By Selena Lucien & Sophie Langlois

As outlined by Andrew Kitching when discussing director liability under the Canadian Business Corporations Act, some commentators assert that shareholders should only make up one part of the broader stakeholder interest in making decisions for the corporation. They believe that the shareholder primacy model, concerned primarily with profit maximization, sidelines stakeholder interests and actually restrains directors’ ability to provide long-term guidance and leadership.

There is growing evidence that shareholders can actually be better served with improved stakeholder engagement and consideration beyond meager public relations campaigns. A UN Global Compact report states, “If stakeholders are adversely affected by a company’s actions, shareholders’ value will suffer. With the growth in pension and insurance funds and other institutional investors, shareholders are increasingly also company stakeholders…therefore these groups’ needs are increasingly interconnected.”

Moreover, shareholders are demanding change and are gradually pushing for strong corporate sustainability strategies. A study conducted by Ernst & Young titled Shareholders press boards on social and environmental risks: Is your company prepared? evaluated American shareholder proposals from 2010 and found that resolutions focusing on environmental and social issues made up the largest portion of shareholder proposals. Moreover, it concluded that shareholders increasingly believe that a robust social and environmental business model correlates strongly with risk management strategies and ultimately its portfolio performance.

A more recent collaborative study by The Conference Board and FactSet indicated that the number of shareholder proposals in the United States concerning social and environmental policy issues (243 proposals in 2011) continued to increase since 2007, despite the decline in other subjects; they constituted 35.2% of the total number of proposals. This data represents the “increasing sensitivity of shareholders to the long-term value generation potential of a cohesive corporate sustainability strategy.”

A forward-looking trend is revolutionizing the expectations placed on corporations. This is exemplified with the B Corps model, an organization that has successfully pushed for the creation of a new legal classification for corporations which aims to “create a material positive impact on society and the environment.”

The trend observed in Canada has been less active, with only 2% shareholder proposals related to social and environmental issues appearing on the S&P/TSX Composite Index in 2010. The S&P had only 254 corporations in 2010, compared to the American Russell’s 3000 and the S&P’s 500. This may reflect a cultural difference in outspokeness or interest in environmental and social sustainability amongst Canadian and American shareholders.

At a recent lecture at Toronto’s Rotman School of Business, Richard Ross, previous Chair and CEO of Inmet Mining Corporation, a Canadian mining company, elaborated on the decision-making process surrounding Inmet’s involvement in the Papua New Guinean Ok Tedi mine. His main message was that mining companies today must “grow responsibly” to increase value for shareholders. Such an approach requires a sound knowledge and understanding of all aspects of corporate responsibility. It also requires a willingness on the part of companies to make decisions that impact short-term profitability and growth with a view to minimizing longer-term reputational and financial risk. During Inmet’s involvement, Ok Tedi was successful in striking a balance between profitability and mitigating environmental impact.

When other shareholders in Ok Tedi decided to follow a course of action that did not meet Inmet’s view of sustainability, they decided to end the partnership and exit the mine. No doubt Inmet could have made a profit in the short-term by staying in the project; however, the risk to their “social license to operate”, which is the key to achieving long-term growth and value creation, could have been impacted.

As a leading force behind the first MBA program with a specialization in global mining management at the Schulich School of Business in Toronto, Ross explained that senior management in mining companies must now have, as a core competency, a strong appreciation for and understanding of all aspects of corporate responsibility. Ultimately they must have a clear vision of what sustainability looks like for their companies and to make sure that their directors and shareholders understand the cost and opportunity of growing responsibly.

While the Board of Directors is responsible for ensuring profit maximization for the shareholders, it is becoming increasingly evident that long-term sustainable value creation depends on a robust social and environmental risk management plan. Directors are most effective when they are able to address increasingly complex environmental and social risks. The trajectory towards responsible and sustainable investment supports a more balanced approach to the director’s fiduciary duty and this suggests stronger consideration for stakeholder interests.