Understanding Corporate Governance: Duties Of Directors Towards Stakeholders, Essay.

As a separate legal person, a corporation has two basic objectives: To survive and to thrive. Shareholder value is not the objective of the corporation; it is an outcome of the corporation’s activities. While shareholders entrust their stakes in a corporation to the board of directors, shareholders are just one audience among others that the board may consider when making decisions on behalf of the corporation. 

These audiences, typically called stakeholders, may also include other financial stakeholders, such as bondholders, and nonfinancial stakeholders, such as employees, customers, suppliers, and NGOs representing various concerns of civil society. In the face of limited resources, no matter how large the corporation, directors must make choices regarding the significance of the corporation’s many audiences.

Assume you have been employed as a corporate governance consultant by the Australian Institute of Company Directors  (AICD). The AICD is concerned that many company directors hold the opinion that the company’s board of directors has a responsibility to place the interests of shareholders above all other stakeholder interests.

Your assignment is to prepare a report to be AICD evaluating the evidence that the responsibility of a company director is to place shareholder interests above those of other stakeholders. Specifically, the  AICD has requested that your report contain evidence, examples and recommendations for company directors that will guide them when making board decisions so they are responsive to diverse stakeholder  audiences.

Duties of Directors towards Stakeholders

A corporation has a separate entity from its owners based on which they cannot be held personally liable for the actions of the company. The board of directors of the company is responsible for making decisions in the company. It is believed by many directors that they owe a duty towards the shareholders based on which they have to prioritise their interest above other stakeholders because they invest money in the operations of the company (Fisher and French, 2014). However, this is a misconception, and the board is equally responsible towards each stakeholder. They have to take into consideration the interest of a diverse range of stakeholders to ensure that they are not biased towards a single category of stakeholders (Masulis, Wang and Xie, 2012). Organisations such as the Australian Institute of Company Directors (AICD) have further explained this duty of directors towards their stakeholders to ensure that they focus on sustainable development of the enterprise. In this report, the duties of directors towards the company and its stakeholders will be analysed to understand their role towards stakeholders of the company. Examples of companies will be evaluated to understand how corporations can they have achieved success through compliance with corporate governance principles. Lastly, recommendations will be given for directors to comply with corporate governance policies.

The shareholders are considered as owners of the company, and they face the most risk in organisations by investing their capital which raises misconception that the board of directors has to prioritise their interest above other stakeholders. Many times the board did not consider the interest of other stakeholders, and they form decisions which solely benefit the shareholders of the company (Eccles and Youmans, 2015). This is a wrong approach of managing a business which could lead to disastrous results, and the corporation could lose its competitive advantage in the company. The directors should comply with corporate governance policies while forming business strategies to ensure that they maintain a balance between the interests of stakeholders. Corporate governance policies are a set of rules and procedures which directs and controls the operations of a company to ensure that a balance is maintained between interests of stakeholders (McCahery, Sautner & Starks, 2016). These policies are becoming popular as the impact of multinational corporations has increased on society. Organisations are becoming larger than ever, and with the popularity of the internet and other technological advancements, these corporations are capable of influencing a substantial number of people on a global stage.

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Therefore, the importance of monitoring the actions of these corporations has increased to ensure that their management did not conduct their operations in an unethical manner. Pressure is also created on these companies to ensure that they fulfil their corporate responsibilities towards the public rather than solely using their position to increase their customer base (Claessens and Yurtoglu, 2013). In order to achieve this objective, the corporate governance policies play a significant role. These policies ensure that the management is responsible for stakeholders to show the actions taken by them to fulfil the social responsibility of the company. These policies promote transparency in the management process and enable the directors to take corrective actions which are focused on benefiting a diverse range of stakeholders. Along with corporate governance policies, there are various duties which are imposed on directors to ensure that they did not misuse their position in the corporation. Following are various duties which are identified in the Corporations Act 2001 (Cth) which governs the actions of the board of directors of Australian companies.

Directors have an obligation to ensure that they maintain care and diligence which is expected from a person operating in a particular position (AICD, 2018). It is their duty to ensure that they maintain a high standard of care which is rational to expect from a reasonable person who is operating in a particular position.

The directors must act in good faith towards the corporation and its stakeholders to ensure that they did not misuse their powers. This good faith means that the directors must prioritise the interest of the company above their personal interest. They have to ensure that appropriate actions are taken by them to protect the company and its stakeholders.

The directors must properly use their position in the company to avoid taking any decisions which could be detrimental for the company or its stakeholders. Since directors operate at an apex position in the company, it is their duty that they should not misuse that position. They should use that position for proper purpose which means that they should not intentionally engage in an activity which could be detrimental for the company.

The directors most properly use the information of the company to avoid gaining personal profits or harming the interest of the company or its stakeholders. With power comes responsibilities, therefore, the directors are obligated to only use the information which they have for proper purposes. Any action which is taken by them that is considered as misuse of confidential information of the company can be considered as a violation of their duties.

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These legal duties are imposed on directors to ensure that they did not misuse their position and powers and focus on the interest of the company and its stakeholders appropriately. These duties highlight that the directors did not have to prioritise the interest of shareholders above other stakeholders, and they have to maintain a balance between the interests of stakeholders by complying with corporate governance policies (Breitbarth et al., 2015). Shareholders are equal to other internet and external stakeholders of the company based on which directors owe an equal duty towards all of them. There is no specific duty imposed on the directors based on which are obligated to prioritise the interest of shareholders above others. They should maintain a balance to ensure that the company is able to discharge its social obligations towards its stakeholders and fulfil its corporate responsibilities. These responsibilities are owned by the company as an artificial person due to which it is the duty of the board of directors to ensure that they should take reasonable actions to discharge the duties of the enterprise.

Following are examples of successful corporations which have adopted corporate governance structure to maintain a balance between the interests of stakeholders.

Google is a leading technology corporation which is known for its digital services all across the globe. The company is also known for its best CSR (corporate social responsibility) reputation in the market because it takes its social responsibilities seriously. The corporation uses renewable energy sources to power its operations to protect the environment. The use of renewable energy sources resulted in decreasing the carbon footprint of the enterprise, and it also promotes natural resources. It also provides a wide range of facilities to its employees based on which it has won the title of ‘the best place to work’ many times (Miceli, 2015). These facilities are targeted towards establishing a positive work environment in which employees receive equal growth opportunities. The company is known for embracing diversity in the workplace. A recent example was shown this responsibility when the CEO of the company fired a senior developer over a controversial memo in which the developer argued that men are superior to women (Russell, 2017).

BMW is another leading brand which is known for its effective corporate governance practices. The company has launched a program called The Schools Environmental Education Development Project (SEED) which is focused on addressing social and environmental issues globally (BMWglobal, 2018). The program addresses a wider range of issues relating to the environment and protection of environmental resources. This project also focused on increasing awareness regarding environmental related issues. The company has decided to help more than one billion people by 2020 which shows its commitment towards stakeholders. This help can be in terms of financial or emotional support to those who are in need.

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Following recommendations can assist directors in Australian corporations to comply with corporate governance principles to ensure that they held accountable towards their stakeholders.

1. The directors must adopt an effective CSR structure in the company which should be focused on promoting transparency and continuous disclosures to ensure that the directors are held accountable towards their stakeholders (Cheng, Ioannou and Serafeim, 2014). This approach will impose a duty on the directors of the company to ensure that they disclose information regarding the actions taken by them to protect the right of its stakeholders. This model also makes it difficult for the company to unethically performance its operations (Mason and Simmons, 2014). On the positive side, it creates a strong brand image of the company which resulted in increasing its profitability.
2. The company should issue ‘Statement of Significant Audiences and Materiality’ in which the directors must identify all the stakeholders of the company and how the actions of the company affect their interest (Eccles and Youmans, 2015). This statement should identify the parties who are affected by the operations of the company which will enable the directors to understand the positive or negative impact of their actions on different stakeholders. Based on this observation, they will be obligated to take actions to avoid adversely affecting stakeholders from their interest. It will create a balance between the interests of the stakeholders which is crucial for achieving sustainable growth in the industry.
3. Directors must work with organisations such as the Australian Institute of Company Directors (AICD) to ensure that awareness regarding director duties are increased in the company, and everyone participates to maintain a balance between the interest of stakeholders. Many directors and executives still believe that they owe a duty towards their shareholders based on which they are obligated to form business strategies which are targeted on fulfilling their interest. However, awareness regarding the general duties of directors should be spread across the country so that directors of large as well as small companies are encouraged to implement corporate governance policies in the company (Servaes and Tamayo, 2013). This encouragement will enable the directors to take reasonable steps to avoid prioritising the interest of shareholders, and they will fulfil the obligations of the company towards its diverse range of stakeholders.

Conclusion

To conclude, it is a common misconception that directors owe a direct duty towards shareholders, and they have to form strategies by considering that their interest is above the interest of other stakeholders. Based on the evaluation of legal director duties and corporate governance principles, it is concluded that no such duty is owed by directors. They must maintain a balance between the interests of stakeholders to ensure that they did not solely focus on shareholders while forming business policies. The examples of Google and BMW are analysed in this report to understand how the board of successful companies comply with corporate governance policies. Lastly, recommendations are given for directors which include implementation of effective CSR structure, issuing Statement of Significant Audiences and Materiality and increasing awareness regarding the corporate governance principles.

References

AICD. (2018) General duties of directors. [PDF] Available from: https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-6-2-duties-directors_general-duties-directors_a4-web.ashx [Accessed 1/12/2018].

BMW Group. (2018) Sustainable Management. [Online] Available from: https://www.bmwgroup.com/en/responsibility/sustainability-at-the-bmw-group.html [Accessed 1/12/2018].

Breitbarth, T., Walzel, S., Anagnostopoulos, C. and van Eekeren, F. (2015) Corporate social responsibility and governance in sport:“Oh, the things you can find, if you don’t stay behind!”. Corporate Governance, 15(2), pp.254-273.

Cheng, B., Ioannou, I. and Serafeim, G. (2014) Corporate social responsibility and access to finance. Strategic management journal, 35(1), pp.1-23.

Claessens, S. and Yurtoglu, B.B. (2013) Corporate governance in emerging markets: A survey. Emerging markets review, 15, pp.1-33.

Eccles, R.G. and Youmans, T. (2015) Why Boards Must Look Beyond Shareholders. [Online] Available from: https://sloanreview.mit.edu/article/why-boards-must-look-beyond-shareholders/ [Accessed 1/12/2018].

Fisher, J. and French, E. (2014) The big issue: Annual reports and directors' duties: Ensuring compliance with financial reporting requirements and director participation. Irrigation Australia: The Official Journal of Irrigation Australia, 30(3), p.34.

Mason, C. and Simmons, J. (2014) Embedding corporate social responsibility in corporate governance: A stakeholder systems approach. Journal of Business Ethics, 119(1), pp.77-86.

Masulis, R.W., Wang, C. and Xie, F. (2012) Globalizing the boardroom—The effects of foreign directors on corporate governance and firm performance. Journal of Accounting and Economics, 53(3), pp.527-554.

McCahery, J.A., Sautner, Z. and Starks, L.T. (2016) Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance, 71(6), pp.2905-2932.

Miceli, M. (2015) Google Tops Reputation Rankings for Corporate Responsibility. [Online] Available from: https://www.usnews.com/news/articles/2015/09/17/google-tops-reputation-rankings-for-corporate-responsibility [Accessed 1/12/2018].

Russell, J. (2017) Google fires the engineer who wrote that viral memo criticizing its diversity efforts. [Online] Available from: https://techcrunch.com/2017/08/07/google-fires-memo-author/ [Accessed 10/12/2018].

Servaes, H. and Tamayo, A. (2013) The impact of corporate social responsibility on firm value: The role of customer awareness. Management science, 59(5), pp.1045-1061.