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A SUBMISSION TO THE PARLIAMENTARY JOINT COMMITTEE ON
CORPORATIONS AND FINANCIAL SERVICES
INQUIRY INTO CORPORATE RESPONSIBILITY
by
Department of Business Law and Taxation (BLT) Faculty of Business and Economics, Monash University
TABLE OF CONTENTS
a. The extent to which organisational decision-makers have an existing regard for the interests of stakeholders other than shareholders, and the broader community.
b. the extent to which organisational decision makers should have regard for the interests of stakeholders other than shareholders, and the broader community.
(b)(1) What are the interests for which organisational decision makers should have regard, and why should they have regard for those interests?
(b)1.1 Employee interests 4 (b)1.2 Creditors 5 (b)1.3 Tort victims 5 (b)1.4 Environmental interests 6 (b)1.5 Theories of the Corporation and Corporate Responsibility 8 (b)1.5.1 Economic theories (^) 8 (b)1.5.2 ‘Team production’ theory 8 (b)1.5.3 ‘Communitarian’ theory 9 (b)1.5.4 ‘Concession’ theory 11 (b)1.6 Further justifications for corporate responsibility 12
(b)(2) When should organisational decision makers have regard for non- shareholder interests?
(b)(3) Whose responsibility is it to have regard for non-shareholder interests?
(b)3.1 Should directors be made personally liable? 14 (b)3.2 Difficulties with imposing liability on directors 15 (b)3.3 Why regulation of directors’ decision-making is necessary 16
c. The extent to which the current legal framework governing directors duties encourages or discourages them from having regard for the interests of stakeholders other than shareholders and the broader community.
(c)(1) The Position of Employees under Australian Corporate Law (^) 17
(c)1.1 The Current Legal Position 17 (c)1.2 Recent Moves to Accommodate Employee Interests 19
(c)(2) The Position of the Environment under Australian Corporate Law 22
(c)2.1 The General Position 22 (c)2.2 Recent moves to Encourage Corporate Environmental Responsibility
(c)2.2.1 Mandatory environmental reporting - s 299(1)(f) 22 (c)2.2.2 Minority shareholder resolutions – s 249D 23 (c)2.2.3 Product Disclosure Statements – s 1013DA 23
(c)2.3 The effectiveness of specific environmental regulation 24
d. Whether revisions to the legal framework, particularly to the Corporations Act, are required to enable or encourage incorporated entities or directors to have regard for the interests of stakeholders, other than shareholders, and the broader community.
(d)(1) Introduction 27
(d)(2) Recommendations for new directors’ duties to recognise stakeholder interests in company decision making
(d)2.1 A permissive aspect having general application 29 (d)2.2 A mandatory aspect having specific application 30 (d)2.3 Two further mandatory aspects to specifically address employee interests
(d)2.4 Four further mandatory duties to specifically address the interests of the broader community in achieving ecologically sustainable development and protection of the natural environment
(d)(3) Enforcement mechanisms 32 (d)3.1 Civil penalty provisions (^) 32 (d)3.2 What changes would need to be made to the regime? 34 (d)3.3 Standing for environmental breaches 35 (d)3.4 Strategic regulation theory 35
g) Whether regulatory, legislative or other policy approaches in other countries could be adopted or adapted for Australia.
(g)(1) Recent legal changes in the United States 38 (g)(2) Current and proposed legislation in the United Kingdom 38
ABOUT THE CONTRIBUTORS 40
However we would argue that there have been many well publicised instances where stakeholder (and shareholder) interests have been subverted or ignored by corporate managers, indicating that the present legal framework is inadequate to ensure the protection of non-shareholder interests (some examples are provided in other parts of this submission).
b. the extent to which organisational decision makers should have
regard for the interests of stakeholders other than shareholders, and
the broader community.
This issue raises a series of subsidiary questions.
(b)(1) What are the interests for which organisational decision makers
should have regard, and why should they have regard for those
interests?
There is a growing acknowledgment – by corporations themselves and the broader community - of the impact of corporate activity on other stakeholders, such as employees, creditors, victims of their torts, as well as the environment. This is reflected in the increased focus on corporate governance in Australian law in relation to large publicly listed companies, and the terms ‘Corporate Social Responsibility’ (CSR) and ‘Corporate Citizenship’. However, these are poorly defined concepts. They are generally understood to convey a sense that companies are powerful and have the capacity to hurt the interests of others, such as employees, creditors, and victims of their torts, as well as the environment. Our submission is that this gives rise to a responsibility to take care of those parties’ interests.
(b)1.1 Employee interests
In recent years, the high-profile collapses of companies like Ansett and One.Tel, and the James Hardie episode, have highlighted the vulnerability of employees in Australia’s current corporate law framework. In these and many other cases of corporate failures and restructures, employees’ interests have been overlooked or consciously bypassed. The political fallout from these events has led to some changes to corporations legislation, and the adoption of arrangements such as the General Employee Entitlements and Redundancy Scheme. However, these measures do not go far enough. Despite their enormous investment of “human capital” in the firms for which they work, employees are still largely regarded as “outsiders” by company law
- with none of the information rights and measures to protect their interests enjoyed by “insiders”, such as shareholders and secured creditors.^1
(^1) The ‘insider/outsider’ terminology is borrowed from B Bercusson, ‘Workers, Corporate Enterprise
and the Law’ in R Lewis (ed), Labour Law in Britain (1986) 139; see further Part (c) of this submission below.
(b)1.2 Creditors
Creditors, like employees, are also vulnerable to the risk of non-payment when a company becomes insolvent. While some creditors hold security or have had the ability to price-protect against the risk of non-payment or to diversify away their risk, other have not. These are the small trade creditors who lack information about the risks to which they are exposed or who are unable because of their lack of bargaining power to charge a premium to compensate for that risk.
(b)1.3 Tort victims
Tort creditors are particularly susceptible to the absence of any legal obligations of corporate social responsibility, because they lack the ability to self-protect ex ante or any rights of recovery ex post under the Corporations Act.^2 This is a particular problem when a holding company has deliberately incorporated an undercapitalised subsidiary to minimise the loss of shareholder funds. As the James Hardie case graphically illustrated, the “separate entity” principle stands in the way of tort victims seeking to recover compensation within corporate groups, in that case necessitated by the underfunding of the Medical Research and Compensation Fund that had been established for this purpose. The Report of the Special Commission of Inquiry into James Hardie identified “significant deficiencies in Australian corporate law”, and raised “the question of whether existing laws concerning the operation of limited liability or the "corporate veil" within corporate groups adequately reflect contemporary public expectations and standards.”^3
Tort victims may also be disadvantaged by the adversarial nature of the judicial system in pursuing claims against powerful corporations. This was well demonstrated in the case of now deceased lung cancer victim, Mrs Rolah McCabe, whose claim against British American Tobacco was severely hindered by the destruction of relevant information by the company.^4 This case highlights the need for some form of moral or ethical charter to guide decision-making within corporations.
This vulnerability is exacerbated by the attitude of courts to claims against directors when they commit torts whilst acting on behalf of the company. First, the legal position is confusing with at least four recognised tests to ascertain the circumstances
(^2) Injury compensation enjoys a degree of priority for payment in a liquidation under s556(1)(f) of the
Corporations Act 2001 (Cth) but it ranks behind the wages and superannuation entitlements of employees. Since these and other higher ranking categories of priority must be paid in full before lower categories are considered, there is a significant risk that injury compensation claimants will not be fully compensated as a result of this priority.
(^3) David Jackson, The Report of the Special Commission of Inquiry into the Medical Research and
Compensation Foundation, 2004, Annexure T The Concept of Limited Liability – Existing Law and Rationale,< http://www.cabinet.nsw.gov.au/hardie/Volume1.pdf >.
(^4) The history of this case is set out at the website of the Plaintiff’s solicitors, Slater and Gordon; see
http://www.slatergordon.com.au/classactions/tobacco.htm. Ultimately, an application by the plaintiff’s estate for special leave to appeal to the High Court was unsuccessful. See Cowell v British American Tobacco Australia Services Ltd [2003] HCATrans 384 (3 October 2003).
consumption^11 , and unprecedented water shortages, deforestation and species extinction rates along with the prospect of irreversible climate change^12. It is clear that the current framework of international agreements and national laws to protect the environment is failing.
The traditional model of environmental law has been a ‘command and control’ approach based on strict government regulation of industrial pollution and government ownership of natural resources. This traditional approach has become less effective following widespread micro-economic reforms that have fostered globalisation, deregulation and privatisation of state-owned enterprises. These reforms have greatly diminished government influence over the use of natural resources. The traditional model is also less effective due to a fundamental change in the nature of environmental problems, with concerns about local industrial pollution now overtaken by global concerns about excessive resource consumption, exploitation of developing countries, climate change and biodiversity loss. The role of the courts in protecting the natural environment is equally problematic, with rules of standing and inequality in financial resources between local residents and large corporations making litigation a very difficult option for stakeholders.
One important step in the transition to sustainable development is reform of decision making processes, as recognised by the United Nations Environment Program in Agenda 21 :^13
8.3. The overall objective is to improve or restructure the decision-making process so that consideration of socio-economic and environmental issues is fully integrated and a broader range of public participation assured.
In this context it is important to distinguish between public or government decisions and private or corporate decisions. At the government level there have been several mandatory processes introduced to assist the integration of environmental outcomes in decision-making. These include the obligation to have regard to principles of sustainable development in State based pollution and planning laws, and in Federal environmental impact assessment laws.^14 Another important feature of government decision making processes is that public participation and standing to review decisions is well supported by a range of administrative law remedies.^15 By contrast, processes for review of corporate decision making are far more limited. This relative
(^11) World Wildlife Fund, Living Planet Report 2004. This Report indicates that our ‘ecological
footprint’ (which measures human resource consumption) is currently 20% greater than the Earth’s biological capacity to replace those resources. Any business with a similar 20% shortfall of costs over revenue would soon be wound up.
(^12) Intergovernmental Panel on Climate Change, Third Assessment Report of Working Group 1,
Summary for Policy Makers (2001).
(^13) Agenda 21 is the charter for action formulated by the parties to the Rio Earth Summit. See United
Nations (1992) Agenda 21 ; United Nations Conference on Environment & Development Rio de Janeiro, Brazil, 3 to 14 June 1992.
(^14) Eg. ss 1A-1L Environment Protection Act 1970 (Vic), ss 4 Planning and Environment Act 1987
(Vic), and ss 3, 3A Environment Protection and Biodiversity Conservation Act 1999 (Cth).
(^15) Administrative Law Act 1978 (Vic), Administrative Decisions (Judicial Review) Act 1977 (Cth),
Freedom of Information Act 1989 (Cth).
lack of accountability does not sit well with the recent wave of microeconomic reforms, which have diminished government involvement and placed many corporations in a quasi-governmental role with respect to environmental protection.
This lack of environmental accountability is particularly dangerous in industries which are heavy users of natural resources, such as agriculture (water, land), paper production (water, forests), electricity generation and transport (fossil fuels, greenhouse gases). In these industries, government decision-making still has an important role, but quite often it merely sets broad guidelines for corporate activities (eg. pollution standards) whilst corporate decision-making determines the real extent of environmental damage (or protection). In effect, corporations are increasingly the de facto guardians of the public interest in the natural environment, and thus reform of corporations law is necessary to ensure that corporations discharge this responsibility in the best interest of the community.
However, any attempt to impose a regime of corporate social and environmental responsibility needs to be reconciled with the traditional responsibilities that companies have to their shareholders and that directors have to their companies.
(b)1.5 Theories of the Corporation and Corporate Responsibility
(b)1.5.1 Economic theories
Traditionally, directors have been confined in their actions by the shareholder wealth maximisation imperative. Companies have been seen by economic theorists as a nexus of contracts, rather than an entity in their own right.^16 The contracts in question are with suppliers of inputs, employees, and customers of outputs, and to maintain these contracts, the company needs to be concerned with the interests of these constituencies. To that extent, companies and directors choose to have regard to their interests.
(b)1.5.2 ‘Team production’ theory
More recently developed law and economics theories look more explicitly at the contributions to the company made by non-shareholder constituencies. Team production theory^17 recognises the power of the board, but it is based on the notion that two or more individuals must combine their valuable resources to produce a single output. Directors, rather than acting solely in the shareholders’ interests, act for
(^16) William Bratton, ‘The “Nexus of Contracts” Corporation: A Critical Appraisal’ (1989) 74 Cornell
Law Review 407, 420. The word ‘contracts’ is not meant literally in this context. Instead it refers to the various relationships between the parties. Companies have relationships with the eventual consumers of their products despite a lack of privity of contract between them. Companies have relationships with the community at large, for example in their environmental responsibilities. Christopher Riley, ‘Contracting Out of Company Law: Section 459 of the Companies Act 1985 and the Role of the Courts’ (1992) 55 Modern Law Review 782, 785-6.
(^17) Margaret Blair and Lynn Stout, ‘A Team Production Theory of Corporate Law’ (1999) 85 Virginia
Law Review 247.
the community … It remains only for the claims of the community to be put forward with clarity and force.’ 23
As with the team production model, the communitarian considers the wider constituency of a company. Its rhetoric is of directors’ behavioural change,^24 from focusing on the traditional wealth maximisation objective to furthering the long term viability of the enterprise which relies on the co-operation of all corporate stakeholders.^25 This requires a consideration of ethics and fairness, which, progressives maintain, is in the overall best interests of the company because it fosters trust and reduces risk and the costs associated with it.^26 While directors are allowed to favour one cohort of corporate stakeholders over another, this is only permissible where this is in the long term interests of the company. Konstant remarked that this view ‘provides a new and more inclusive paradigm of corporate governance in which stakeholder voice and loyalty are crucial.’^27
The mechanisms by which progressives believe this paradigm will be achieved are less clear. Williams asserted that disclosure and transparency are key determinants of directors’ actions, and that scrutiny by corporate stakeholders will foster beneficial norms of behaviour.^28 Greenfield contended that if corporate actions are perceived to be procedurally fair, the behaviour of others improves, to the benefit of all stakeholders.^29 Konstant recommended the appointment of an independent board, which ‘can check opportunistic abuses by powerful inside senior managers and which can give voice and procedural fairness to all constituents.’^30 An independent board is also desirable because it lacks any personal financial incentive to benefit its members from its actions, and risks reputational damage from breaches of the law.
(^23) Adolf Berle and Gardiner Means, The Modern Corporation and Private Property (revised ed, 1968)
(^24) Peter Konstant, ‘Team Production and the Progressive Corporate Law Agenda’ (2002) 35 UC Davis
Law Review 667, 676. ‘Serious application of TPM [the team production model of Blair and Stout] offers at least the possibility that public corporations can achieve some meaningful increase in fairness for all corporate constituents. Such fairness can be accomplished without changing legal rules, but by encouraging directors and all corporate constituents to act in accordance with TPM under the existing law.’
(^25) Ibid 669.
(^26) Ibid 671.
(^27) Ibid 674. Konstant rejected suggestions that the communitarian view is Utopian. He maintained that
‘the currently dominant academic model of corporate law is such a caricature of selfishness that the ameliorative mechanisms that corporate communitarians propose can seem real, grounded, and morally refreshing’ at 676.
(^28) Cynthia Williams, ‘Corporate Social Responsibility in an Era of Economic Globalization’ (2002) 35
UC Davis Law Review 705, 711-17.
(^29) Kent Greenfield, ‘Using Behavioural Economics to Show the Power and Efficiency of Corporate
Law as a Regulatory Tool’ (2002) 35 UC Davis Law Review 581, 642.
(^30) Konstant, above n 24, 683.
It may be argued that because communitarianism is ultimately in the best interests of the corporation, the implementation of these mechanisms requires no change to the existing law,^31 and thus some communitarians regard the theory as both positively descriptive and normatively useful. Nonetheless, there are serious practical obstacles in implementing communitarianism. The outlook it espouses is of more relevance to the large public company than the far more typical, closely held proprietary company. As Millon noted, any action by the board which deviates from the traditional wealth maximisation objective exposes the board to dismissal or the company to a hostile takeover, as disenchanted shareholders sell their shares and look for better investments.^32 Shareholders are legally entitled to vote in such a way that enhances their own financial position, even if that causes harm to non-shareholders. 33
It may also be argued that the theory provides no guidance to decide between competing claims; rather it seems to hope that everyone who is fairly treated and ‘heard’ by the board will accept ‘give and take’ without making the board, as referee, decide who should win and who should lose. Moreover, it does not assist in determining the winner where two communitarian claims are competing. Communitarianism may support the imposition of liability on directors to consider the claims of creditors, employees or others, but if satisfying those claims makes a director risk averse, that could have economically detrimental effects on the directors’ behaviour. In other words, is it better to ensure that a non-shareholder constituencies have an entitlement to be compensated by the director for failing to pay due regard to their interests, or that the director is more willing to take risks and expand the business, creating jobs and wealth for the community as a whole? However, it needs to be recognised that whilst taking financial risks may be a normal part of business, public policy has now reached a point where it is simply unacceptable for corporations to take risks with the environment or citizen welfare.
The focus in all of these theories of the corporation is on achieving the best for the company and its shareholders, whether that is done by concentrating on shareholders exclusively or by looking at wider stakeholder groups. Another perspective is to look at the company’s place in society, regardless of its role in maximising shareholder wealth.
(b)1.5.4 ‘Concession’ theory
Indeed this is the way that some ‘progressive corporate law’ scholars understand communitarianism. It is sometimes also known as the ‘concession theory of the firm’.
(^31) Section 181(1) of the Corporations Act states that ‘A director or other officer of a corporation must
exercise their powers and discharge their duties (a) in good faith in the best interests of the corporation; and (b) for a proper purpose.’
(^32) David Millon, ‘New Game Plan or Business as Usual? A Critique of the Team Production Model of
Corporate Law’ (2000) 86 Virginia Law Review 1001, 1024-30.
(^33) David Millon, ‘Communitarians, Contractarians, and the Crisis in Corporate Law’ (1993) 50
Washington and Lee Law Review 1373 1384 commented that ‘[t]he claim that shareholders should continue to enjoy a property right to harm non-shareholders incidentally to their pursuit of profit maximisation seems at times to rest on nothing more than a reflexive commitment to the status quo.’
expect that the corporation will consider the interests of that community when it makes business decisions that may be detrimental to that community. A simplistic economic approach based purely on cost minimisation is not a sufficient process for this purpose.
Under concession theory, the idea of the vulnerability of non-shareholders and the community is compounded by the limited liability of shareholders and the separate legal entity of the company. This produces a veil of incorporation which protects the managers and owners of small and large companies alike from the consequences of their actions. This point will be explored further below under the heading of whose responsibility it is to look after non-shareholder constituents.
(b)(2) When should organisational decision makers have regard for
non-shareholder interests?
Under team production theory, keeping the parties happy during the solvency of the company is relatively easy. By definition, creditors and employees are being paid; environmental agencies are enforcing the law against errant companies and directors; customers are being looked after because otherwise they may take their business elsewhere.
However, the chief problem with this theory occurs when the company nears insolvency: just when the creditors and employees need the company and its directors to take care of them, their interests deviate from those of shareholders. The natural environment is also at risk at this time as an insolvent enterprise may choose to relax its standards on pollution and waste management. Since the directors’ established fiduciary duty is to the company, they may not be permitted, let alone mandated, to consider others’ interests at that time. The board of directors, in whom the creditors and employees are expected to repose their trust as a mediating hierarchy, is, after all, voted for exclusively by the shareholders and not by other participants in the corporation.
Therefore, in any consideration of whether organisational decision makers should have regard to the interests of stakeholders other than shareholders and the broader community, the time when this ought to take place needs to be considered. Should it be their responsibility only when the company is a going concern, or ought it to continue when the company is in financial distress? The point here is simple – if it is difficult for managers to take into account the concerns of multiple parties when the company is viable and successful, how much harder is it to consider those parties when the company faces extinction? Yet it is often precisely at this time that non- shareholder interests are most vulnerable to the decisions of the company’s board.
Scott commented:
As long as the debtor’s business prospects remain good, a strong reputational incentive deters misbehaviour. But once the business environment deteriorates, the [director] is increasingly influenced by a ‘high-roller’ strategy. The poorer the prospects for a profitable conclusion to
the venture, the less the entrepreneur has to risk and the more he stands to gain from imprudent or wrongful conduct. 35
The problem is particularly acute for directors of small companies, who do not always have reputational incentives. Keay noted that ‘it has become axiomatic that this risk- taking will take place, particularly where the directors are also the owners in the context of closed corporations.’^36 However, he remarked on the importance of wanting ‘to avoid, particularly where there is a conflict of interests between corporate stakeholders, ending up with a vague obligation imposed on directors that has little content and provides insubstantial guidance.’^37 This leads to the issue of whose responsibility it is to consider the interests of non-shareholder constituencies – the company’s or the directors and managers?
(b)(3) Whose responsibility is it to have regard for non-shareholder
interests?
(b)3.1 Should directors be made personally liable?
Imposing personal responsibility on directors for behaviour that may damage the interests of stakeholders other than shareholders, deals with the moral hazard occasioned by the separate legal entity principle. It encourages directors to either obey the law or to protect themselves against liability by some other means. This may include taking more care to maintain adequate capitalisation of the company, so that claimants sue the solvent company rather than the directors themselves. Alternatively, they may seek insurance on behalf of the company or themselves.
Imposing liability or punishment on the company alone may be insufficient especially where an undercapitalised company owned by a sole shareholder will be happily abandoned to liquidation.^38 Finch noted, with reference to ensuring compensation for tort creditors:
Personal liability may leave risk evaluation and spreading to those individuals who are the best acquirers of information concerning corporate risks, levels of capitalisation, internal control systems and insurance. It thus offers firms a flexibility of response that may be preferable to externally-imposed rules on minimum insurance or adequate capitalisation. Making the director liable thus protects against legislative over-or-under provision for tort risks, and it permits managers to select the optimal strategy for covering risk from among insurance, self-insurance or risk-reduction though the control of the firm activities.^39
(^35) Robert Scott, ‘A Relational Theory of Default Rules for Commercial Contracts’ (1990) 19 Journal of
Legal Studies 597, 624.
(^36) Andrew Keay, ‘Directors’ Duties to Creditors: Contractarian Concerns Relating to Efficiency and
Over-Protection of Creditors’ (2003) 66 Modern Law Review 665, 669 (footnotes omitted).
(^37) Ibid 671.
(^38) Vanessa Finch, ‘Personal Accountability and Corporate Control: The Role of Directors and Officers’
Liability Insurance’ (1994) 57 Modern Law Review 880, 881-2.
(^39) Ibid 883 (footnotes omitted).
As Easterbrook and Fischel note here, the fear of liability may make directors overly cautious.^45 This risk averse behaviour^46 on behalf of directors could be detrimental to the achievement of the company’s profit and wealth maximization objectives although Keay reasoned that the additional care taken by directors under conditions of potential liability is in fact beneficial to the shareholders. 47 He contended:
The argument that monitoring activity is costly and reduces efficiency masks the fact that monitoring is a necessary element of responsible corporate governance and a natural part of directors’ functions, whether or not a duty to creditors exists … Rather than inhibiting efficiency, it might well lead to improvements that could be made in the company’s procedures and profit-making processes … 48
(b)3.3 Why regulation of directors’ decision-making is necessary
Overall, however, as noted above, certain cohorts of non-shareholder stakeholder are particularly vulnerable to the risk of improper behaviour by corporate decision makers either during the solvency of the company or in its decline.
For these reasons, in our view the public interest in regulating directors’ actions by reference to increasingly accepted standards of corporate social responsibility outweighs the potential negative effects of such regulation. Our recommendations for the form of that regulation are discussed in Part (d) below.
c. The extent to which the current legal framework governing
directors duties encourages or discourages them from having regard
for the interests of stakeholders other than shareholders and the
broader community.
This issue has already been explored in Part (b) of this submission. Australia has traditionally adhered very closely to a shareholder-centred model of corporate law.^49 Accordingly, the current legal framework provides companies and those who run them with very limited capacity to have regard for employee, environmental, and
(^45) Coase argued that it is wrong to simply impose restraints upon director behaviour without weighing
up the total cost of that intervention. Ronald Coase, ‘The Problem of Social Cost’ (1960) 3 Journal of Law and Economics 1, 2. See also Jonathan Lipson, ‘Directors Duties to Creditors: Power Imbalance and the Financially Distressed Corporation’ (2003) 50 UCLA Law Review 1189, 1244.
(^46) Eugene Fama and Michael Jensen, ‘Agency Problems and Residual Claims’ (1983) 26 Journal of
Law and Economics 327, 327.
(^47) For example, Modigliani and Miller contended that while the recognition of a duty to creditors
causes costs to the company, directors and shareholders, the costs are offset by a correlative reduction in the cost of the credit, so that the position of the parties remains unchanged, in a state of economic equilibrium. Franco Modigliani and Merton Miller, ‘The Cost of Capital, Corporation Finance and the Theory of Investment’ (1958) 48 American Economic Review 261, 267-70.
(^48) Keay, above n 36, 686.
(^49) See eg Jennifer Hill, ‘Public Beginnings, Private Ends – Should Corporate Law Privilege the
Interests of Shareholders?’ (1998) 9 Australian Journal of Corporate Law 21.
other non-shareholder interests – and in several important ways, actually discourages them from doing so. This part of the submission considers, in closer detail, how the traditional shareholder-centred paradigm of Australian corporate law has impacted upon two particular categories of non-shareholder interests, being employees and the environment.
(c)(1) The Position of Employees under Australian Corporate Law
(c)1.1 The Current Legal Position
The basic legal position is quite straightforward: the duty of directors to act in good faith and in the best interests of the company (at common law and under section 181 of the Corporations Act ) requires directors to treat shareholders’ interests as paramount. The interests of employees, or other stakeholders, can be considered in performing these duties – but only where this would also be in the company’s (ie the shareholders’) interests. Employee concerns cannot be placed ahead of those of shareholders. For example, a company could not make redundancy payments to employees in the context of a business closure, where this would run down the funds available for distribution to shareholders. Not even the company’s interest in maintaining harmonious industrial relations would warrant directors pursuing such a course of action.^50
Case law requires directors to consider creditors’ interests when a company is insolvent or facing insolvency.^51 However, the cases stop short of establishing a duty that is enforceable at the instance of creditors;^52 only the company’s liquidator or the Australian Securities and Investments Commission (ASIC) can bring an action for compensation or the recovery of company funds to return to creditors. As Symes has indicated, these developments do not provide much comfort to employees in insolvency situations. He noted that ‘[f]rom these cases, it is not possible to state that a duty to creditors upon insolvency means that they should take “care” of employees …’ albeit that employees ‘are creditors (statutory priority creditors, in fact) for their unpaid salary and other entitlements.’^53
When companies become insolvent, employees not only lose their jobs. They also have to line up with other creditors for recovery of their unpaid wages and other employment entitlements. Workers take their place in the queue behind secured creditors (such as financiers), although they have the right to priority treatment over
(^50) Parke v Daily News Ltd [1962] Ch 927; see also Hutton v West Cork Railway Company (1883) 23
Ch D 654.
(^51) Walker v Wimborne (1976) 137 CLR 1 ; Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722.
The ‘uncommercial transactions’ provisions of the Corporations Act (section 588FB, 588FC, etc) operate as a form of statutory duty to protect creditors’ interests.
(^52) Spies v R (2000) 18 ACLC 727.
(^53) Christopher Symes, ‘A New Statutory Directors’ Duty for Australia – A “Duty” to be Concerned
about Employee Entitlements in the Insolvent Corporation’ (2003) 12 International Insolvency Review 133, 137.
Commonwealth Bank, Mitsubishi and (most recently) Holden.^63 These examples have highlighted an important deficiency in Australian law – the fact that, although their interests are directly and vitally affected when companies restructure or face insolvency, employees have few rights to information or any opportunity for input into decision making in these situations. Labour law provides unions with minimal rights to seek orders compelling employers to consult over large-scale redundancies, although the effectiveness of these provisions has been questioned.^64 However, a quarter of the almost 600,000 Australian workers made redundant between 1998 and 2001 received less than one day’s notice of their dismissal.^65 This leaves employees poorly positioned to deal with the implications of events that have such serious consequences for them and their families.
(c)1.2 Recent Moves to Accommodate Employee Interests
In a number of high-profile company collapses – primarily, National Textiles in early 2000, and One.Tel and Ansett in 2001 – large numbers of employees lost unpaid entitlements to annual leave, long service leave and the like, and missed out on redundancy payments prescribed in industrial awards and agreements. In response, the Federal Government has implemented the following legislative and policy initiatives:
- Corporations Law Amendment (Employee Entitlements) Act 2000 , introducing Part 5.8A into the Corporations Act which builds on the existing duty of directors to prevent companies from trading whilst insolvent,^66 by imposing personal liability on directors where they enter into “uncommercial transactions” – that is agreements, transactions, or corporate restructures which are intended to prevent workers from accessing their accrued employment entitlements. Heavy penalties, including fines and imprisonment, are available to deal with breaches of the “uncommercial transactions” provisions, and employee creditors can themselves initiate legal proceedings with the liquidator’s permission. However, the significant problems with proving that directors were acting with the requisite intention under these provisions “inevitably limit [their] scope and effectiveness as a protective mechanism for employees”.^67 There have been no reported cases to date involving a successful action by employees under these provisions.
- Corporations Amendment (Repayment of Directors’ Bonuses) Act 2003, prompted mainly by the One.Tel collapse in 2001, inserting section 588FDA in the Corporations Act to enable the recovery by a liquidator of excessive bonuses that
(^63) See eg CCH, Collapse Incorporated: Tales, Safeguards and Responsibilities of Corporate Australia
(2001).
(^64) Workplace Relations Act 1996 (Cth) ss 170FA and 170GA; see Anthony Forsyth, “Giving Teeth to
the Statutory Obligation to Consult over Redundancies” (2002) 15 Australian Journal of Labour Law
(^65) ABS (2002), above n 62.
(^66) Corporations Act 2001 (Cth), sections 588G and following.
(^67) Jennifer Hill, “Corporate Governance and the Role of the Employee” in P Gollan and G Patmore
(eds), Partnership at Work , 110, 119; see further Symes, above n 53, 144-145.
have been paid to directors in circumstances where a company is in no financial position to make such payments.
- The General Employee Entitlements and Redundancy Scheme (“GEERS”) scheme was introduced in the wake of the Ansett collapse, replacing the former Employee Entitlements and Support Scheme. GEERS enables employees of insolvent companies to claim recovery of their unpaid entitlements from a government fund. The establishment of such a “safety net” mechanism represents a significant improvement in the level of protection offered to employees. However, it operates subject to a number of important limitations, including a limit of 8 weeks’ redundancy pay (when many employees are legally entitled to far greater severance payments under industrial awards or agreements), and an overall “cap” of $94,900 on the level at which entitlements paid out under the scheme are to be calculated.^68 The future viability of GEERS may also be in some doubt, following a recent Federal Court decision indicating that the Federal Government does not have enforceable “creditor” rights to recover payments made to employees under GEERS, in respect of companies subject to a deed of company arrangement.^69 It should also be noted that the existence of a government-funded scheme arguably discourages directors from taking greater responsibility for ensuring that companies have sufficient assets to meet their employees’ entitlements. While the outcome of GEERS in terms of employee protection is commendable, the public policy benefit of effectively transferring directors’ potential liability to taxpayers is questionable.
- Following the Ansett collapse, the Federal Government promised to place employees ahead of secured creditors in the statutory priority list for distribution of company assets upon insolvency. However, nearly four years later, no legislation to implement this change has yet materialised.^70
It is important to note that employees have received very little attention in the extensive debate over corporate governance reform in Australia. Rather, the debate has been overwhelmingly shareholder-centred, with legislative responses aimed at improving board relationships with shareholders, and auditor independence.^71 These reform measures make little or no mention of employees, partly because political actors representing workers’ interests (such as the ACTU and the federal Labor Opposition) have not sought to take the corporate governance debate in this direction.
(^68) For further detail, see the GEERS Operational Arrangements available at:
http://www.workplace.gov.au/workplace/Category/SchemesInitiatives/EmployeeEntitlements/GEERS/ GeneralEmployeeEntitlementsandRedundancyScheme.htm.
(^69) See Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (Receivers and Managers
Appointed) [2005] FCA 902 (1 July 2005).
(^70) As at March 2004, the federal Treasury Department was reportedly still consulting on these
proposals: M Priest, “States want ‘workers first’ legislation”, Australian Financial Review, 19 March
(^71) Andrew Clarke, “The Relative Position of Employees in the Corporate Governance Context: An
International Comparison” (2004) 32 Australian Business Law Review 111; Paul von Nessen, ‘Corporate Governance in Australia: Converging with International Developments’ (2003) 15 Australian Journal of Corporate Law 1.
