In July 2022 the Australian Institute of Company Directors issued a Practice Statement focusing on the duty of directors to act in the best interests of their corporations and stakeholders. The Practice Statement is supported by an in-depth published opinion from Bret Walker AO SC and Gerald Ng. The Practice Note highlights ESG issues and what is permissible for directors to consider in the context of the best interests duty. We also consider that it is appropriate to consider what is required to be considered in the discharge of directors’ duty of care.
A common refrain by directors when considering their duty of care and diligence is that this duty is owed to the corporation, its shareholders and/or members. Readers may then be surprised to learn that section 180(1) the Corporations Act 2001 (Cth) (the Act), which codifies director’s duty of care, does not, (unlike certain of its predecessors), tell us to whom the duty is owed. In fact, the duty owed is a public one.
In the case of Australian Securities and Investments Commission v Cassimatis (No 8) (Cassimatis), ASIC presented detailed arguments that the duty has both a private and a public aspect. One contextual reason for suggesting that the duty might be owed to the public, is the provision for injunctions in section 1324 of the Act, by “a person whose interests have been, are or would be affected by the conduct”, which is not limited to a corporation’s shareholders.
On appeal in 2020, both Greenwood J and Thawley J said that the duty was public. Justice Thawley stated that ‘the obligation mandated by section 180(1) is the same whether enforced as a private wrong to the corporation or as a public wrong in failing to meet the standard.’ Similarly, Justice Greenwood stated that ‘fifth, and critically, section 180(1) is normative and its burden is a matter of public concern not just private rights. It is an expression of the Parliament’s intention to establish an objective normative standard of the degree of care and diligence directors must attain or discharge in exercising a power conferred on them or in discharging a duty to be discharged by them.’
In considering their duty of care, it is not merely a matter of directors saying the relevant ESG issue had to take a back seat to the profitability of the corporation. This is because reasonably foreseeable harm to the corporation is “best understood” as a reference to harm to any of the interests of the corporation and thus all of the corporation’s interests are relevant when undertaking the process of “balancing” the foreseeable risk of harm against the potential benefits.
These interests include non-pecuniary matters per Edelman J at first instance in Cassimatis:
‘For instance, suppose a director makes a decision to commit a serious breach of the law, by intentionally discharging large volumes of toxic waste. Suppose the decision is made on the basis that the financial cost of avoiding the breach would be far greater than the cost of a pecuniary penalty under the relevant environmental regulation. This conduct might nevertheless involve a breach of the director’s duty of care and diligence, irrespective of any other breaches. In other words, the director might not avoid liability merely because he or she proved that a balancing exercise showed that the likely financial cost of a penalty was exceeded by the likely profit from a serious contravention of the law.’
Considering His Honour’s example further, there need not necessarily be a breach of ESG related legislation (such as a discharge of toxic material) as a ‘stepping stone’ to a breach of Section 180.
Cassimatis continues to be cited in emerging cases that consider whether the section 180(1) duty has been breached by directors such as Termite Resources NL (in liq) v Meadows. As this case makes clear, these duties apply to private corporations as well as well as listed ones. Although not an ESG case, this matter tells us that:
- any policy must be appropriate to the circumstances of the corporation and all of the duties of the directors should be considered;
- the policy must be implemented as designed and regularly monitored;
- substantial awards can be made against directors for failure in this duty. For instance, if an ambitious ESG policy is announced and not followed, such that the corporation’s business suffers reputational damage and therefore loss that could be sheeted home to directors personally. In any event, as this is a statutory duty it is not necessary to establish loss or damage in order to bring an action.
Changing focus of the public and the regulator
In Mark McVeigh v Retail Employees Superannuation Pty Ltd, a member of a super fund filed proceedings against REST in July 2018, alleging that the fund violated the Act, by failing to provide information related to climate change business risks and any plans to address those risks. REST reached a settlement which included it agreeing to implement a net zero carbon footprint by 2050 goal for the fund, to measure, monitor and report climate progress in line with the TCFD framework, to ensure investee climate disclosure, and to publicly disclose portfolio holdings, among other commitments.
A plethora of discussions suggests that the stage is set for ‘ESG actions’ to commence, whether by shareholders or the public, or through ASIC or otherwise. This is supported by ASIC’s confirmation in March 2022 that they will be looking to focus on misleading ESG statements, particularly net zero statements, in disclosure documents.
Where do we stand now?
Even though we may not yet have a body of ‘ESG’ cases, we suggest that it is only a matter of time. That time may well hasten on by the current change in economic circumstance (that is already seeing an uptick in insolvencies). Or it might be approaching because the duty of care is a public one and in recent times the public has been enlivened by ESG issues. It may also be because in our recent experiences in dealing with ASIC, we have noticed a greater focus on ESG, consistent with their public statements.
It would not, in the current state of the law, be too much to suggest that directors that do not establish and monitor a climate policy, may be held in breach of Section 180 and it may be approaching the time where directors without a clear and monitored ESG policy more generally will also be in breach.
 Directors’ “best interests” duty in practice (aicd.com.au)
 Australian Securities and Investment Commission v Cassimatis (No 8)  FCA 1023.
 Cassimatis v Australian Securities and Investments Commission  FCAFC 52.
 Ibid, 449.
 Ibid, 87.
 Ibid, 83.
 Australian Securities and Investment Commission v Cassimatis (No 8)  FCA 1023, 485.
 Termite Resources NL (in liq) v Meadows, in the matter of Termite Resources NL (in liq) (No 2)  FCA 354.
 The Task Force on Climate-related Financial Disclosures, 2015.
 See Speech, ASIC’s Corporate Governance Priorities and the Year Ahead, ASIC Chair Joe Longo, 3 March 2022.
If you have any questions about this article, please get in touch with an author or any member of our Corporate & Commercial team.
This information and the contents of this publication, current as at the date of publication, is general in nature. It’s intention is to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.