Grant Chapman (SA, Liberal Party) Share this | Hansard source

I present the report of the Parliamentary Joint Committee on Corporations and Financial Services entitled Corporate responsibility: managing risk and creating value, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

I move:

That the Senate take note of the report.

Corporate responsibility is emerging as an issue of critical importance in Australia’s business community. It is usually described in terms of a company or organisation considering, managing and balancing the economic, social and environmental impacts of its activities. It relates to a company taking a long-term view of its shareholders’ interests and sustainability as an operating organisation, rather than a short-term view—that is, building long-term shareholder value irrespective of the short-term reaction of financial markets. This is borne out in my committee’s report on corporate responsibility, entitled Corporate responsibility: managing risk and creating value.

During the course of the inquiry, the committee received a great deal of evidence of the many innovative ways Australian companies are employing responsible corporate approaches to manage risk and to create corporate value in areas beyond a company’s traditional core business. That is why the committee sees no need for further legislation or regulation to mandate activity in this regard. Indeed, at a time when business is seeking and government is responding positively to a reduction in strangulating red tape, further regulation regarding corporate responsibility is likely to be counterproductive.

The committee’s inquiry, which commenced at this time last year, has generated enormous interest from a broad spectrum of corporations, organisations and individuals. In fact, the committee received some 145 submissions—the most submissions received by this committee in the last decade—and conducted wide-ranging hearings with an extensive cross-section of witnesses. Previously a fringe notion largely in the domain of academic discourse, corporate responsibility has developed over the past decade into a practical mechanism for companies to assess and manage their non-financial risks and maximise their long-term financial value. It is also a burgeoning driver of modern financial markets. Both the ethical investment and mainstream institutional investment sectors are increasingly considering how well companies manage their non-financial risks. This is supplemented by globalisation and several disastrous, large-scale corporate collapses. Although Australian companies have shown a greater engagement with corporate responsibility over the past decade, they lag behind international standards.

Four main areas were considered by the committee for improvement: directors’ duties, institutional investors, sustainability reporting and encouragement by government and industry, which I will now discuss in turn. The committee heard a number of arguments in relation to whether or not existing requirements in the Corporations Act 2001 allow company directors to consider broader community interests and whether any change is required to legislation to either permit or require responsible corporate behaviour. We found that, despite some isolated instances where directors have interpreted their duties narrowly—for example, in the James Hardie case—the vast majority of Australian company directors are taking an enlightened self-interest approach. This view essentially allows directors to consider and act upon the legitimate interests of stakeholders other than shareholders to the extent that these interests are relevant to the corporation.

We consider that an interpretation of the current legislation based on enlightened self-interest is the best way forward for Australian corporations. There is nothing in the current legislation which constrains directors contributing to the long-term development of their corporations by taking account of interests of stakeholders other than shareholders. The wellbeing of the corporation comes from strategic interaction with outside stakeholders in order to attract competitive, reputational and recruitment advantages. As a result, we recommend that amendment of the directors’ duties provisions within the Corporations Act is not required.

A good deal of evidence to the committee concerned the role of institutional investors and the important influence they can have on corporate behaviour. Institutional investors are more likely to take a long-term view of a company’s financial performance. Despite the focus of institutional investors on financial performance, evidence suggests that increasingly they are considering non-financial factors that can present significant risks and opportunities for a company’s future financial performance.

A significant impediment to institutional investors engaging more with the non-financial performance of companies is the deficiency in non-financial information. The committee recommends that the Australian Stock Exchange’s Corporate Governance Council should provide further guidance to companies on how best to inform investors of material non-financial performance by disclosing their top five sustainability risks and by providing information on the strategies to manage those risks.

We also recognise the potential of the relatively new operating and financial review provisions of the Corporations Act for the disclosure of material non-financial information. We recommend that each company auditor monitor and review disclosures made under the OFR provisions and make recommendations to their company’s board regarding the adequacy of the disclosures. Finally, for institutional investors, the committee supports the adoption of the United Nations Principles for Responsible Investment and, in particular, recommends that the recently established Future Fund should become a signatory.

Sustainability reporting refers to the practice of corporations and other organisations measuring and reporting publicly on their economic, social and environmental performance and future prospects. The committee heard arguments as to whether reporting should be voluntary or mandatory. We concluded that reporting should remain voluntary. In particular, we took note of evidence suggesting that mandatory reporting would lead to a ‘tick the box’ culture of compliance. This is an undesirable outcome and one that defeats the purpose behind the concept of corporate responsibility. We believe that it is important for companies to be encouraged strongly to engage voluntarily in sustainability reporting rather than being forced to do so.

A separate issue was that of a voluntary standardised sustainability reporting framework. The most prominent and widely accepted of these is the Global Reporting Initiative, or GRI, an international reporting framework favoured by many submitters. The committee is strongly supportive of the GRI but believes that it is too early to recommend it as the voluntary Australian framework.

The committee wants to encourage greater industry-led uptake and disclosure of corporate responsibility activities. Of particular interest was the example from overseas: the United Kingdom organisation Business in the Community. This industry-led network assists businesses to develop practical and sustainable solutions to manage and embed responsible business practice. We support the establishment of such a network in Australia and recommend that the Australian government provide appropriate seed funding.

Government has an important role to play in encouraging and facilitating corporate responsibility. The committee received a strong message that government has a key role to play in the education of company directors, investors and other stakeholders. We support activities already in place, such as the Prime Minister’s Community Business Partnerships. We concluded that the Australian government could increase its involvement in this area, and we believe that it should develop educational materials to encourage corporate responsibility for institutional investors and for the not-for-profit sector.

The other key area where the government should demonstrate leadership is through best practice initiatives in its own agencies and activities. The committee commend those government agencies that undertake sustainability reporting, but we recommend that, to show greater leadership and to encourage more reporting by government agencies, the Australian government establish voluntary sustainability reporting targets for government agencies. We recommend also that the Australian government establish voluntary targets for government agency procurement in areas such as water, waste, energy, vehicles and equipment.

The support of Labor committee members for the bulk of this report is welcomed. Their decision to issue a supplementary report is regrettable, but I suppose they have to attempt some product differentiation, even when it is not really justified. It should be noted that, by and large, the narrative of Labor’s report restates much of the committee’s report. As to their claim to have initiated the inquiry because of government inaction, it needs to be noted that, firstly, the government had already asked CAMAC to investigate corporate responsibility and, secondly, inquiries are initiated by committees, not by parties.

To the extent to which Labor’s report differs—particularly in its recommendations—the business community should note very carefully that their report advocates more government intervention, regulation and red tape. Also, Labor leave open the option for a totally mandatory approach in the future. Business should beware that this is Labor’s real future agenda; it is just that they do not want to say it yet. While in opposition they attempt to convince business that a future Labor government should not be feared.

This has been a major inquiry with a heavy workload for the committee members, who, despite the differences I have just highlighted, I thank for their efforts. Likewise, I thank the committee staff: Kelly Paxman, Anthony Marinac, Stephen Palethorpe, Laurie Cassidy and Andrew Bomm, who have worked tirelessly to assist the committee to produce a first-class report. (Extension of time granted)

To conclude, corporate responsibility in Australia is still in its developmental stages. Over the course of the inquiry, the committee has been encouraged by the evidence of increasing engagement by Australian companies and Australian government agencies with sustainable practices and sustainability reporting. Further progress is desirable, however. The Australian government and the Australian Securities and Investments Commission, where appropriate, should monitor progress.

The committee strongly supports further successful engagement in the voluntary development and the wide adoption of corporate responsibility. We have formed the view that mandatory regulation of directors’ duties and sustainability reporting are not required and indeed could be counterproductive. However, consequent on the recommendations of this report, the committee expects increasing engagement by corporations in corporate responsibility activities. We believe that the recommendations contained in this report will play an important part in progressing the future of corporate responsibility in Australia. I commend the report to the Senate.