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Townsend, James --- "When Kings Curtsy To Custom: Are Australian Company Directors Under A Positive Duty To Follow Corporate Governance Standards?" [2021] UNSWLawJlStuS 43; (2021) UNSWLJ Student Series No 21-43


WHEN KINGS CURTSY TO CUSTOM: ARE AUSTRALIAN COMPANY DIRECTORS UNDER A POSITIVE DUTY TO FOLLOW CORPORATE GOVERNANCE STANDARDS?

JAMES TOWNSEND[1]

I INTRODUCTION

Section 180(1) of the Corporations Act 2001 (Cth) (‘CA’) provides an Australian company director’s statutory duty of care. An element of the test of this duty requires the court to determine what a reasonable person would do in the director’s position. This raises the following question: does this objective test mean that a voluntary corporate governance instrument can become binding on directors of a company that has not adopted the instrument, merely because a reasonable director would act consistently with the standards of that instrument? In short, are voluntary corporate governance standards capable of becoming involuntary, binding standards?

Section 2 of this essay briefly summarises the object, operation and scope of s180(1). Section 3 analyses a sample of relevant corporate governance literature to determine when, and under what conditions, a non-binding instrument may become binding.

Section 4 proposes a judicial test to determine whether an instrument such as the SA8000 could become binding. The SA8000 is a voluntary certification standard that seeks to improve workers’ rights and workplace conditions.[1] For a company to secure SA8000 certification, it must satisfy all of the SA8000’s Requirements. Section 4 highlights Requirement 9.10.1, which places responsibilities on companies to conduct due diligence on their suppliers and contractors.

Ultimately, the author concludes that a non-binding standard can, in limited circumstances, become involuntarily binding if the standard’s provisions reflect what a reasonable director would do.

II SUMMARY OF SECTION 180(1)

The operation of s 180(1) inevitably depends on the circumstances of the case in question. As such, its scope is subject to perennial discussion. Before considering whether extraneous materials may inform the character of the statutory duty, it is necessary to briefly summarise the object, operation and scope of s 180(1) as discussed by judicial authority.

A Content

Corporate directors in Australia are bound by a common law duty to carry out their office with care, skill and diligence. The duty is owed to the company and is justified by the nature of the relationship between the director and the company, and in particular the management of risks involved in the company’s business.[2]

Section 180(1) has been greatly influenced by the common law duty of care, skill and diligence.[3] Although the word ‘skill’ does not appear in the statutory provision, this has no impact upon the strictness of the duty.[4] In short, the provision requires an objective standard that is coloured by the circumstances of the matter before the court.

The director must exercise their powers with the same degree of care that a reasonable person (in practical terms: a reasonable peer director) would use to exercise the power. This is the objective standard and is consistent with the common law tort of negligence.

The degree of care that the reasonable peer director would take is informed by two considerations, namely (i) the company’s circumstances, and (ii) the director’s position and responsibilities within the company. In short, the court inquires ‘what an ordinary person, with the knowledge and experience of the defendant, would do in the circumstances’.[5]

One key point of differentiation between the common law and statutory duties of care is that, when pursued as a civil penalty provision by ASIC, the latter does not require the applicant to demonstrate that the director’s action or inaction caused actual harm to the company. Nevertheless, the notion of harm is not jettisoned entirely; the director is still expected to calculate a risk/benefit balancing assessment in discharging their duties, as in common law. Courts will scrutinise this balancing assessment accordingly. Actual harm suffered by the company will, therefore, still inform the court’s analysis.

B Operation

The recent case of Cassimatis synthesised the existing case law relevant to s 180(1). It emphasised and elaborated on certain aspects of the test as to whether the director had breached their statutory duty of care, skill and diligence.[6]

First, Edelman J clarified that the notion of ‘harm’ is not limited to mere financial loss, but can take a non-pecuniary form. For example, Edelman J made express reference to a company’s reputation as an interest that can be harmed by misconduct.[7] Second, Edelman J reinforced that the director’s duty to calculate the risk/benefit of a decision should be understood as a balancing exercise, consistent with Wyong Shire Council v Shirt.[8] This indicated that any detriment to a company could, in theory, be counter-balanced by a substantial enough benefit. However, Edelman J found it ‘hard to imagine’ that any benefit, financial or otherwise, could be so great that it outweighed the risk posed to a company’s reputation by serious unlawful conduct.[9] Third, Edelman J held that s 180(1) does not provide for so-called ‘stepping stone’ liability.[10] This means that directors do not owe a public duty to prevent their companies from carrying out unlawful acts. Rather, s 180(1) is a duty owed to the company itself. As such, if a company carries out unlawful conduct, the director will not automatically be held to have breached their statutory duty of care so long as they have acted with the care of a peer director in relation to the conduct.[11]

In short, s180(1) requires directors, when making a decision, to balance the foreseeable risk of harm to the company (financial or non-financial) against the foreseeable benefit to the company. The key question that arises from this formulation is therefore: how does a court determine what decisions would have been available to a reasonable person who was in the director’s place and in the circumstances of the company?

C Scope

There is a modest volume of judicial authority endorsing the court’s narrow use of voluntary or non-binding corporate governance instruments to determine what decisions or conduct were open to a reasonable peer director.[12] Examples of such instruments include codes of conduct, standards, and principles. This essay focuses on instruments that are drafted outside of the adoptive company (ie they are extraneous); that affect companies that conduct their business across multiple countries (ie they are transnational); and are voluntary (ie they are soft regulation). In this essay, these regulatory forms are referred to collectively as “CG Standards”.[13]

In ASIC v Healey (No 1), Middleton J said that a Guide published by the Australian Institute of Company Directors (“AICD”) ‘reflected’ his own view of what was required of directors at the proceeding.[14] When determining an appeal for relief, Middleton J used other AICD materials[15] and relied on the ASX’s Corporate Governance Principles to determine ‘well-established corporate governance practices’.[16] In Bell Group v Westpac, Owen J held that corporate governance ‘guidelines and legal principles... dictate how a director is expected to carry out her or his responsibilities’.[17] In ASIC v Rich, Austin J acknowledged that several pieces of international literature could be used to inform what a reasonable director might do.[18] This approach was endorsed on appeal.[19] ASIC v Vines provides an example of the court informing itself, by expert witness, of the standard of care expected of a peer director.[20]

It is reasonable to infer from this line of authority that certain voluntary CG Standards can be used to inform the court of corporate governance norms. In doing so, the court is able to use those CG Standards as an aid to determine the standard of care that is expected of directors under s 180(1). However, a standard of care can only be expected when it is made up of practices that are well-established or customary. In short, a CG Standard may assist to inform the court of the standard of care expected of a reasonable peer director so long as that instrument reflects already established corporate governance principles.

III EXISTING LITERATURE

Certain provisions within the CA are drafted in such a way that they cannot be readily distilled into principles of general application with meaningful specificity. Section 180(1) relies heavily on the context of the matter before the court for its meaning.

The following analysis considers some of the existing literature on non-binding principles in governance and how they may inform application of a duty as open textured as s 180(1). The principles derived from these commentaries are helpful in suggesting how a court may inform itself of the content and scope of the duty in s 180(1).

In the following section the analysis of this question considers the notions of “soft” and “hard” regulation, and alternative modes by which soft regulation may impact hard regulation, namely by “hardening” and “gap-filling”.

A Soft vs Hard Regulation

Du Plessis, building on the work of Farrar, provides a clear and concise summary of the distinction between soft and hard regulation. Hard regulation is composed of mandatory external rules that influence company law. Such rules consist primarily of statutory instruments and relevant case law.[21] Soft law, by contrast, consists of (inter alia) voluntary external CG Standards that are incorporated into corporate practices and norms, in turn impacting corporate governance.[22]

Du Plessis also places great emphasis on the notion of ‘hybrid’ regulation that exists somewhere between the soft and hard concepts.[23] Du Plessis points to the ASX’s Listing Rules, and the ASX’s Principles and Recommendations, as instruments that are quasi-mandatory, despite the fact that they lack state authority.[24] This implies that the soft/hard dichotomy is actually a spectrum, rather than a neat binary. The question, then, is not whether an extraneous instrument is or is not hard law, but rather whether it is hard enough law to inform, and thus bind, the director’s duty of care. This nuanced conceptualisation reinforces the context-dependant approach discussed above, since no two non-state CG Standards necessarily yield the same “hardness”.

Kingsford Smith provides an authoritative and comprehensive evaluation on the sources of law that inform the peer director’s governance responsibilities. Her conceptualisation of soft regulation is broadly consistent with that of Du Plessis, in part because it also draws upon Farrar’s work as its foundation.[25] Kingsford Smith adds that the strength of soft regulation is that it is usually the work of self-regulatory bodies and is part of a growing body of decentred, voluntary regulation. This voluntarism gives the soft regulation legitimacy when a court determines whether to adopt a CG Standard as an aid to identifying reasonable conduct. In short, the voluntary and flexible CG Standard is a legitimate demonstration of corporate governance custom. In the modern business world, it may also be important that such voluntary CG Standards may have transnational effect and thus demonstrate corporate governance custom on an international scale. The weakness of these voluntary CG Standards is, obviously, their enforcement (or lack thereof). As Kingsford Smith argues, however, the court’s interpretive use of CG Standards when addressing directors’ duties goes some way to mitigating this deficiency.[26]

Two other commentaries are worth mentioning in brief. First, Purcell and Loftus identify the sources of corporate law in a manner that is consistent with Du Plessis, Farrar and Kingsford Smith in principle. However, Purcell and Loftus use different terminologies. Regulation is not soft or hard, but rather principle-based and rules-based respectively. Moreover, regulation exists upon a continuum rather than a spectrum or series of concentric circles.[27] Semantic discrepancies aside, the underlying principles in Purcell and Loftus’ work are consistent with their colleagues’.

Second, Kinley and Chambers discuss the development of the UN Human Rights Norms for Corporations. In doing so, they note that business leaders responded to the Norms defensively and emphasised the benefits of self-regulation (ie soft regulation) as a protective mechanism against human rights abuses.[28] This real-world example demonstrates that the boundaries of hard and soft regulation can wax and wane as they are subjected to political pressure. This challenge is exacerbated when one considers the distinction between soft and hard regulation to be a matter of degree on a spectrum, rather than a neat choice between two distinct classes of conduct.

B “Hardening” Soft Regulation: Custom

Baade provides an early conception of the interplay between soft and hard regulations.[29] He writes about the capacity for voluntary corporate codes of conduct to impact international law.[30] The crux of Baade’s article is the legitimacy of international corporate governance instruments as a source of binding law for a state. Baade argues that international codes of conduct are designed to remain as non-binding (ie soft) law because their drafters have no authority to unilaterally bind sovereign states.[31] Baade is quick to point out, however, that just because an extraneous instrument is non-binding by default does not mean that the instrument cannot become binding (ie hard) law.[32]

Baade emphasises that CG Standards may provide a ‘springboard’ for legally creative action by a state via two methods.[33] The first method is that that non-binding regulation can ‘creatively develop' into generally binding regulation.[34] By this, Baade means that international corporate practices can become so normalised that they ‘harden’ into domestic law.[35] For a Standard to harden, it must satisfy two elements. First, the specific provision must reflect general corporate custom; second, the state must have “adopted” the provision.[36]

Baade develops this thinking further. He holds that the provisions within a CG Standard will harden at different rates, depending on their character and whether they have been elevated to the status of “norm”. Baade surmises that CG Standards consist of ‘Zebra code’, a composition of binding and non-binding provisions depending on the circumstances.[37] It may be that an Australian court could inform itself of the standard of care expected of a peer director by cherry-picking provisions out of a voluntary CG Standard.

C “Hardening” Soft Regulation: State Adoption

Ultimately, the state will decide whether ‘the sword shall be drawn’[38] when determining whether international custom should be binding domestically.[39] Clearly, custom alone is insufficient since the state’s authority to create binding law is absolute.[40] States must therefore adopt the CG Standard’s provision. Baade provides one qualification to his springboard principle. Although the qualification is discussed in terms of international law, it is broadly analogous to the state’s decision to adopt international custom at a binding, domestic level. Baade notes that adoption need not be express:

... the question whether (and if so, to what extent) codes of conduct, guidelines, and other instruments relating to the conduct of [multinational enterprises] adopted by or on behalf of states give rise to international law obligations on the part of the declarant states does not depend on the form of such declarations. It is ultimately a question of the intent of the declarant states, to be ascertained by means of interpretation.[41]

Baade provides little justification for his interpretive rather than legislative preference for adoption of extraneous instruments. Nevertheless, the point is relevant and useful in the present context.

Section 180(1) is intentionally drafted in general terms so that the scope and content of the director’s duty of care is appropriate to the circumstances before the court. Section 180(1) is drafted with such generality that the legislature clearly intended for Australian courts to consider a very broad range of materials when informing the director’s duty of care. This is consistent with the judicial authorities discussed above that have held that extraneous materials can inform the court as to what governance practices are, in a particular circumstance, so established that they may benchmark the standard of care expected of the peer director. Section 180(1) is thus a good example of a statutory provision capable of "adopting" relevant instruments.

D “Gap-Filling” Hard Regulation: Overview

Baade holds that a CG Standard’s provision can assist with the court’s interpretation of a ‘prior instrument’ (eg existing legislation) where that instrument contains generalities or ambiguities.[42] There is a somewhat fine distinction between a CG provision’s potential to be adopted, and its potential to fill gaps in legislation. Each possibility depends upon the statutory provision being drafted with such general wording that it permits a CG provision to enter the discussion.

Adoption and gap-filling can be distinguished by the scope of their impacts. Adoption is general in nature – directors in a certain type of circumstance will be held to the CG provision because it has hardened into, or ‘risen’ to, binding regulation.[43] Gap-filling, by contrast, is contextual – the particular director in the immediate matter may have the expected standard of care informed by a CG provision. Instruments that fill gaps do not ‘rise’ to the level of hard regulation, they temporarily inform the existing hard regulation for the matter before the court.

The principle that soft regulation can fill the gaps of hard regulation has been subjected to material development over the last four decades. As such, there exists a deep well of literature from which to draw. Several authors have provided qualified endorsement, whether express or tacit, for the gap-filling principle.

E “Gap-Filling” Hard Legislation: Strengths

Kingsford Smith provides the most robust demonstration of the principle. She notes that directors’ duties – statutory, general law or equitable – contain necessary ambiguities so that their application can be tailored to the circumstances.[44] These ambiguities are resolved in part by corporate governance soft regulation.[45]

Kingsford Smith argues that one of the strengths of soft regulation as gap-filler is its potential to provide a level of specificity that hard regulation may not. This specificity can improve corporate governance in two ways. First, directors are required to investigate what conduct is expected of them.[46] This encourages directors to take a more active role in discharging their duty of care, reinforcing legitimacy benefits that come with voluntarism, self-regulation, and good governance generally.[47] Second, shareholders are empowered in their decision making as they, too, are informed of what expectations can be placed upon a reasonable peer director.[48]

Young QC offers another strength. He notes that a robust approach to s 180(1) can engender desirable director behaviour and effective corporate governance and culture.[49] The greater the threat of sanction, the stronger the normative impact upon behaviour and culture.[50] However, any threat must always remain proportionate with its associated risk, so that undesirable behaviour is deterred without also deterring too much desirable behaviour.[51] Indeed, risk is a necessary component of wealth accumulation, the latter of which is the fundamental purpose of the corporate entity.[52]

In short, the requirement that s 180(1) be applied proportionately provides strong justification for the duty of care to be founded in hard law so long as its content and scope are contextual and determined according to the reasonable person test as demonstrated by a peer director observing good governance practice. Were the duty codified entirely in statute (ie disproportionately rigid), directors may be disinclined to take on the office altogether.[53] Were the duty left entirely to self-regulation (ie disproportionately soft regulation) then its content would be so ambiguous that it would effectively be meaningless and practically unenforceable (not to mention absolutely voluntary).

In their analysis of slavery legislation in Australia, Sinclair and Nolan note that gap-filling soft regulation allows for international legal harmonisation.[54] States may be reluctant to adopt international legal instruments that are drafted with too great specificity because, inter alia, they may wish to protect their sovereignty. International legislation that is drafted in general terms is attractive to those states because it respects each state’s authority to set the content of its domestic laws (ie to fill the gaps itself).

F “Gap-Filling” Hard Legislation: Weaknesses

Soft regulation instruments are not without their problems, however. As flagged, Kingsford Smith notes that there can be difficulties when enforcing soft regulation, as well as when sanctioning non-compliance.[55] Self-regulation may bring benefits, but effectiveness relies heavily on engaged stakeholders. A loose approach that places too much reliance on soft regulation risks being rendered so voluntary that it is ineffective.

Young QC reinforces this criticism. Reliance on self-regulation, informed by soft regulation, can drive up monitoring costs as directors ‘over-invest’ in monitoring mechanisms to ensure that their decisions meet the standard of care expected of them.[56] This problem is exacerbated when hard regulation includes ambiguities by design, requiring directors to cast the monitoring net even wider.

Kinley and Chambers offer a relevant and material weakness which arguably applied to all voluntary CG Standards. They succinctly note that companies that choose to voluntarily adopt a CG Standard risk competitive disadvantage when their competitor chooses not to adopt a comparable instrument – often referred to as ‘first mover’ disadvantage.[57] These risks can result in “window-dressing” (where a company claims to be bound by voluntary CG Standards but does little to implement them) or even outright abandonment once the instrument becomes inconvenient.[58]

By far the most vehement criticism of the gap-filling principle is provided by Purcell and Loftus, though even this does not amount to complete rejection. Their comments use corporate social responsibility to illustrate a number of points. They argue that directors’ duties are already detailed enough to include a positive duty to consider stakeholder interests as a viable method of discharging a duty of care owed solely to shareholders (because it is in the company’s, and therefore shareholders’, best interests to mitigate its adverse impact upon stakeholders).[59] For example, it is in the stakeholders’ interests that the company’s reputation be maintained; frequently, the failure to uphold corporate governance customs will result in harm to the company’s reputation.

Purcell and Loftus fret that ‘an extension of directors’ duties to a broader set of stakeholders would potentially cause harm by introducing uncertainty into the law’.[60] Characterising stakeholders and their interests is likely done by reference to at least some form of soft regulation, since soft regulation is often intended to signpost which issues a director should consider when making a decision. Given that the variety of CG Standards is great, the range of possible considerations is also great.

In effect, Purcell and Loftus argue that it may be impossible for directors to adequately discharge their duty of care if the range of considerations is too broad. This essay does not share their concern. It must be emphasised that the standard expected of the peer director is merely that of a reasonable person in their position and in the circumstances of the company. The duty does not require a director to consider stakeholder interests in any greater scope or detail than a reasonable person would. If anything, casting the scope of the duty wider at the general, hard law level is an appropriate way to encompass and then engage, as appropriate, a selection of issues that the reasonable director would consider.

Purcell and Loftus do cede some ground on this point. They strongly argue that directors’ duties such as s 180(1) can only expand through incremental judicial development.[61] Their criticism is geared more towards strict codification of an expanded, specified duty of care. Some of the case law discussed above postdates their article, and may demonstrate that the incremental expansion Purcell and Loftus anticipate is indeed underway. Presumably the authors would express great concern over Baade’s hardening principle.

G Summary of this Part

Non-state CG Standards are voluntary. As such, they require an authority to legitimise them before they become binding. Clearly, the company itself can choose to voluntarily adopt the CG Standard. However, CG Standards can springboard into legitimacy by two other methods.

First, CG Standards can “harden” into domestic law if they reflect corporate custom and are adopted by the state. Whether the state has adopted a piece of soft regulation can be inferred from the intentions of the state. Moreover, the CG Standards do not need to harden in totality; select CG provisions can and usually will harden at different rates based on the recognition of corporate governance customs of the day.

Second, soft regulation can fill the gaps that are left in hard regulation. Hard regulation may intentionally leave generalities and ambiguities so that the provisions are given broad, timeless application. The benefit of this generality is that different CG Standards of soft regulation, of varying specificities, can inform the court as to the content of the hard regulation on a case-by-case basis. This can inform and empower directors and their shareholders, has a strong normative effect, and harmonises international legal frameworks while respecting states’ sovereignties. Gap-filling has some weaknesses, however. The voluntary nature of soft regulation diminishes the state’s ability to enforce a CG Standard, and the company’s ability to efficiently monitor their own standards. Moreover, voluntarism may disadvantage those companies that choose to be early adopters of the CG Standard. Finally, it may be that such reliance on soft regulation adds uncertainty to the directors’ duties.

IV MODES OF JUDICIAL INTERPRETATION

Provisions within CG Standards can be used to inform a court of the standard of care expected of a corporate director only when those provisions satisfy certain criteria. This essay proposes the label “Test of Legitimacy” be used to represent the judicial determination of whether a CG Standard, or a particular provision therein, satisfies these criteria.

This section describes the content of the Test of Legitimacy. This section then illustrates the Test of Legitimacy by applying it to Requirement 9.10.1 of the SA8000. Finally, this section considers how a court would interpret the standard of care expected of directors pursuant s 180(1) by reference to Requirement 9.10.1.

A Test of Legitimacy: Content

There are three methods by which a select Zebra provision from a CG Standard can satisfy the Test of Legitimacy and thus be eligible for judicial consideration. These methods are based on a synthesis of the case law and literature discussed above. Once one of these methods has been satisfied, the court should also refer to an open list of indicia of Legitimate instruments before making a discretionary determination as to whether the Standard in question is Legitimate.

First, a company may simply adopt the CG Standard itself (“Voluntary Adoption”). This is a straightforward determination of fact. Voluntary Adoption would result in the instrument gaining Legitimacy only when considering the standard of care of the actual directors of the adopting company.

Second, the CG Standard may harden into binding domestic legislation (“Hardened Regulation”). This method has two elements that must both be satisfied. First, the CG Standard must describe corporate governance custom in Australia (though this need not be its express purpose). So, the Standard must not be too niche or particular in its subject matter. Second, a CG Standard can become Hardened Regulation only when it has been adopted by the state. Adoption does not need to be express and can be inferred from the intentions of the home state. It should be noted that the party arguing for Hardened Regulation (eg ASIC) would need to satisfy material evidentiary burdens to demonstrate that the instrument is consistent with domestic corporate custom and has been adopted by the state by way of intention. The Hardened Regulation method is therefore likely to be used infrequently.

Third, a CG Standard may be used to fill gaps in binding domestic regulation (“Gap-Filling”). Here, the door must be left open for soft regulation: the statute’s generalities or ambiguities must be interpreted to intentionally require some form of discretionary or evaluative judgment by the court. Also, it must be consistent with public policy (understood broadly) that the instrument in question be granted Legitimacy. Gap-Filling is distinct from Hardened Regulation in that it engages with CG Standards that are more specific to the matter before the court. CG Standards that are too niche or particular to be deemed Hardened Regulation can be used as Gap-Filling regulation if the circumstances are appropriate. Gap-Filling is a more contextual method, while Hardened Regulation is a more general method.

It is noteworthy that the case law discussed above would likely fit into this third method of Legitimacy. It may be argued, then, that the Gap-Filling principle is already in operation, but has not yet been categorised or formulated.

Finally, assuming at least one of these methods has been satisfied, a court should then consider the range of legitimating elements of such Standards. These elements are drawn from the strengths and weaknesses of soft regulation already discussed. This is not a mathematical exercise, but rather an exercise of judicial discretion. Examples of such elements include that the CG Standard has:

• an appropriate level of specificity (Kingsford Smith),

• no preferable regulatory alternative (Kingsford Smith, Young QC and Purcell and Loftus),

• the potential for normative impact (Young QC),

• a proportionate risk/reward paradigm (Young QC),

• a not unreasonable increase in monitoring costs (Young QC),

• the potential for domestic legal harmonisation (Sinclair and Nolan), and

• no disadvantage to Voluntary Adopters (Kinley and Chambers).

Should a CG Standard satisfy one of the three methods, and have at least some of these elements, then the court may hold that it satisfies the Test of Legitimacy. The CG Standard can then be used to inform the court of the standard of care expected of directors pursuant s 180(1), ie what a reasonable person in the place of the director and circumstances of the company would have done.

B SA8000

The SA8000 is a ‘voluntary standard for auditable third-party verification’ that sets out the requirements companies must meet to secure SA8000 certification.[62] Certification has global application, but the SA8000 was drafted by Social Accountability International, an American body. The SA8000 is, inter alia, a declaration of international labour norms and a guide of how companies can ensure that their supply lines are consistent with those human rights norms.[63] The SA8000 is thus a CG Standard because it was drafted outside of the adopting company, has transnational effect, and is voluntary. Provisions of the SA8000 also have elements included in the list above.

Requirement 9.10.1 of the SA8000 outlines the conduct expected of an organisation engaging in international supply.[64] Companies will only be certified if they conduct due diligence on their new and existing international suppliers and sub-suppliers to ensure that those suppliers conform with the SA8000.[65] Due diligence requires, at a minimum, that the home company:

1. effectively communicates the requirements of the SA8000 to its suppliers,

2. assesses significant risks that its suppliers may not conform with the SA8000,

3. makes reasonable efforts to ensure its suppliers address these risks, and

4. conducts ongoing monitoring of its suppliers’ efforts to address these risks.[66]

These obligations are exacting. Requiring a company to monitor and influence its supplier’s compliance with a voluntary, non-binding, transnational instrument such as the SA8000 can be onerous. Note, however, that the home company is not required to enforce their supplier’s actual conformance with the SA8000 Requirements, but rather to merely make ‘reasonable efforts’ to ensure its supplier’s conformance. The only practical sanction that a home company can visit upon a non-conforming supplier is to refuse to renew the relevant supply contracts.

C Mode One: Voluntary Adoption

Requirement 9.10.1 would satisfy the Voluntary Adoption method if a company has received SA8000 certification. A reasonable person, in the position of the director and in the circumstances of the company, would take steps to satisfy the due diligence requirement above because one of the company’s circumstances is its certification status. This circumstance attracts the benefit of certification but also the concordant duties.

It is less certain, however, whether 9.10.1 would satisfy the Voluntary Adoption method if the listed company has merely indicated to the public that it hopes to secure certification at some future point. One argument is that the company, by publicly declaring its intention to secure certification, has endorsed the SA8000 as an authoritative source on responsible management of supply lines. This would imply that the company expects its directors to conduct their role according to the SA8000. The better view, however, is that certification that has yet to be secured cannot satisfy the Voluntary Adoption method. This is because the company is not held to the SA8000 until it receives certification, meaning the reasonable director retains an opportunity to validly conclude that certification is not in the company’s best interests. In this example, the SA8000 had not yet been “adopted”.

D Mode Two: Hardened Regulation

As noted, the Hardened Regulation method is the most difficult to satisfy because it carries a heavy evidentiary burden. Requirement 9.10.1 would be unlikely to held to be consistent with general Australian corporate governance custom since its due diligence elements are so taxing. It would be unreasonable to expect all companies to monitor their international suppliers to the SA8000’s satisfaction. The SA8000 also has a problematically niche focus for the Hardened Regulation method, since it speaks to companies involved in international supply chains, which is not general enough for the CG Standard to have been hardened into domestic law.

An argument could be sustained, however, that Australia has adopted provisions like 9.10.1 by passing the federal and state Modern Slavery Acts.[67] Though those Acts make no express reference to the SA8000, the Acts may be evidence of Australia’s intention to impart duties upon corporate directors to maintain ethical working conditions in their supply lines.

E Mode Three: Gap-Filling

Requirement 9.10.1 has its greatest potential impact by way of Gap-Filling. As has been argued throughout this essay, s 180(1) is intentionally drafted so that courts may inform themselves of what a reasonable person, in the director’s position and in the circumstances of the company, would do to discharge their duty of care. Moreover, sustaining ethical supply lines is clearly consistent with public policy – again, reference may be made to the Modern Slavery Acts.

F Relevant Considerations and Indicia

Assuming that Requirement 9.10.1 satisfies the Gap-Filling method, the court should consider whether the Requirement contains elements that justify its use. A selection of the relevant criteria is examined presently.

Specificity: As noted, 9.10.1 requires the home company to make ‘reasonable efforts’ to ensure that their suppliers also comply with the SA8000. Though the Requirement contains a detailed description of how this due diligence should be achieved, the results expected of the home company are not unreasonable or unachievable. The home company is not liable for the supplier’s non-compliance with the SA8000. The specificity of Requirement 9.10.1 is not unreasonable.

Regulatory alternative: There is no preferable regulatory alternative because, although the Modern Slavery Acts demonstrate Australia’s intention to hold directors to a standard of care, the Acts do not themselves codify that standard.

Normative impact: Requirement 9.10.1 has great potential to impact corporate norms as it can, if widely adopted as best practice, incentivise home companies to exercise greater diligence when monitoring and maintaining their ethical supply lines.

Harmonisation: Likewise, there is good potential to harmonise domestic corporate culture when managing international supply lines, thereby ensuring that all companies that compete on this issue are held to an equal standard of care. In time, this could translate to international harmonisation if the norms become widespread.

Proportionate risk/reward: The risk of detriment suffered by non-conformity with the SA8000 is minimal, because the adverse impact is that a company simply fails to secure (or retain) certification. This may result in a competitive and reputational disadvantage, but the detriment has a minimal impact upon immediate corporate operations. Moreover, competitor companies and their directors are held to the same standard of care, minimising any disadvantage. The reward, on the other hand, for compliance with the SA8000 is considerable, since certification carries with it material reputational benefit.

Monitoring costs and Disadvantage to Early Voluntary Adopters: The monitoring costs incurred when discharging 9.10.1 would likely be considerable, particularly for large, listed companies that rely on complex supply chains. These costs may disproportionately affect early adopters who bear greater expense when establishing systems to monitor their supply chains. Depending on the company’s circumstances, these costs may be so great that a reasonable director would not conduct monitoring to the SA8000’s satisfaction. In such a case, 9.10.1 could fail the Test of Legitimacy.

However, assuming that the monitoring costs are not too great, there is a solid case to be made that Requirement 9.10.1 may satisfy a Test of Legitimacy employed by a court, primarily because it can be used as Gap-Filler and because it shares indicia with other legitimate instruments.

G Summary of this Part

Ultimately, the Test of Legitimacy informs just one element of the test applied to s 180(1) that was neatly summarised by Cassimatis. This test holds that directors must balance the foreseeable risk of harm against the foreseeable benefit to the objective standard of a reasonable person who is in the director’s position and in the circumstances of the company. CG Standards may inform the court, so that the court can properly characterise that reasonable director. In determining whether a court can refer to a particular soft law CG Standard, the Test of Legitimacy may assist.

It has been tentatively concluded that Requirement 9.10.1 could, in appropriate circumstances, inform the court of the characteristics of the reasonable director. This would mean that a reasonable person, in the director’s position, would ensure that their company conducts due diligence pursuant Requirement 9.10.1. Failure to do so may constitute a breach of s180(1).

A director who ensures that their company satisfies Requirement 9.10.1 is also discharging their duty under s180(1) generally, by reinforcing good governance regarding international supply chain management. The benefits that derive from this good governance may include more effective risk management, securing financial interests through competitive advantage, ensuring sustainable business practices by limiting the risk of legal sanction and human rights infringements, and maintaining investor satisfaction. Each of these benefits are in the company’s interests and effectively speak to discharging the director’s duty of care owed to the company.

V CONCLUSION

This essay has argued that a Corporate Governance Standard that has not been voluntarily adopted by an Australian company can nevertheless inform a court of the content of the duty found in s 180(1) of the Corporations Act 2001 (Cth). A review of s 180(1) and relevant case law demonstrates that this is already being done in small ways. A review of relevant corporate governance literature demonstrates that it is coherent and potentially desirable to hold directors to a standard of care elaborated in a CG Standard.

A judicial test was proposed. It contained three modes of judicial interpretation of a CG Standard. Requirement 9.10.1 of the SA8000 was used to demonstrate how those modes of interpretation may consider whether a CG Standard’s provision binds a director to a particular standard of care, because a reasonable person would satisfy that provision.

It is therefore likely permissible for a court to turn to Requirement 9.10.1 when determining what a reasonable director would do to manage their international supply lines. A voluntary CG Standard can therefore become binding by way of popularity because a reasonable director would often conform with corporate governance custom.

VI BIBLIOGRAPHY

A Articles

Baade, Hans ‘The Legal Effects of Codes of Conduct for Multinational Enterprises’ (1979) 22 German Yearbook of International Law 11

Bottomley, Stephen et al, Contemporary Australian Corporate Law (Cambridge University Press, 2nd ed, 2021)

Carr, Claudia and Robert Cunningham ‘A step too far? The “stepping stone” approach and s 180(1) of the Corporations Act 2001 (Cth)’ (2019) 34(1) Australian Journal of Corporate Law 58

du Plessis, Jean J, ‘Directors’ duty to act in the best interests of the corporation: “Hard cases make bad law”’ (2019) 34(1) Australian Journal of Corporate Law 58

du Plessis, Jean Jacques, Anil Hargovan and Jason Harris, Principles of Contemporary Corporate Governance (Cambridge University Press, 4th ed, 2018)

Hutley SC, Noel and Sebastian Hartford Davis, ‘Climate Change and Directors’ Duties’ (Further Supplementary Memorandum of Opinion, The Centre for Policy Development, 23 April 2021)

Kingsford Smith, Dimity, ‘Governing the corporation: the role of “soft regulation” [2012] UNSWLawJl 16; (2012) 35(1) UNSW Law Journal 378

Kinley, David and Rachel Chambers, ‘The UN Human Rights Norms for Corporations: The Private Implications of Public International Law’ (2006) 6(3) Human Rights Law Review 447

Purcell, John A and Janice A Loftus, ‘Corporate social responsibility: Expanding directors’ duties or enhancing corporate disclosure’ (2007) 21 Australian Journal of Corporate Law 135

Redmond, Paul, Corporations and Financial Markets Law (Thomson Reuters, 7th ed, 2017)

Redmond, Paul ‘Directors' Duties and Corporate Social Responsiveness’ [2012] UNSWLawJl 13; (2012) 35(1) UNSW Law Journal 317

Redmond, Paul ‘Sanctioning corporate responsibility for human rights’ [2002] AltLawJl 7; (2002) 27(1) Alternative Law Journal 23

Sinclair, Amy and Justine Nolan, ‘Modern Slavery laws in Australia: Steps in the Right Direction?’ (2020) 5 Business and Human Rights Journal 164

Young QC, Neil, ‘Has directors' liability gone too far or not far enough? A review of the standard of conduct required of directors under sections 180-184 of the Corporations Act(2008) 26 Company and Securities Law Journal 216

B Corporate Governance Instruments

Social Accountability International, Social Accountability 8000, International Standard, June 2014

C Cases

Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; (2016) 336 ALR 209

Australian Securities and Investments Commission v Healey [2011] FCA 717

Australian Securities and Investments Commission v Healey (No 2) [2011] FCA 1003; (2011) 284 ALR 734

Australian Securities and Investments Commission v Rich [2003] NSWSC 85; (2003) 44 ACSR 341

Australian Securities and Investments Commission v Rich [2004] NSWSC 836; (2004) 50 ACSR 500

Australian Securities and Investments Commission v Vines [2005] NSWSC 738; (2005) 55 ACSR 617

Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 70 ACSR 1

Cullen v Corporate Affairs Commission (1988) 14 ACLR 789

Daniels v Anderson (1995) 37 NSWLR 438; 118 FLR 248

Re Douglas Construction Services Ltd [1988] BCLC 397

Wyong Shire Council v Shirt [1980] HCA 12; (1980) 146 CLR 40

D Legislation

Corporations Act 2001 (Cth)

Modern Slavery Act 2018 (Cth)

Modern Slavery Act 2018 (NSW)

E Web Materials

Australian Government, Department of Industry, Science, Energy and Resources, Emission Reduction Fund (Web Page) <https://www.industry.gov.au/funding-and-incentives/emissions-reduction-fund>

Australian Government, Department of Industry, Science, Energy and Resources, Renewable Energy Target scheme (Web Page) <https://www.industry.gov.au/funding-and-incentives/renewable-energy-target-scheme>

Climate Active, Homepage (Web Page) <https://www.climateactive.org.au/>


&#6[1] The author would like to express his sincerest thanks to Professor Dimity Kingsford Smith for her support, guidance and feedback.

[1] Social Accountability International, Social Accountability 8000, International Standard, June 2014.

[2] See generally Daniels v Anderson (1995) 37 NSWLR 438; 118 FLR 248.

[3] Neil Young QC, ‘Has directors' liability gone too far or not far enough? A review of the standard of conduct required of directors under sections 180-184 of the Corporations Act(2008) 26 Company and Securities Law Journal 216, 219-20.

[4] Ibid 220.

[5] See ibid.

[6] Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023; (2016) 336 ALR 209.

[7] Ibid [480]-[484].

[8] Ibid [486] citing Wyong Shire Council v Shirt [1980] HCA 12; (1980) 146 CLR 40, 47–48.

[9] Cassimatis (n 6) [482].

[10] See generally Claudia Carr and Robert Cunningham ‘A step too far? The “stepping stone” approach and s 180(1) of the Corporations Act 2001 (Cth)’ (2019) 34(1) Australian Journal of Corporate Law 58.

[11] Cassimatis (n 6) [526], [529].

[12] Dimity Kingsford Smith, ‘Governing the corporation: the role of “soft regulation” [2012] UNSWLawJl 16; (2012) 35(1) UNSW Law Journal 378, 378.

[13] Note the distinction between “CG Standards” (types of corporate governance instruments) and “standards” (of care, for example).

[14] Australian Securities and Investments Commission v Healey [2011] FCA 717 [194]-[196].

[15] Australian Securities and Investments Commission v Healey (No 2) [2011] FCA 1003; (2011) 284 ALR 734 [171].

[16] Ibid [170].

[17] Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) [2008] WASC 239; (2008) 70 ACSR 1 [4362], [4367].

[18] Australian Securities and Investments Commission v Rich [2003] NSWSC 85; (2003) 44 ACSR 341 [68]-[72], [75].

[19] Australian Securities and Investments Commission v Rich [2004] NSWSC 836; (2004) 50 ACSR 500 [35]-[36].

[20] Australian Securities and Investments Commission v Vines [2005] NSWSC 738; (2005) 55 ACSR 617 [91]-[93], [905], [1319]-[1320], [1345], [1387].

[21] Jean Jacques du Plessis, Anil Hargovan and Jason Harris, Principles of Contemporary Corporate Governance (Cambridge University Press, 4th ed, 2018) 138-40.

[22] Ibid 142-3.

[23] Ibid 141.

[24] Ibid 141-2.

[25] Kingsford Smith (n 12) 382.

[26] Ibid 394-5.

[27] John A Purcell and Janice A Loftus, ‘Corporate social responsibility: Expanding directors’ duties or enhancing corporate disclosure’ (2007) 21 Australian Journal of Corporate Law 135, 155.

[28] Kinley, David and Rachel Chambers, ‘The UN Human Rights Norms for Corporations: The Private Implications of Public International Law’ (2006) 6(3) Human Rights Law Review 447, 449.

[29] Hans Baade, ‘The Legal Effects of Codes of Conduct for Multinational Enterprises’ (1979) 22 German Yearbook of International Law 11.

[30] Note that the focus of Baade’s paper is the impact that a code of conduct may have upon international legislation. Although his paper mostly relevant – at times directly, at times by analogy – it nevertheless develops some principles and ideas that have modest relevance or application to the present discussion of domestic legislation. This essay does not cite Baade’s paper as an outright authority in support of its ideas. Rather, this essay recognises Baade’s paper as an ancestor to its own ideas.

[31] Baade (n 29) 13-4.

[32] Ibid 15.

[33] Ibid 40.

[34] See ibid.

[35] Kinley and Chambers (n 28) 483-4.

[36] Baade (n 29) 39, 49.

[37] Ibid 24.

[38] Ibid 40.

[39] Ibid 32.

[40] Ibid 39, 49; see also Kinley and Chambers (n 28) 483-4.

[41] Baade (n 29) 28.

[42] Ibid 46, 50.

[43] Ibid 22, 39.

[44] Kingsford Smith (n 12) 380-1.

[45] Ibid 381.

[46] Ibid 393.

[47] Ibid 399.

[48] Ibid 399-400.

[49] Young QC (n 3) 231, 233.

[50] Ibid 229.

[51] Ibid 227.

[52] Cullen v Corporate Affairs Commission (1988) 14 ACLR 789, 796 (Young J) citing Re Douglas Construction Services Ltd [1988] BCLC 397, 402 (Harman J).

[53] Young QC (n 3) 228.

[54] Amy Sinclair and Justine Nolan, ‘Modern Slavery laws in Australia: Steps in the Right Direction?’ (2020) 5 Business and Human Rights Journal 164, 169.

[55] Kingsford Smith (n 12) 401.

[56] Young QC (n 3) 227.

[57] Kinley and Chambers (n 28) 491-2.

[58] Ibid 492.

[59] Purcell and Loftus (n 27) 137-8, 143-4, 147.

[60] Ibid 137.

[61] Ibid 150.

[62] Social Accountability 8000 (n 1) 2.

[63] Ibid 4.

[64] Ibid 16.

[65] See ibid.

[66] See ibid.

[67] Modern Slavery Act 2018 (Cth); Modern Slavery Act 2018 (NSW).


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