Grant Chapman (SA, Liberal Party) Share this | Link to 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.

Penny Wong (SA, Australian Labor Party, Shadow Minister for Corporate Governance and Responsibility) Share this | Link to this | Hansard source

I rise to speak on the motion moved by Senator Chapman in relation to the tabling of the report entitled Corporate responsibility: managing risk and creating value by the Joint Committee on Corporations and Financial Services, of which I am a member. I am very pleased to be able to speak, albeit briefly, on a very important report in relation to an inquiry that Labor promoted to the committee and has, over a number of months, spoken about at length publicly and to the business community. I start by thanking the secretariat staff, a couple of whom are in the gallery, for their support and assistance. This was a very lengthy inquiry with a lot of evidence. We in the opposition—and, I am sure, all senators and members on the committee—are most grateful for the assistance provided.

I also want to make a couple of points in response to Senator Chapman. Given how far many of the committee members who perhaps were initially a little doubtful about the thrust of the inquiry have come, it is unfortunate that Senator Chapman feels the need to attempt scare politics—not very effectively, I might say—on the position Labor has taken on this report. If he were to understand the nature of the supplementary report and recommendations that Labor has made, perhaps he would be a little less polemic in his response.

This inquiry was sought by the Labor Party because it seems quite patent to us—and many Australian businesses already understand this—that, in terms of meeting the challenges, current and future, social, economic and environmental, that our society faces, corporations have to be part of the solution. Our future economic viability, environmental sustainability and social cohesion are not matters that government alone can assure. It is important that business is part of the solution and that the full potential of business to be a force for good in meeting these challenges is realised. We on this side of the chamber believe—and I suggest that the report from the entire committee indicates—that corporations can and do offer something to deal with many of the challenges we are facing.

I want to make this point: corporate responsibility is fundamentally an issue of economic, environmental and social sustainability. It is the firm belief of Labor that business must be part of the solution when dealing with emerging sustainability challenges. The fact is that positive social and environmental outcomes are no longer the sole domain of government or community groups. Businesses, along with various stakeholders in business activities, are becoming aware of this fact.

The first and probably most important point where Labor’s supplementary report perhaps goes a little further than some of the recommendations of the committee is that we say that government should lead by example. You cannot lecture Australian business about the need to integrate non-financial risks and sustainability issues in their business operations if, in government, you are doing far worse than the private sector. The committee had some fairly cogent evidence from government departments that demonstrated that the reporting of non-financial risk, the reporting on sustainability issues and the reporting on environmental targets was very poor in government agencies. It seems quite patent to us that you cannot be in a situation where business is lectured about its behaviour and the government is not leading by example. One very important aspect of Labor’s recommendations is that we are seeking far better leadership from government when it comes to sustainability reporting and performance.

On the issue of directors’ duties, we shared the view of all parties that it is not appropriate to amend directors’ duties in the way sought by a number of the submitters. When it comes to reporting on non-financial risk, can I say that Senator Chapman might try to dress this up as an enormous imposition; in fact, the recommendation of the committee that deals with listed companies is effectively an ‘if not, why not?’ reporting approach. The approach Labor are taking is a similar approach—that is, mandatory reporting on an ‘if not, why not?’ level. However, our view is that it should apply not only to listed companies but also to large proprietary companies which also have potentially significant impacts on society, the community and the environment. If we are serious about trying to engage business in a cultural shift, reporting is one of the ways in which we can try to pull through that cultural shift. As I said, we are proposing a flexible mandatory minimum. It is an ‘if not, why not?’ approach without a requirement as to how businesses chooses to report it. I suggest that the way in which Senator Chapman has sought to characterise it is hyperbole, to say the least.

We have also suggested, consistent with previously announced Labor policy, that a national sustainability council be established to deal with a range of issues which are discussed in the report. We need thought leadership on sustainability and we need national targets on sustainability issues across both the public and private sectors. In our view, we need a body such as a national sustainability council to deal with these challenges.

One thing that was quite obvious in the evidence was that there is fragmentation in the way in which government corporate responsibility programs are currently delivered. That comes through even in the majority committee report. It is important that the government consider some of the recommendations of this committee and try to get a more coherent strategic framework for the government to encourage more sustainable business practices, or ‘corporate responsibility’, depending on the definition. There are a great many recommendations in the majority committee report that Labor support. There are about five areas where we go further. They centre on the issues that the government has to lead by example and that there has to be a better framework for engagement within government.

I want to place on record my thanks not only to the secretariat but also to the many witnesses and submitters who made submissions to this inquiry. The opposition members have had extremely good dialogue with some of those organisations within the business community that are leaders in this area. It is our hope that through this discussion the current government and future Australian governments can perhaps do a little better both in terms of their leadership and in terms of engaging with the broader business community to try to get it to step up to the plate, as many Australian corporations currently do.

Andrew Murray (WA, Australian Democrats) Share this | Link to this | Hansard source

I rise to speak to the motion moved by Senator Chapman in relation to the tabling of the corporate responsibility report of the Joint Committee on Corporations and Financial Services. I want to acknowledge and thank the secretariat for the extremely comprehensive and voluminous exercise that they had to go through to assist the senators to produce this report. The submitters were also of great assistance. I also want to record my thanks to Senator Chapman and Senator Wong for their efforts in arriving at the final report.

The Australian Democrats support the committee’s report, titled Corporate responsibility: managing risk and creating value. The report, including the supplementary report of the Labor members of the committee, significantly advances parliamentary understanding of corporate responsibility issues, and the recommendations of the committee will assist considerably in Australian corporate entities lifting their game in corporate responsibility reporting. Our own support for the report has no codicil attached to it, although I have made some additional remarks to clarify our views on a number of additional issues raised by Labor in their supplementary report.

We Democrats take the view that corporate responsibility reporting and its development in Australia is still in its early developmental stages and needs to be nurtured and encouraged. We note that Australia lags many of the more advanced OECD countries and we look forward to Australia catching up to what is going on in those leading countries.

If the Australian government and the corporate community engage fully with the proposed voluntary development and adoption of corporate responsibility then there will be no necessity for mandatory action in the future. However, it is our explicit intention to keep an open mind on this matter. There may be circumstances where the adoption of a mandatory code would be desirable in the longer term. International trends or conventions may recommend and encourage the adoption of uniform codes in OECD countries on a mandatory basis. If that were the case, Australia should be in a position to adopt such codes. I remind the chamber that both accounting and auditing standards were once voluntary; it is now seen as helpful to regularise them in statute. Whether or not mandatory codes are desirable in the future, it is essential there be a meaningful monitoring of the work of corporations in this area, and that has to be started sooner rather than later with good quality reporting.

It was evident during the hearings and in the submissions from the corporate sector that many companies and directors were taking their corporate social responsibilities seriously and including them in their decision making. The motives for adopting corporate responsibility reporting, however, were due to enlightened self-interest, often, which is another way of saying that they were concerned about the outcomes if they did not adopt them. The motivators could be reputation loss or being unable to hold onto their leading executives who believed in such things or to avoid expensive litigation or community agitation.

On the other hand, there were contributors to the hearings who recognised the significant and material contribution corporate responsibility reporting can and does make to the long-term health of a corporation, particularly with respect to the assessment and understanding of what is characterised as non-financial long-term risk. The need for further progress has of necessity to focus on the laggards as well as the leaders. If there is no ongoing improvement across all sectors in the next three to five years, at least to the level of comparable advanced OECD countries, then in the view of the Democrats it will be essential to revisit the need for a mandatory code.

I was attracted to Labor’s notion in its supplementary report that there could be mandated corporate responsibility reporting in the federal public sector. This sits well with the Australian Democrats’ belief that the government should be taking a facilitation role in developing corporate responsibility in the for-profit and the not-for-profit sectors. There was a good deal of support in the submissions and in the evidence given to the committee for a facilitative function from the government, and that would be appreciated by many in the for-profit and not-for-profit sectors. Such facilitation from the government could include a variety of devices, such as offering staff advice systems or other sorts of assistance, both financial and non-financial, which could assist the for-profit and not-for-profit sectors in ensuring that corporate responsibility was achievable on an affordable and sustainable basis. It may even be more important that such facilitation is made available to the not-for-profit sector, which is often working with limited resources and expertise but which still has a very large footprint in the society in which we live. Those not-for-profits might in other circumstances find meeting corporate responsibility obligations onerous.

Although there was evidence that Australian corporations have started down the road to good corporate responsibility reporting, there is a sense that many of them see that what they have done is sufficient, and this fails to take into account that many corporations lag behind their global counterparts who are continuing to move ahead in this area. There therefore needs to be a monitoring of Australian corporations against international standards.

I thought the choice of the title, Managing risk and creating value, was a good one. It is exactly what corporate responsibility should be attached to—that is, it should be grounded in an assessment of both risk and value from the perspective of the corporation. There does need to be a link in people’s minds—by people I mean the directors of companies, the shareholders and institutional investors—that corporate responsibility is something that helps the company manage risk. It helps with decision making because it requires a more holistic and long-term approach to the health and welfare of the company. Instead of simply looking at the financial return to investors, you would look at it as a return to all investors, including future investors.

This link between risk assessment and creating value is extremely important and should act as a motivational tool in bringing Australian corporations up to the level of many international counterparts. In the past it has been my observation—and I have had experience in the private sector—that corporations have focused almost entirely on financial audits in relation to risk appraisal. Corporate responsibility encourages them to move towards the public sector practice of performance audits, which are risk based evaluations, and it has been shown that performance audits are better at exposing longer term risks to a company than financial audits, which tend to focus on the immediate financial health of a corporation.

The report recognised that other jurisdictions, such as the United Kingdom and France, have ministers in charge of corporate social responsibility, which is an interesting development. I agree with the report that currently a number of Australian federal ministers and agencies are indeed taking an active role in assessing and understanding corporate responsibility, but I strongly support the view of the committee that it is necessary for the Department of the Prime Minister and Cabinet to take a leadership role in this area and to adopt a whole-of-government approach to the coordination and development of corporate responsibility reporting in the public sector and, indeed, to try to encourage it in the private sector.

I noted recommendation 10 of Labor’s supplementary report regarding the United Nations Convention against Corruption and the OECD anti-bribery convention and I look forward to the early introduction of amending legislation to deal with concerns raised in the OECD report about shortcomings in Australia’s adoption in the Criminal Code of aspects of its anti-bribery convention. I have had things to say about that recently in an adjournment speech. The report recommendations and the additional recommendations offered by Labor deserve a serious and early response from the government, the Australian Securities and Investments Commission and the corporate and professional community at large. I am glad for this report; I think it is quite a groundbreaking report, frankly, from the perspective of the committee. I join the other two senators who have spoken in commending the report to the Senate.

Question agreed to.