PurposeBased Governance Rosemary Teele Langford Associate Professor Melbourne

Purpose-Based Governance Rosemary Teele Langford Associate Professor Melbourne Law School

Importance of Purpose • Purpose is a key reason for which we value charities • Robinson, Judd and Errington state: “Being purpose-driven affects the entire character and operation of a charity. It affects its direction and its strategies. It affects what the board and management are focused on and even who is on the board. It impacts on the level of employee engagement, on staff recruitment and remuneration and performance appraisal. Being purpose-driven affects how a charity is engaged with its community and how it approaches its finances. ” • AICD Not For Profit Governance Principles: Purpose is the centrepiece of governance in the not for profit sector • Importance of purpose in maintaining charitable status

How does purpose impact on governance? • Outline of presentation: • Advantages of purpose-based governance model • Outline of purpose-based governance model for charitable entities • Theoretical basis • Application in social enterprise context • Application to for-profit companies • The need to synthesise and simplify governance • Comments and questions

Advantages of purpose-based governance model • Has the potential to apply regardless of form • Provides a different approach to governance problems • Perceived tension between best interests and purposes • Stakeholder demands Sets boundaries around governance Makes sense of other governance rules Contributes organisational and motivational advantages Sets the foundation for a determination and outworking of values and culture • Aids in understanding which form law and regulation should take • •

Application to charitable entities - overview Duty of Care Good Faith Purpose Proper Purposes Conflicts and Profits Other

Application to charitable entities - Duties • Standard 1 – Charities must be not-for-profit and work towards their charitable purpose. • Standard 5 – Duties of Responsible Persons: A registered entity must take reasonable steps to ensure that its responsible entities are subject to, and comply with, the following duties: • (a) To exercise the responsible entity’s powers and discharge the responsible entity’s duties with the degree of care and diligence that a reasonable individual would exercise if they were a responsible entity of the registered entity; • (b) To act in good faith in the registered entity’s best interests, and to further the purposes of the registered entity; • (c) Not to misuse the responsible entity’s position; • (d) Not to misuse information obtained in the performance of the responsible entity’s duties as a responsible entity of the registered entity; • (e) To disclose perceived or actual material conflicts of interest of the responsible entity … • (f) To ensure that the registered entity’s financial affairs are managed in a responsible manner; • (g) Not to allow the registered entity to operate while insolvent…]

Theoretical Basis • Miller and Gold: • Governance mandate: Fiduciary as exercising discretionary power to promote particular purposes • Fiduciary loyalty to purposes – a fiduciary is loyal by allegiance to certain purposes • Fox-Decent: Most fundamental fiduciary duty is fidelity to the other-regarding purposes for which the fiduciary power is held • Harding: Loyalty as fidelity

Application in social enterprise context • Directors balance social/public benefit purpose and interests of members (in the form of returns) – balancing of two purposes • Not a ‘two masters’ issue • The balance between the two purposes can be predetermined (e. g. in the constitution or a shareholders’ agreement)

Application in for-profits sphere • Clear potential but more difficult, as can be seen by: • Abolition of ultra vires doctrine • Research by Ramsay into corporate objectives • Case law on core duties to act in good faith in the interests of the company and for proper purposes • BLab initiatives to have Corporations Act amended • Possible role in resolving stakeholder issues • Case law on corporate trustees as example

For profits - Mayer model • Reconceptualisation of business (in light of failures such as the rise of inequality in income and wealth, environmental degradation and increased mistrust of business) • Purpose of business should be producing profitable solutions to problems of people and planet • Directors’ fiduciary duties should be to promote the corporate purpose • Ownership of the company’s purpose not assets • Requires changes to ownership, stewardship and regulation

For profits - Larry Fink letter to CEOs “[E]very company needs a framework to navigate this difficult landscape, and that it must begin with a clear embodiment of your company’s purpose in your business model and corporate strategy. Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them. Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time – not only shareholders, but also employees, customers, and communities. Similarly, when a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company. ”

Simplification and Synthesis • ACNC Review: “The Panel heard that the current system of different governance requirements is complex and confusing. It is unreasonable to expect volunteer directors working in the sector to understand comply with multiple jurisdictional and sometimes inconsistent governance requirements. While there are common themes across the competing governance requirements, such as duties to act honestly and avoid conflicts, the expression of those duties differs between them and imposes an unacceptable level of red tape. ” • Is a purpose-based model of governance possible given the layers of governance (and compliance) requirements? • Need for simplification and synthesis • Example: Numerous expressions of the core duties to avoid unauthorised conflicts and profits (see next slide) • These can be synthesised to render them more manageable and coherent

Conflicts and profits rules - synthesis Avoid Unauthorised Conflicts and Profits Related Party Provisions Disclosure of Interests Misuse of Position Misuse of Information - perceived or actual material conflicts of interest (GS 45. 25(2)(e)) - GS 45. 25(2)(c) - s 83(2) AIR act - s 195 Nat Law Co-Ops - S 182 Corps Act - GS 45. 25(2)(d) - S 195 Nat Law Co-Ops - s 183 Corps Act - s 83(1) AIR Act - material personal interests (s 80 AIR Act Vic; s 191 Corps Act) - directly or indirectly interested (s 208 National Law Co-Ops)

Conclusion • Purpose-based governance model has clear potential to recentre and reinvigorate governance in relation to charitable entities and possibly more broadly • Purpose and profit are ‘balanced’ in social enterprise models • At the very least purpose can have an organising and motivating role in the for-profits sphere (see, e. g. , Fink) • At the other extreme the system could be remodelled based on purpose (see, e. g. , Mayer) • Clear potential for more significant role in for-profit sphere but would require a concerted shift

Questions/comments • Design thinking methodology • Feel free to email comments: Rosemary. Langford@unimelb. edu. au