A fine balance – directors’ best interest duty
The Australian Institute of Company Directors (AICD) recently engaged prominent Sydney barristers Gerald Ng and Bret Walker AO SC to examine and analyse the current interpretation of directors’ best interest duty by the Australian Courts.
Counsels’ legal opinion was that a director’s duty to act in good faith in the best interests of the company has evolved beyond the traditional consideration of the shareholders’ interests. Instead, directors should give consideration to a range of stakeholder interests (think employees, customers, suppliers, environment and local communities).
Obligations under the Corporations Act
Under the Corporations Act 2001 (Cth) (Corporations Act), directors are obliged to discharge their duties in good faith in the best interests of the company.
Courts have traditionally considered that shareholders’ interests are the primary consideration for directors when discharging those duties and exercising their powers.
However, several decisions from the courts have suggested that acting in the best interests of the company is not the same thing as acting in the best interests of shareholders (see, for example, Bell Group Ltd (in liq) v Westpac Banking Corp (No 9)) ,and finding that company directors have considerable discretion in identifying the best interests of a company. Consequently, directors are permitted to consider the interests of all stakeholders, provided there is rational justification to do so. Put simply, directors are provided with a wide-ranging discretion to determine:
the best interests of the company;
the time at which those interests are to be assessed; and
the precise nature of the interests that are to be advanced or protected.
Stakeholders’ interests
According to the AICD practice statement, to protect the reputation and long-term sustainability of a company, when making corporate decisions, directors must consider their impact on a wide range of stakeholders. In today’s corporate landscape, this includes (but is not limited to) employees, customers, suppliers, creditors, Traditional Owners, the environment and local communities.
Key takeaways
Shareholders are now demanding greater accountability from their organisations. Consequently, directors are now expected to align their corporate pursuit and impact with growing contemporary issues such as employee welfare, climate change, diversity and modern slavery risks within the supply chain.
The failure to promptly confront these issues may result in widespread public criticism which may undermine the reputation and integrity of the company.
It will be interesting to see if these expectations will give rise to circumstances where it is found that shareholders’ interests do not align with broader stakeholder interests. If you are a company director, it is important you are aware of developments in this space and your obligations under the Corporations Act. For more information please contact:
Paul Gray
Principal
T: 03 5225 5231 | M: 0414 195 886
E: pgray@ha.legal
Hugo Le Clerc
Lawyer
T: 03 5225 5213
E: hleclerc@ha.legal
Zac Griffiths
Special Counsel
T: 03 5225 5229
E: zgriffiths@ha.legal
Prepared with the assistance of Benjamin Smith, seasonal clerk
