Corporate governance, financial institutions and the “social licence”

Abstract

Financial institutions owe a range of obligations – legal and regulatory, contractual, and non-legal – to their shareholders, their other stakeholders and, arguably, to the public good. Understanding the nature and intensity of those obligations, and the role of boards in balancing and reconciling them, is a key concern of corporate governance. Recent discussions about the need for financial sector entities to earn and maintain a social licence to operate suggest a new way of framing discussions about these obligations.

Notes

1 Minerals Council of Australia, Enduring Value: The Australian Minerals Industry Framework for Sustainable Development (June 2005), p 2. http://www.minerals.org.au/file_upload/files/resources/enduring_value/EV_GuidanceForImplementation_July2005.pdf.

2 M Carney, “Three Truths for Finance”, speech given at the Harvard Club UK Southwark Cathedral dinner, London, 21 September 2015. Remarks by The Hon Malcolm Turnbull reported in P Coorey, “Malcolm Turnbull Slams Banks, Saying They Have Not Always Treated Customers Right”, Australian Financial Review, 5 April 2016.

3 The activities of systemically significant financial institutions impact on economies and communities generally, not just on their immediate customers and counterparties, as the global financial crisis of 2007–08 clearly demonstrated.

4 The notion of the corporation as obligor and its implications for corporate governance are explored in J Farrar and P Hanrahan, Corporate Governance (OUP, 2016), Chs 32 and 36.

5 3rd edn (2014). Further examples of these kinds of “other-regarding” codes include the UN Global Compact (2000), http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf; the OECD Guidelines for Multinational Enterprises (2011), https://www.unglobalcompact.org/; https://www.oecd.org/corporate/principles-corporate-governance.htm; and the UN Guiding Principles on Business and Human Rights (2011), http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf.

6 See section 140 of the Corporations Act 2001 (Cth).

7 “Stakeholder” is used in this context to refer to individuals or groups who have an interest or concern in how the corporation is conducted, rather than in the broader sense of those who exert influence, such as the media. For a detailed discussion of the notion of stakeholders, see Corporations and Markets Advisory Committee (CAMAC), The Social Responsibility of Corporations (2006), para 2.4.1. http://www.camac.gov.au/camac/camac.nsf/byheadline/pdffinal+reports+2006/$file/csr_report.pdf.

8 Farrar and Hanrahan, supra n 4, Ch 30.

9 Chapter 5C of the Corporations Act 2001 (Cth).

10 Superannuation Industry (Supervision) Act 1993 (Cth).

11 Life Insurance Act 1995 (Cth).

12 Farrar and Hanrahan, supra n 4, 31.

13 See eg Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023.

14 There is significant research on this issue in the United States, which seeks to explain why firms engage in different levels of corporate social responsibility (CSR), which is not costless. “After all, if CSR paid for itself or was financially profitable, one would expect all firms, regardless of stakeholder preference toward social responsibility, to vigorously implement it”. This research recognises that, like individuals, corporations have political preferences and that the more left-leaning the corporation the greater its relative commitment to CSR. See A Di Giuli and L Kostovetsky, “Are Red or Blue Companies More Likely to Go Green? Politics and Corporate Social Responsibility” (2014) 111 Journal of Financial Economics 158, 159.

15 A number of scorecards rank corporations’ performance on particular environmental, social and governance (ESG) measures; these rankings clearly demonstrating that some spend more money and effort on CSR than others. For example, the MSCI ESG Ratings rank thousands of corporations against 97 metrics based on three pillars (environment, social and governance) on a scale from AAA to CCC. In Australia, CEAR has offered ESG research on ASX 300 corporations since 2000, reflecting 80 different ESG research areas, including board practice, bribery and corruption, managing environmental and climate change impacts, human rights and supply chain labour standards. The equivalent measure in the UK is provided by EIRIS.

16 Directors must act in good faith in the interests of the corporation and for a proper purpose. The exercise of their discretion is not open to challenge, so long as they are motivated in their decision-making by the corporate interest and not a private enthusiasm or other ulterior consideration, unless their decision is one no rational board could have considered to be in the corporation’s interest.

17 CAMAC, supra n 7, para 3.12.

18 These corporate attributes include separate legal personality, limited liability and perpetual succession.

19 Suggesting, for example, a corporation would be required to contravene a local law in a country in which it was operating if that law infringed human rights.

Additional information

Notes on contributors

Pamela Hanrahan

Pamela Hanrahan, Professor, School of Taxation and Business Law, UNSW Business School and Senior Fellow, Melbourne Law School, The University of Melbourne, Australia. Email: [email protected]