Almost 30 years since the introduction of the Companies Act 1993, it’s now a timely opportunity to review the framework for directors’ duties to ensure ongoing strong and effective governance. By Felicity Caird.
The need for robust corporate governance and leadership are heightened in times of crisis and challenge – and governing in today’s world certainly fits that bill.
As stewards and kaitiaki of company value, boards are increasingly taking a more holistic view of how their companies create long-term worth, and they are giving greater attention and recognition to broader stakeholder interests.
In a world more focused on ethical behaviour and outcomes, and amid heightened boardroom scrutiny, progressively more governance decisions are being made through an ethical and sustainable lens, and anchored to the company’s core purpose – its raison d’être.
Along with law-firm MinterEllisonRuddWatts, the Institute of Directors recently published a paper on stakeholder governance.
This not-new, but increasingly prevalent concept suggests that companies have multiple stakeholders, whose interests should be factored into decision-making. Shareholders are key members of this group, but so are regulators, customers, suppliers, employees, the environment, and society as a whole.
The notion does not appeal to everyone and as expected there’s been some good discourse and debate on the issue.
Some maintain that the theory of shareholder primacy has stood the test of time, driving wealth, progress and opportunity. Others are adamant that as a corporate philosophy it’s broken and must be fixed.
The focus on stakeholders is nothing new. However, society’s expectations and the rise of environmental, social, and governance criteria have driven it up the agenda.
It has been a topic of priority in global governance for a while now, and has gained even more traction in the face of intense challenges around climate, social inequality and the ongoing pandemic.
In the UK, for instance, there are increasing calls for legal reform to advance the interests of wider society and the environment alongside those of shareholders.
Here in New Zealand, company reporting will soon need to encompass climate-related disclosure alongside traditional financial reporting.
Of course, no one is calling profit a dirty word or suggesting that a business should not strive to deliver decent returns to those who provide it with capital.
The question is: Should profit be prioritised at all costs, if those costs are borne by staff, or the environment, or customers, or the community in which a company operates?
Framing the debate as shareholders versus stakeholders, as if their interests are mutually exclusive, doesn’t help.
The point is, building a sustainably profitable business requires a long-term view of the factors that are both impacted by, and contribute to, a company’s operations.
A strategy that has delivered profitably in the past may not be as successful in a world where expectations on businesses to be good corporate citizens have arguably never been higher. Corporate reputation is critical to success.
Governing in this context can be complex. Directors need sufficient clarity and certainty around their core duties and the extent of their responsibilities.
For example, do we need clarification about whether the law expects directors to prioritise shareholders’ profitability over other stakeholders’ interests as part of their obligation to act ‘in the best interests of the company’?
We have suggested in the white paper that, almost 30 years since the introduction of the Companies Act 1993, it is now a timely opportunity to review the framework for directors’ duties to ensure ongoing strong and effective governance.
You can read the white paper in full, at: https://www.iod.org.nz/resources-and-insights/research-and-analysis/stakeholder-governance/#
Felicity Caird is the GM governance leadership centre and membership at the Institute of Directors.