a federal Charter of Human Rights and is due to report to the Government in September 2009.
Regulatory Framework
2. To what legal tradition does the jurisdiction belong?
2.1 Australia is a common law jurisdiction.
3. Are corporate/securities laws regulated federally, provincially or both?
3.1 In Australia, corporate law is regulated under federal legislation, primarily the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Nevertheless, it should be noted that corporations are also subject to regulation of their business operations under federal and state law regarding a number of matters, including environmental and health and safety issues. Corporations may also be subject to claims based upon rights recognised by common law.
4. Who are the government corporate/securities regulators and what are their respective powers?
4.1 The Commonwealth Treasury is the Federal Government department that is responsible for providing policy advice on company law and corporate governance issues, including law reform. The Commonwealth Treasury supervises a number of independent corporate regulators that fall within its portfolio, including ASIC, the Australian Competition and Consumer Commission (ACCC), the Australian Prudential Regulation Authority (APRA) and the Australian Tax Office (the ATO). In 2007, the Treasurer, the Minister for Revenue and the Assistant Treasurer issued a Statement of Expectation for each of these agencies which recognised their status as independent regulators and clarified government policies and objectives relevant to their roles and responsibilities. 4.2 ASIC is the principal corporate, markets and financial services regulator and has general administration of the Corporations Act and the ASIC Act. ASIC is an independent Commonwealth statutory corporation, established by the ASIC Act. Under the Corporations Act and the ASIC Act, ASIC is responsible for registering and licensing
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companies, company auditors and liquidators and maintaining a public database of registered companies.13 ASIC's regulatory powers include:
(a) granting exemptions to relieve companies from compliance with certain provisions of the Corporations Act;14 (b) investigating and reporting on suspected contraventions of the Corporations Act, the ASIC Act or a law (state or federal) that: • concerns the management or affairs of a body corporate or managed investment scheme; or • involves fraud or dishonesty and relates to a body corporate or managed investment scheme or to financial products.15 Pursuant to this investigatory power, ASIC may carry out examinations of individuals, require the production of certain information and, in certain circumstances, obtain a warrant to seize such information;16 and (c) enforcing compliance with the Corporations Act, including instituting civil or criminal proceedings against individuals or bodies corporate.17 4.3 A number of other relevant regulators are briefly referred to below. These regulators have signed Memoranda of Understanding with ASIC that permit cooperation between the agencies where their powers and responsibilities intersect. (a) The ACCC is a federal statutory body that is responsible for regulating competition, fair trading and consumer protection laws under the Trade Practices Act 1974 (Cth) (TPA). The ACCC's powers include investigating breaches of the TPA, granting immunity from certain sections of the TPA, arbitrating access disputes and assisting consumers in obtaining compensation for breaches of the TPA. (b) APRA is the federal regulator of the financial services industry. Under the Australian Prudential Regulation Authority Act 1998 (Cth), APRA has the power to license financial institutions and collect and analyse data from such institutions. (c) The ATO is responsible for regulating and enforcing various tax, excise and superannuation legislation as it applies to individuals and corporations. The ATO has the power to investigate breaches of tax legislation, seek access to information and prosecute corporations and individuals for failure to comply with tax legislation.
5. Does the jurisdiction have a stock exchange(s)?
5.1 Australia has three stock exchanges. The ASX is the principal Australian stock exchange for large corporations. The National Stock Exchange and the Bendigo Stock Exchange list
13 Corporations Act 2001 (Cth) (the Corporations Act), s 118.
14 See, eg. Corporations Act, s 111AT.
15 Australian Securities & Investments Commission Act 2001 (Cth) (the ASIC Act), s 13(1).
16 ASIC Act, ss 19-38.
17 ASIC Act, ss 49 and 50. Note that the federal Director of Public Prosecutions may carry out the criminal prosecution of bodies corporate or individuals. renm A0112319423v6 305861270 24.9.2009 Page 8 Australia
medium and small corporations, the latter catering primarily to rural and regional businesses.
Incorporation and Listing
6. Do the concepts of 'limited liability' and 'separate legal personality' exist?
6.1 In Australia, all corporations are taken to have a separate legal personality from their members and directors. Under Australian law, the members of a corporation may choose to constitute a limited liability company; that is, the liability of shareholders is limited to what they agreed to contribute to the company and, beyond that amount, they will not be exposed to the company's liabilities. Australian courts have, however, found that the doctrine of separate legal personality does not apply in limited circumstances. It is unclear when 'lifting the corporate veil' will be permitted under general law. However, cases have indicated that a court will do so where the company structure is used to perpetrate a fraud or to enable a legal or fiduciary obligation to be evaded.18 The Corporations Act also dictates circumstances where a director may be found liable for the actions of a company, notably, where the company engages in insolvent trading.19
7. Did incorporation or listing historically, or does it today, require any recognition of a duty to society, including respect for human rights?
7.1 Incorporation does not appear to have been linked, now or historically, to any sense of duty to society. The main rationale for incorporation has been the need to create a body that permits perpetual succession.20 Corporations legislation was introduced in the various Australian states between 1863 and 1874 and was broadly based on the Companies Act 1862 (UK). Lipton notes that, historically, companies chose to incorporate in Australia to facilitate 'flexibility in the capital structure of the enterprise, especially by enabling the issue of large numbers of shares in the event of a company becoming successful'.21
7.2 The primary rationales for listing are commercial: listing facilitates capital raising, permits efficient investment and provides companies with the opportunity to gain a broader shareholder base (and thereby increase their sources of financing for the long term).22 Other advantages of listing include raising the public profile of the company, allowing
18 Dennis Willcox Pty Ltd v Federal Commissioner of Taxation (1988) 79 ALR 267. See H A J Ford & ors, Ford's Principles of Corporations Law (2005), p 125-131 and I Ramsay and D Noakes, 'Piercing the Corporate Veil in Australia' (2001) 19 Company and Securities Law Journal 250-271.
19 See Corporations Act, s 588G (liability for company debts incurred during insolvent trading and liability where the company's share capital transactions cause insolvency), s 254T (liability for payment by company of improper dividends) and s 197 (liability for trust company's debts where no right of indemnity against the trust fund exists)
20 H A J Ford & ors, Ford's Principles of Corporations Law (2005), p 31.
21 P Lipton, 'A History of Company Law in Colonial Australia: Economic Development and Legal Evolution' (2007) Melbourne University Law Review 805.
22 P Davies and D Peacock, 'The Role of the Stock Exchange and the Financial Characteristics of Australian Companies' in Robert Bruce & ors, Handbook of Australian Corporate Finance (1997) p 82. renm A0112319423v6 305861270 24.9.2009 Page 9 Australia
succession planning and providing incentives for employees.23 Whilst these commercial rationales can be said to benefit society by stimulating economic growth, it cannot be said that the listing of a company involves or requires recognition of any direct duty to society. 7.3 Additionally, once listed, a company becomes subject to a duty to keep the market operator informed of information about its business that might be expected to have a material effect on the price of its securities.24 In Australia, publicly listed companies must comply with corporate governance and disclosure obligations under the Corporations Act and the ASX Listing Rules, which are detailed in Question 16 below.25 Listed companies must also report on their compliance with the ASX Principles of Good Corporate Governance and Best Practice Recommendations (the ASX Recommendations) which, as noted further below, contain obligations to report on human rights and sustainability related issues.26
8. Do any stock exchanges within the jurisdiction have a responsible investment index, and is participation voluntary?
8.1 The ASX does not have a sustainability index. The National Stock Exchange launched a sustainability index entitled the 'FEX Sustainability and Cleantech Investment Market' (FEX-SIM) in September 2007. Participation is voluntary, however a company will only be eligible for listing on the FEX-SIM if it can demonstrate that it meets certain criteria, such as deriving at least 50% of its sales or operating profit from sustainable technologies, processes, products or services and using sustainable business practices in carrying out its operations.27 There are a number of voluntary sustainability market indexes that are not administered by an Australian stock exchange: see for example, the Australian Corporate Responsibility Index,28 the Sustainable Asset Management Index29 and the RepuTex Sustainability Index.30
23 Australian Securities Exchange, Benefits of Listing, http://www.asx.com.au/professionals/listing/benefits.htm# at 30 January 2009; National Stock Exchange of Australia, Benefits of Becoming a Listed Company, http://www.nsxa.com.au/documents/news/146006%20NSX%20Benefits.pdf at 30 January 2009.
24 Corporations Act, s 674.
25 Note that the ASX Listing Rules are binding on listed companies under the Corporations Act and create obligations that are additional to common law and statutory obligations. The ASX publishes Guidance Notes regarding compliance with the listing rules, however, these are not exhaustive. Unless otherwise stated in the ASX Listing Rules, the ASX has absolute discretion in requiring and waiving compliance with a listing rule.
26 ASX Principles of Good Corporate Governance and Best Practice Recommendations: http://asx.ice4.interactiveinvestor.com.au/ASX0301/Principles%20of%20Good%20Corporate%20Governance/EN/body.aspx ?z=1&p=1&v=1&uid.
27 Financial and Energy Exchange, SIM Listing and Classification http://www.fexclimate.com/Images/Upload/News/SIM_Listing_and_Classification_%20Public.pdf at 30 January 2009.
28 The Australian Corporate Responsibility Index http://www.corporate-responsibility.com.au/.
29 The Australian SAM Sustainability Index http://www.aussi.net.au/aussi_pdf/AuSSI_index/AuSSI_members/AuSSI_IndexMembers.pdf at 25 February 2009.
30 Reputex maintains 11 indices which measure performance of listed companies in relation to energy use and efficiency, carbon emissions and sustainability. Reputex Website, Reputex Indexes http://www.reputex.com.au/page/view/indexes-25 at 25 February 2009. renm A0112319423v6 305861270 24.9.2009 Page 10 Australia
Directors' Duties
9. To whom are directors' duties generally owed?
9.1 Directors' duties are owed to the company, which is generally taken to mean the existing shareholders of the company, as a group. Where a company is insolvent or is approaching insolvency, Australian courts have held that directors must also look to the interests of creditors. For the purposes of this report, the discussion below should be understood in the context of solvent companies.
10. Are there duties to avoid legal risk and damage to the company's reputation? If so, are they duties in their own right or are they incorporated into other duties?
10.1 Directors of Australian companies are subject to fiduciary duties at general law and statutory duties, many of which are broadly similar to those at general law, under the Corporations Act. Of most significance are the duties to exercise reasonable care and diligence and to act in good faith in the best interests of the company.31 10.2 Australian corporate law does not impose on directors a specific duty to avoid legal risk and damage to the company's reputation. However, it may be argued that the failure of a director to act to prevent legal risk to the company, where the director had or should have had knowledge of that legal risk, could constitute a breach of his or her duties to exercise reasonable care and diligence. Similarly, if a director has failed to prevent damage to the company's reputation, it may be argued that this constitutes a breach of the duty to act in good faith and in the best interests of the company. Nevertheless, as noted below, analysis of the 'business judgment rule' would be important in consideration of whether a failure to prevent a legal risk or damage to the company's reputation might be said to constitute a breach of a director's duties.
11. More generally, are directors required or permitted to consider the company's impacts on non-shareholders, including human rights impacts on the individuals and communities affected by the company's operations? Is the answer the same where the impacts occur outside the legislating jurisdiction? Can or must directors consider such impacts by subsidiaries, suppliers and other business partners, whether occurring inside or outside the jurisdiction?
11.1 Under Australian law, directors are not expressly required to consider the company's impacts on non-shareholders, whether such impacts occur within or outside Australian jurisdiction. Further, directors of an Australian company are not expressly required to consider the impacts of the operations of the company's subsidiaries, suppliers or business partners, whether such impacts occur within or outside Australian jurisdiction. 11.2 Directors may consider non-shareholder interests where they consider that it is in the best interests of the company to do so. A number of Australian commentators and parliamentary reports have stated that, generally, it will be in the best interests of the company for the directors to consider the human rights impacts of the company's operations and for the company to comply with the law. This has been termed the
31 Corporations Act, ss 180-183. renm A0112319423v6 305861270 24.9.2009 Page 11 Australia
'enlightened self-interest' approach to business and human rights.32 As noted by Fitzgerald:
[a] director acting in the best interests of the company as a whole should avoid human rights abuses because in the long run these may cause economic detriment to the company or its shareholders…Not only does a bad human rights record increase the risk of consumer sentiment turning against a company's business…it may also cause certain types of investors to abandon the company's shares…In addition, a number of human rights abuses are also torts or breaches of environmental legislation, so a company that breaches human rights may incur significant civil liability or administrative fines.33 11.3 Directors may therefore also breach their duties if they make decisions that cause the company to breach laws that protect the interests of company stakeholders or the community, such as labour and occupational health and safety laws, consumer protection laws and environmental and other laws.
11.4 Moreover, given the growing interdependence of the world economy and the increasing availability of information to the public through corporate governance reporting to the ASX (discussed in the Reporting section below) and through various media outlets in Australia, the conduct of entities with whom the company associates may be relevant to the interests of the company. It is arguable that the human rights impacts of the conduct of a subsidiary, supplier or business partner, wherever that conduct occurs, could affect the standing or reputation of an Australian corporation and therefore investor or public confidence in its business. In that case, directors may consider such impacts, as well as the company's own direct human rights impacts if any, when fulfilling their duties to act in good faith in the best interests of the company and exercise reasonable care and due diligence.
12. If directors are required or permitted to consider impacts on non-shareholders, to what extent do they have discretion in determining how to do so?
12.1 Directors may consider impacts on non-shareholders when exercising their powers and fulfilling their duties provided that, in doing so, they are acting in the best interests of the corporation. Australian courts have stated that they will allow directors considerable discretion in determining whether a decision is in the best interests of the company.34
13. What are the legal consequences for failing to fulfil any duties described above and who may take action to initiate them? What defences are available?
13.1 ASIC may bring civil proceedings against a director who has breached his or her duties. The directors' duties provisions of the Corporations Act mentioned above are civil penalty provisions. Remedies available for contravention of civil penalty provisions include injunctive relief, compensation for loss suffered, recovery of property or profits derived from a transaction and a declaration that a transaction is void. ASIC may also seek
32 See PJC and CAMAC Reports.
33 S Fitzgerald, 'Corporate Accountability for Human Rights Violations in Australian Domestic Law' [2005] Australian Journal of Human Rights 2.
34 Harlowe's Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL (1968) 121 CLR 483; and Darvall v North Sydney Brick & Tile Co (1989) 15 ACLR 230. renm A0112319423v6 305861270 24.9.2009 Page 12 Australia
disqualification orders to bar a director from managing corporations for a certain period. Where a director's failure to fulfil his or her duties has materially prejudiced the interests of the corporation or its members, or the corporation's ability to pay its creditors, or is 'serious', ASIC may seek pecuniary penalties from that director. If the contravention of a director's duty caused damage to the company, ASIC, the company or a member, on behalf of the company, may also itself seek compensation under the Corporations Act pursuant to so-called derivative actions.35 A person whose interests have been, are or would be affected by a breach of directors' duties or an attempt to breach directors' duties may also apply for an injunction or damages under the Corporations Act.36 Such person may also have standing to seek compensation orders.37 The company may also seek similar remedies for breach of directors' duties at general law. 13.2 Where directors have breached their duty to act in good faith in the best interests of the company under the Corporations Act recklessly or with intentional dishonesty, this may constitute a criminal offence that is punishable by a fine and/or imprisonment.38 ASIC or the Director of Public Prosecutions may institute criminal proceedings against a director. 13.3 Under the Corporations Act, if a director makes a business judgment and the director rationally believed that the judgment was in the best interests of the company, the judgment was made in good faith for a proper purpose and the director informed him or herself about the subject matter of the judgment to the extent he or she reasonably believed to be appropriate, the director will be taken to have fulfilled his or her duty to act with care and diligence, even if that decision resulted in loss or damage to the company.39 This defence is termed the 'business judgment rule'.40 Additionally, shareholders of a
35 Corporations Act, s 236(1). Note that if a director has breached his or her duties, a shareholder may also have an action in his or her own right where the director's conduct or proposed conduct on behalf of the company has been oppressive or unfairly prejudicial or unfairly discriminatory against a member or members. A Court has discretion to award various remedies to members, including restraining or requiring a person to do a certain act or ordering the company to institute, prosecute, defend or discontinue specified proceedings: Corporations Act, ss 232-234.
36 Corporations Act, s 1324. Note that there has been judicial disagreement as to who may avail themselves of this action. In Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 19 ACSR 483, the Court held that, as a civil penalty provision had been breached, only the regulatory authority (at that time the Australian Securities Commission, now ASIC) had standing to bring an action under this provision. In contrast, in Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 23 ACSR 715, it was held that this interpretation was too restrictive and those who have a relevant interest over and above that of a member of the general public have standing to bring such an action. Courts have, thus far, only considered the operation of s 1324 where the person whose 'interests have been affected' was a shareholder or a creditor. It is unclear whether a stakeholder who is neither a shareholder nor a creditor (for example, a community located near a company's project site) whose human rights have been impacted by a decision of a director could have standing to bring a cause of action under s 1324. As yet, the High Court has not handed down any decisions based on application of s 1324. For further discussion of s 1324, see L Thai, 'Statutory injunction – call for amendment to s 1324 of the Corporations Act', (2006) Company and Securities Law Journal, 41.
37 For example, see Corporations Act, ss 1317HA, 1325.
38 Corporations Act, s 184.
39 Corporations Act, s 180(2). See also Furs Ltd v Tomkies (1936) 54 CLR 583 for the common law position, however this is subject to a number of exceptions: Miller v Miller (1995) 16 ACSR 73.
40 Other doctrines at general law and under statute may demonstrate that a director was not responsible for a breach of his or her duties. For example, if a director relied on information or professional or expert advice and his or her reliance was in good faith, after making an independent assessment of the information or advice, the director's reliance may be taken to be renm A0112319423v6 305861270 24.9.2009 Page 13 Australia
company may relieve directors of any potential liability for breach of directors' duties at general law by ratifying the actions of a director. However, it appears unlikely that shareholder ratification would absolve directors for any breaches of their duties under the Corporations Act.41
14. Are there any other directors' duties which might encourage a corporate culture respectful of human rights?
14.1 Directors may be liable for offences related to reporting obligations and the provision of relevant information under the Corporations Act, thereby encouraging a corporate culture that is transparent and respectful of human rights. These are discussed in the Reporting section below.
15. For all of the above, does the law provide guidance about the role of supervisory boards in cases of two tier board structures, as well as that of senior management?
15.1 Australia has a single board system of corporate governance. Under the Corporations Act, the directors' duties outlined above extend to 'officers' of the company. This term encompasses senior management roles as it includes a person who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business or a person who has capacity to affect significantly the corporation's financial standing. It should be noted that directors' duties may extend to third parties who constitute 'shadow directors' or 'shadow officers'; that is, a person in accordance with whose instructions or wishes the company's directors are accustomed to acting.42 A 'shadow director' may include senior management or in some cases a parent company of the relevant corporation.43
reasonable in the context of assessing whether he or she breached any directors' duties. Further, a director may not be responsible for the actions of a delegate where the director believed on reasonable grounds at all times that the delegate would exercise the power in conformity with the director's duties and the company's constitution and believed on reasonable grounds, in good faith and after making proper inquiry where necessary, that the delegate was reliable and competent.
41 Ford, above, pp 403-404. Ford notes that the directors' duties under the Corporations Act are civil penalty provisions and, as such, are enforced by ASIC, a public authority. Different considerations may therefore be relevant in assessing public, as opposed to private, enforcement of directors' duties.
42 Note that the Corporations Act, s 9 states that the definition of a director includes 'a person who is not validly appointed as a director if…they act in the position of a director; or…the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes'.
43 Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290. In that case, the Supreme Court of New South Wales found that parent company Pioneer had effective control of its subsidiary, Giant, via its shareholding in Giant (Pioneer indirectly held 42% of shares in Giant). Additionally, through its conduct, Pioneer demonstrated 'a willingness and ability to exercise control, and an actuality of control, over the management and financial affairs of Giant'. This was because, in practice, Pioneer made decisions about the assets of Giant and imposed financial reporting requirements on Giant consistent with those followed by Pioneer. Moreover, the conduct of the directors of Giant indicated that they accepted and followed strategic decisions made by Pioneer in relation to Giant's business. On that basis, Pioneer was considered to have acted as a 'shadow director'. Whilst this case considered liability for insolvent trading, we assume that similar principles apply in relation to the directors' duties under consideration in this report. renm A0112319423v6 305861270 24.9.2009 Page 14 Australia
Reporting
16. Are companies required or permitted to disclose the impacts of their operations (including human rights impacts) on non-shareholders, as well as any action taken or intended to address those impacts, whether as part of financial reporting obligations or a separate reporting regime?
16.1 Listed companies are subject to continuous disclosure obligations and must inform the ASX immediately upon becoming aware of any information that a reasonable person would expect to have a material effect on the price or value of the entity's securities.44 This obligation would include information relating to the impacts of the company's operations on stakeholders if a reasonable person would expect that information to have a material effect on the price of the company's shares. Similar disclosure obligations may also apply to unlisted companies who issue certain securities to the public.45
16.2 Listed companies are also subject to periodic reporting obligations. Directors of a listed company must produce an annual report (comprising a financial report and a directors' report) for shareholders about the company's operations during that financial year and lodge those reports with ASIC.46 Directors may be required to disclose the impacts of a company's operations on non-shareholders in a company's annual report in various circumstances. These circumstances are outlined below. 16.3 First, the Corporations Act47 and ASX Listing Rule 4.10.17 state that the annual report must contain a review of operations and results for those operations. Arguably, this review could include the impacts of those operations on stakeholders. Guidance Note 10 to the ASX Listing Rules refers corporations wishing to comply with the listing rule to the Group of 100 Incorporated publication 'Guide to Review of Operations and Financial Conditions' (G100 Guide).48 It should be noted that, while the ASX Listing Rules are binding on listed companies, compliance with the G100 Guide is not mandatory per se. The G100 Guide states that companies should report on both financial and non-financial matters and specifically recommends that companies report against 'sustainability measures including social and environmental performance measures, where relevant'.49 The main factors and influences on future results should be discussed, including 'key customer and other relationships and dependencies', 'employee skills and training', 'environmental, occupational health and safety' and 'significant legal issues'.50 Further:
[t]he Review should provide a commentary on the strengths and resources of the company whose value may not be fully reflected in the statement of financial position…Disclosure of
44 ASX Listing Rule 3.1.
45 Corporations Act, s 675(1).
46 Corporations Act, s 292.
47 Corporations Act, s 299(1).
48 Guide to Review of Operations and Financial Conditions (G100 Guide) http://www.group100.com.au/publications/g100_Review_operations2003.pdf.
49 G100 Guide, p 12. Note that the G100 Guide does not elaborate on the meaning of 'social' performance measures.
50 G100 Guide, p 13. renm A0112319423v6 305861270 24.9.2009 Page 15 Australia
information about unrecognised intangible assets such as brands, research and development, human resources, customer and supplier relationships and innovations is helpful to users in making decisions…The Review should contain a discussion of the company's risk profile and risk management practices' including 'regulatory compliance', 'fraud', 'occupational health and safety', 'environmental issues' and 'product liability'.51 16.4 The Corporations Act also requires companies to include in their annual report details of 'any matter or circumstance' that has arisen if that has significantly affected or may significantly affect the company's operations, its results or its state of affairs in future financial years.52 If a company is subject to particular and significant environmental regulation, it must also give details of the company's performance in respect of that regulation,53 which may include human rights or sustainability impacts. 16.5 Further, the Corporations Act states that the report must contain information that shareholders would require to 'make an informed assessment' of the company's operations, its financial position and its business strategies and prospects for future financial years.54 The explanatory memorandum to the introduction of this section of the Corporations Act refers to the G100 Guide, indicating that non-financial considerations, such as human rights, may be relevant. It should be noted that companies may also be subject to separate greenhouse emission and energy consumption reporting requirements under federal legislation. 16.6 Under the ASX Listing Rules, a company must state the extent to which it has complied with the ASX Recommendations in its annual report. These principles are voluntary. However, where companies have not followed the ASX Recommendations, the ASX Listing Rules require that the companies must explain their reason for not doing so. The ASX Recommendations mandate that companies maintain a risk management policy that is publicly available on the company's website. This policy must include a description of material risks facing the company, which:
… may include but are not limited to…operational, environmental, sustainability, compliance, strategic, ethical conduct, reputation or brand, technological, product or service quality, human capital financial reporting and market-related risk.55 16.7 The PJC Report recommended that the ASX Recommendations be amended to require that companies 'inform investors of material non-financial aspects of the company's risk profile by disclosing their top five sustainability risks, as well as the associated management strategies'.56 However, these recommendations have not been implemented. The ASX Recommendations also provide that companies should establish and publish on their websites a code of conduct to promote ethical and responsible decision making. This includes a description of the measures or practices that the company follows to fulfil its
51 G100 Guide, pp 21-22.
52 Corporations Act, s 299(1)(d).
53 Corporations Act, s 299(1)(f).
54 Corporations Act, s 299A(1).
55 ASX Recommendations, p 32.
56 PJC Report, p 132. renm A0112319423v6 305861270 24.9.2009 Page 16 Australia
legal obligations in Australia and in other jurisdictions in relation to its stakeholders, including clients, customers, consumers, employees and the community.57
16.8 Separate sustainability reporting, as distinct from any information about environmental and social impacts supplied as part of the financial reporting obligations detailed above, remains voluntary in Australia. Further, it should be noted that both the CAMAC Report and the PJC Report recommended against requiring full sustainability reporting.58 The PJC Report stated that companies should not be forced to submit to full sustainability reporting requirements because:
[t]his would result in…companies [who are currently not engaged in the corporate responsibility debate] developing a piecemeal and minimalist approach, rather than integrating the concept of corporate responsibility into the corporation's core operations and activities in a manner that best suits the company and its stakeholders.59 The PJC Report added:
[a]s investors and other stakeholders demand more non-financial information, the ASX could consider options to enhance the non-financial disclosure aspects of the Review of Operations and Activities or the ASX Council Recommendations.60 16.9 Similarly, the CAMAC Report reviewed reporting requirements in foreign jurisdictions and concluded that the provisions in the Corporations Act were sufficient for ensuring disclosure of non-financial information. In the event that the government seeks to require businesses to provide further information on public interest grounds, the CAMAC Report recommended the introduction of specific legislation for this purpose rather than inserting a broader framework into the Corporations Act.61 No such legislation has yet been proposed or passed. Nevertheless, a number of Australian companies have produced annual sustainability reports. These reports are publicly available on the companies' websites.62
17. Do reporting obligations extend to such impacts or actions outside the jurisdiction; to the impacts or actions of subsidiaries, suppliers and other business partners, whether occurring inside or outside the jurisdiction?
17.1 As noted above, the obligation to report is measured by the effect that the information or conduct may have, or has had, on company share price or company performance or risk. A company may be required to report on the human rights impacts of its operations outside the jurisdiction if these impacts would be expected to have a material effect on the company's Australian share price or if these actions have or are likely to have a material
57 ASX Recommendations, p 22. Note that the ASX Recommendations do not specifically refer to 'human rights' obligations of the company, but rather to 'the company's responsibilities to shareholders, employees, customers, suppliers, creditors, consumers and the broader community. This may encompass such issues as standards of product quality or service, commitments to fair value, fair dealing and fair trading, and the safety of goods produced'.
58 PJC Report, p 135; and CAMAC Report, pp 146-7.
59 PJC Report, p 135.
60 PJC Report, p 135.
61 CAMAC Report, pp 146-7.
62 According to the KPMG Corporate Responsibility Reporting Survey 2008, 69% of ASX N100 companies published information on sustainability in 2008, a figure that has more than doubled since 2005. renm A0112319423v6 305861270 24.9.2009 Page 17 Australia
effect on the company's operations or its results. Further, as noted above, the ASX Recommendations suggest that a company should include a description of the practices that it undertakes so that its operations also comply with foreign laws, where appropriate. For example, in its 2008 Annual Report, Rio Tinto Ltd provided details of its compliance with its human rights policy in relation to its operations worldwide, as well as data on the company's sustainable development risks.63
17.2 If the actions of a subsidiary, supplier or business partner (whether within or outside Australia) were likely to have a material effect on the company's Australian share price, or were likely to have a material effect on the company's operations or its results, it seems likely that the company would be subject to an obligation to report on such impacts.
18. Who must verify these reports; who can access reports; and what are the legal consequences of failing to report or misrepresentation?
18.1 An independent auditor must audit a company's annual financial report and must provide an auditor's report on compliance of the company's annual report with the Corporations Act.64
18.2 Listed companies and large proprietary companies must provide the financial report and directors' report (which make up the annual report) to their members annually.65 Directors must also lay the annual report before each AGM.66 Failure to comply with these requirements constitutes a criminal offence.67 Annual reports for listed companies and large proprietary companies must also be lodged with ASIC on its database and may be accessed by a non-shareholder for a fee.68 18.3 Small proprietary companies must provide annual reports to their shareholders if directed to do so by their shareholders or by ASIC.69 If the a small proprietary company is controlled by a foreign company and it was not consolidated in financial statements lodged with ASIC that year by a registered foreign company, a company, a registered scheme or a disclosing entity, it must also provide annual reports to members.70 A small proprietary company is generally only required to lodge its annual reports with ASIC in the latter instance.71 18.4 A director's failure to take all reasonable steps to comply with, or to secure the company's compliance with, the obligations listed above will constitute contravention of a civil penalty
63 Rio Tinto Annual Report 2008, 'Performance', pp 80-9.
64 Corporations Act, s 301.
65 Corporations Act, ss 292(1) and 314.
66 Corporations Act, s 317(1).
67 Corporations Act, s 317(2).
68 Corporations Act, s 319(1).
69 Corporations Act, ss 292(2), 293 and 294.
70 Corporations Act, s 292(2).
71 Corporations Act, s 319(2). renm A0112319423v6 305861270 24.9.2009 Page 18 Australia
provision and the director may be subject to a pecuniary penalty.72 It is an offence punishable by fine and/or imprisonment for a director to dishonestly fail to take all reasonable steps to comply or secure compliance with these obligations.73 18.5 A failure by a listed company to comply with its continuous disclosure obligations is an offence and may also constitute a contravention of a civil penalty provision.74 In both cases, the company may be liable to pay a pecuniary penalty or fine. The company may also be liable to compensation orders.75 If a director or a senior executive is 'involved' in the company's breach of its continuous disclosure obligations, that person may also be subject to a pecuniary penalty.76 18.6 It is a criminal offence for a person to authorise a statement in a document that is lodged with ASIC that the person knows is false or misleading or for a person to knowingly authorise the omission of a matter without which the document is false or misleading. If found guilty, a company is liable to pay a fine and a director or senior executive could be liable to pay a fine, face imprisonment of up to five years or both.77
Stakeholder Engagement
19. Are there any restrictions on circulating shareholder proposals which deal with impacts on non-shareholders, including human rights impacts?
19.1 Shareholders may circulate proposals which deal with impacts on non-shareholders, including human rights impacts. Support from 100 shareholders or 5% of the total members of the company is required before a company must put forward a resolution.78 Voting blocks of shareholders of this size can also have material distributed in support of those resolutions or against resolutions proposed by the Board and requisition extraordinary general meetings.79 The resolution or material put forward by the shareholders cannot be more than 1000 words long or contain defamatory material.80 There are also limits upon the subject matter of a resolution in that it must not deal with matters of management exclusively vested in the directors. This prohibition also extends to the expression of a non-binding opinion by the members as to how the directors should exercise their powers.81 At a general meeting, a Chair has discretion to reject a motion if
72 Corporations Act, s 344.
73 Corporations Act, s 344.
74 Corporations Act, s 674.
75 Corporations Act, s 1317HA.
76 Corporations Act, ss 674(2) and 674(2A).
77 Corporations Act, ss 344(2), 1317E and Pt 9.4.
78 Corporations Act, s 249N. Under s 249O(1), If a notice of resolution is put forward that conforms with these requirements, it must be considered at the next general meeting that occurs more than two months after notice is given.
79 Corporations Act, ss 249P and 249F.
80 Corporations Act, ss 249O and 249P.
81 NRMA Ltd v Parker (1986) 6 NSWLR 517. renm A0112319423v6 305861270 24.9.2009 Page 19 Australia
he or she considers that the motion addresses a matter that is within management powers reserved for directors.82 If a shareholder wishes to challenge this decision, he or she may apply to a court to determine the validity of a shareholder resolution.83 A number of shareholder resolutions concerning corporate social responsibility have been put before shareholders of ASX listed companies, however, these resolutions have not been passed due to lack of votes.84
20. Are institutional investors, including pension funds, required or permitted to consider such impacts in their investment decisions?
20.1 Three types of institutional investors are active in the Australian market - superannuation funds, life insurance funds and managed investment schemes. While these investors are governed by different legislation,85 broadly speaking the duties imposed on each kind of investor are similar. All institutional investors are expected to demonstrate due care, skill and diligence in managing their investments86 and are expected to place the interests of members over their own interests.87 20.2 In addition to the above, superannuation funds are subject to a further restriction. Section 62 of the Superannuation Industry (Supervision) Act 1993 (Cth) provides, essentially, that the superannuation fund must be run for the 'sole purpose' of benefiting members of the fund. On one view this provision may represent a barrier to consideration of human rights in investment. Alternatively, it is arguable that the word 'purpose' should be construed as referring to the goal of the fund, rather than the means by which it is to be achieved. On this approach, provided the investments were profitable, consideration of human rights issues in making investments would not be precluded.
82 See E Magner, Joske's Law and Procedure at Meetings in Australia (2001), p 57 and A Stephens, 'Effective General Meetings: The Role of the Chair', Keeping Good Companies (1 May 2006).
83 Re Sal Mar Enterprises Lot Pty Ltd; and Young v Sal Mar Enterprises Lot Pty Ltd [2005] FCA 1853. In this case, the court granted the applicant a declaration that a shareholder resolution that had been passed, and of which he, as a shareholder, had no notification, was invalid. See also E Magner, Joske's Law and Procedure at Meetings in Australia'(2001), which states at p 57 that a shareholder could also apply for a writ of mandamus to compel a Chair who refused to put a motion to a meeting to do so. See generally Wishart v Henneberry [1962] 3 FLR 171, where the Commonwealth Industrial Court held that the Chairperson of the Australian Builders' Labourers' Federation could not rule a motion of a member as out of order and refuse to put it to the meeting where it was within the competence of the meeting and the Court made an order to compel the Chair to put a motion to the meeting.
84 See discussion of case studies involving these companies in K Anderson and I Ramsay, From the Picketline to the Boardroom: Union Shareholder Activism in Australia (2005) and M Rawling, 'Australian Trade Unions as Shareholder Activists: The Rocky Path Towards Corporate Democracy', (2006) 28 Sydney Law Review 227. Anderson and Ramsay highlight the fact that shareholder resolutions may still be effective in bringing pressure to bear on companies to adopt corporate social responsibility practices, even when the resolutions are not passed: 'No Australian union shareholder campaign has resulted in a union sponsored resolution being passed at a meeting of shareholders. However, in several of the Australian case studies discussed…unions have been successful in negotiating favourable outcomes with companies during, or at the conclusion of, a shareholder campaign'. (See p 82). See also Rawling at p 245.
85 Superannuation funds are regulated by the Superannuation Industry (Supervision) Act 1993 (Cth); life insurance funds by the Life Insurance Act 1995 (Cth); and Managed Investment Schemes by the Corporations Act.
86 Superannuation Industry (Supervision) Act, s 52(2)(b); Life Insurance Act, s 48(2); Corporations Act, s 601 FC(1)(c).
87 Superannuation Industry (Supervision) Act, s 52(2)(c); Life Insurance Act, s 48(3); Corporations Act, s 601 FC(1)(d). renm A0112319423v6 305861270 24.9.2009 Page 20 Australia
20.3 To date, the obligations imposed upon institutional investors have not been interpreted as requiring regard to human rights considerations. Further, there may be some authority for the view that an institutional investor must not consider human rights impacts in making investment decisions where this would not be in the financial interest of the beneficiaries of such investments. The English case of Cowan v Scargill [1985] Ch 270 is cited by Halsbury's Laws of Australia for guidance on this point.88 This case is said to stand for the principle that an institutional investor has a duty to maximise profits for members above all else.89 This does not preclude trustees from taking account of social, ethical and environmental issues; however, generally such considerations cannot justify an investment strategy which reduces financial advantage to the trust.90 20.4 More recently, the trend amongst commentators has been to question the practical relevance of this authority and, at most, treat the decision as endorsing the accepted rule that trustees exercising fiduciary investment powers must exercise those powers for the purpose for which they were granted and in the interests of beneficiaries.91 There is an absence of Australian case law which would clarify this position. The PJC Report states that, under the Corporations Act, there is nothing to limit institutional investors to acting in the best financial interests of members. However, submissions to this report demonstrate that, in practice, trustees of superannuation funds have interpreted the 'sole purpose test' as requiring them to make investment decisions based on maximisation of financial returns for members, without consideration of human rights impacts.92
88 Halsbury's Laws of Australia [400-300]. This case concerned five trustees appointed by a coal mineworkers' union to the board of a mineworkers pension scheme. The five trustees refused to approve an investment plan on the basis that the funds should be invested in Britain and not in energy industries in direct competition with coal. Megarry VC held that the purpose of the trustee fund was to provide financial benefit to the beneficiaries of the trust and, as such, the trustees had to act in the best financial interests of the beneficiaries. In this case, the trustees could not refuse to approve an investment that would be financially beneficial to the mineworkers on the basis of social or political reasons. Interestingly, Megarry VC stated, by way of obiter dicta, that there may be a 'rare' case where the trustee must only consider financial benefit to the beneficiaries of the trust. His Honour noted that '…if the only actual or potential beneficiaries of a trust are all adults with very strict views on moral and social matters, condemning all forms of alcohol, tobacco and popular entertainment, as well as armaments, I can well understand that it might not be for the "benefit" of such beneficiaries to know that they are obtaining larger financial returns under the trust by reason of investments in those activities than they would have received if the trustees had invested the trust funds in other investments'. Arguably, a trust that is created specifically as an 'ethical investment' trust would permit a trustee to consider human rights concerns when exercising their duty to act in the beneficiaries' best interest. There do not appear to be any cases in which this argument has been advanced.
89 For criticism of this wider position see Research Paper prepared by Freshfields Bruckhaus Deringer for the Asset Management Working Group of the United Nations Environment Programme Finance Initiative (UNEPFI), A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment, pp 8-9.
90 Cowan v Scargill [1985] Ch 270, 288-9; (Megarry VC).
91 See Research Paper prepared by Freshfields Bruckhaus Deringer for the Asset Management Working Group UNEPFI, A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment, p 10.
92 PJC Report, p 73; Submission by Coghill et al to the PJC Report http://www.aph.gov.au/SEnate/committee/corporations_ctte/completed_inquiries/2004- 07/corporate_responsibility/submissions/sub71.pdf (September 2005). See for example the comments at page 57, stating 'Several [interviewees] commented that the CSR concept itself was problematic in the context of the sole purpose test, as investing on ‘social responsibility’ criteria could be seen as a breach of fiduciary duty in the absence of information linking specific CSR issues to investment risk/returns.' renm A0112319423v6 305861270 24.9.2009 Page 21 Australia
20.5 In February 2009, the former Federal Minister for Superannuation and Corporate Law, Senator Nick Sherry, announced that he had written to APRA requesting that it review its guidance to superannuation funds to take greater account of environmental, social and governance issues in their investment practices.93 In making the announcement the Minister criticised the uncertainty around trustee duties and the sole purpose test. In particular, Senator Sherry said:
In my view, the consideration of ESG factors is so critical to the long-term financial success of super assets, it is an important part of trustees' fiduciary responsibilities. And as such, I believe that ESG and other extra-financial factors should be incorporated into the investment decision-making process of superannuation trustees. Their potential to impact heavily on the long-term viability of investments links them inextricably to beneficiary outcomes, including financial returns. Trustees that recognise and respond to ESG factors will be better prepared for the risks and opportunities that they will face. I believe that a comprehensive, evidence-based review of extra-financial risks will ultimately improve the returns and lower the investment risk they offer members.94 20.6 While Senator Sherry did not specifically refer to human rights, he stated that his request to APRA was made in order to:
… make it clear that trustees can incorporate environmental, social and governance (ESG) issues in the formulation of their investment and other operational strategies…This is a critical formal step on the part of the Government to ensure that the regulatory environment throws up no impediments to the mainstream integration of ESG/CSR factors in superannuation fund investment decision-making.95 It remains to be seen whether the Federal Government will take further steps to regulate investment institutions in relation to environmental, social and governance issues. 20.7 Generally, sellers of financial products are required to give potential retail (as opposed to institutional) purchasers a Product Disclosure Statement (PDS). The information required in a PDS is set out in s 1013 of the Corporations Act. Section 1013(D)(I) provides that where a product includes an investment component, the PDS must detail the extent to which 'labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment'. The PDS must contain such information as a person would reasonably require to make a decision whether to
93 Closing Keynote Address by Senator Sherry at Australian Centre for Corporate Social Responsibility Third Annual Conference, Westpac Place, 275 Kent St, Sydney, http://www.treasurer.gov.au/DisplayDocs.aspx?doc=speeches/2009/003.htm&pageID=005&min=njs&Year=&DocType= (5 February 2009). See press release issued on same date: http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2009/009.htm&pageID=003&min=njs&Year=&DocTy pe=0 .
94 Closing Keynote Address by Senator Sherry at Australian Centre for Corporate Social Responsibility Third Annual Conference, Westpac Place, 275 Kent St, Sydney, http://www.treasurer.gov.au/DisplayDocs.aspx?doc=speeches/2009/003.htm&pageID=005&min=njs&Year=&DocType= (5 February 2009).
95 Closing Keynote Address by Senator Sherry at Australian Centre for Corporate Social Responsibility Third Annual Conference, Westpac Place, 275 Kent St, Sydney, http://www.treasurer.gov.au/DisplayDocs.aspx?doc=speeches/2009/003.htm&pageID=005&min=njs&Year=&DocType= (5 February 2009). renm A0112319423v6 305861270 24.9.2009 Page 22 Australia
invest in the product.96 Failure to comply with the requirements of section 1013D can lead to criminal and civil sanctions and may entitle the purchaser to return the product and obtain a refund.97
21. Can non-shareholders address companies' annual general meetings?
21.1 Non-members do not have any right to address an AGM per se. This is because AGMs are private meetings and non-shareholders cannot attend without an invitation from the company.98 However, companies retain a discretion to invite non-shareholders to attend and speak at AGMs. Individual shareholders are permitted to pose questions or make comments.99 These questions and comments may be directed toward the management of the company. Questions can also be asked of the auditor which are relevant to the conduct of the audit and the preparation of the audit report.100 It should be noted that the chair of an AGM retains the common law power to run an orderly meeting and is not necessarily required to allow each member an opportunity to ask questions.
Other Issues of Corporate Governance
22. Are there any other laws, policies, codes or guidelines related to corporate governance that might encourage companies to develop a corporate culture respectful of human rights, including through a human rights due diligence process?
22.1 Listed companies must comply with the ASX Listing Rules, which regulate admission, suspension and removal from the list, as well as disclosure rules and corporate governance aspects of a listed company's conduct, such as conditions on share transfers and registration and holding meetings. The ASX Listing Rules are mandatory under the Corporations Act and ASIC may bring an action against a company for a breach of the ASX Listing Rules. As noted above, the disclosure obligations contained in the ASX Listing Rules are likely to encourage listed companies to develop and incorporate into their day to day business practices a corporate culture that is respectful of human rights. The fact that there have been a number of shareholder class actions based on alleged breaches by companies of their continuous disclosure obligation demonstrates that, even where ASIC does not prosecute a company, the company's shareholders may be willing to pursue further action against a company.101 Further, as discussed above, ASX Listing Rule 4.10.3 requires listed companies to state in their annual report the extent to which they have
96 Corporations Act, s 1013D(1). Reasonableness is considered from the purchaser's perspective. See ASIC Regulation Guide 65 s 1013A Disclosure Guidelines, December 2003, p 11.
97 Corporations Act, Pt 7.9, Div. 7, Sub A (criminal offences), Sub B (civil liability) and s 1016F (right to return and refund).
98 In practice, companies are known to allow non-shareholders, such as the press, to attend meetings.
99 Corporations Act, s 250S(1) which requires the chair of an AGM to allow 'a reasonable opportunity for the members as a whole … to ask questions about or make comments on the management of the company'. Note that members may nominate a proxy, who is not necessarily a member, to attend and address the AGM on their behalf.
100 Corporations Act, s 250T.
101 A Ferguson, 'Lessons to Learn in Class Actions', The Australian (2 January 2009). renm A0112319423v6 305861270 24.9.2009 Page 23 Australia
followed the corporate governance principles in the ASX Recommendations. Where a company has not followed the ASX Recommendations it must not only detail why it has not done so, but:
… explain how its practices accord with the 'spirit' of the relevant Principle, that the company understands the relevant issues and has considered the impact of its alternative approach'.102 22.2 The requirements and ideas underlying the ASX Recommendations (for example, Principle 3 which states that companies should actively promote ethical and responsible decision-making and recommends adoption of a code of conduct policy) require public disclosure by companies of the ways in which they are to abide by principles of corporate social responsibility and are therefore likely to encourage a corporate culture respectful of human rights. The G100 Guide, while not compulsory, is another factor that may contribute to the incorporation of human rights considerations into day to day activities of companies. 22.3 Australian corporations have adopted a number of sector-specific voluntary codes. These include the Australian Minerals Industry Framework for Sustainable Development (Enduring Value) in the mining sector, which establishes a voluntary code for environmental performance and sustainability reporting, and the Credit Union CSR Toolkit in the financial services sector, which provides a framework for credit unions to engage in sustainability activities and reporting. As noted above, a number of listed companies participate in voluntary sustainability indexes that encourage businesses to operate with respect for human rights. Additionally, Standards Australia has produced guidelines on CSR that are aimed at non-listed companies and cover employment, environmental, health and safety issues.
22.4 As at 25 September 2009, thirty nine Australian companies (including small and medium enterprises) are members of the UN Global Compact. The Australian Network of the UN Global Compact was launched on 26 May 2009, and is expected to facilitate the implementation of the principles of the UN Global Compact and create further opportunities for multi-stakeholder engagement.103
23. Are there any laws requiring representation of particular constituencies on company boards?
23.1 There are no laws that specifically require representation of particular groups on company boards. Under the Corporations Act, a non-listed company must have at least one director and a listed company must have at least three directors, two of whom ordinarily reside in Australia. The constitution of a company may provide further detail as to the types of people who can or must be appointed as directors of the company. The ASX Recommendations state that a company should 'have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties' and recommends that a majority of the board, including the board's chairman, be
102 ASX Recommendations, p 3.
103 United Nations Global Compact, 'Australia Launches Local Network', 26 May 2009, http://www.unglobalcompact.org/NewsAndEvents/news_archives/2009_05_28.html. renm A0112319423v6 305861270 24.9.2009 Page 24 Australia
independent.104 However, the ASX Recommendations do not require or recommend representation of particular constituencies.
24. Are there any laws requiring gender, racial/ethnic representation, or non- discrimination generally, on company boards?
24.1 As noted above, there are no laws requiring gender or racial representation on company boards. This is a matter that is determined in accordance with a company's constitution. However, recent developments suggest further debate on this issue. In July 2008 the Victorian Attorney-General requested the Standing Committee of Attorneys-General (SCAG) examine the issue of diversity on private sector boards.105 This would involve an analysis of world best practices regarding board representation, including the possibility of legislation to mandate board diversity. SCAG is yet to comment publicly on the subject.
104 ASX Recommendations, p 19.
105 Premier of Victoria Press Release, Hulls: Private Sector Should Get on Board,