A company or an organization is considered to be as the separate legal entity and it has been illuminated by the judicial system. The two main purposes of the company are to maintain stability between the needs of their stakeholders and their shareholders so that the company can survive and become successful. There are several stakeholders like customers, investors, suppliers and the whole community. On the other part it has been explained that the shareholders who merely turns out to be the audience, invest their money in the organization that has to be governed by the directors who make decisions on the behalf of the company. The directors take the decisions by considering the interests of the stakeholders or the audiences as they have the limited resources and it also depends on the size of the corporation. There are other groups in the audience that includes stakeholders and others and they are the financial stakeholders, bondholders, customers, non-financial stakeholders, NGO’s and the suppliers who represent the problems and the concerns of the civil society (Crane and Matten 2016).
The main objective of this report is to evaluate the evidences which state the duty of the company’s directors is to give more importance to the shareholder’s interest rather than the interest of the other stakeholders of the company. The report also analyzes whether it is important for the directors to take into consideration the interest of the stakeholders along with the shareholders while making decisions.
The purpose of a company
The primary reason for which a company is incorporated, is to make profit for its owners unless it is a charity company. All operations of the organizations are therefore carried out for the purpose of making profit. However the profit which is made by the organizations has to be made in an ethical and legal manner for the purpose of surviving in the long run. There are various approaches towards the functioning of an organization such as taking the Broad view of Corporate Social Responsibility, the narrow view of CSR and good corporate governance principles. All such principles provide for a different way for the functioning of a company (Trevino and Nelson 2016). These approaches along with the legal framework provide evidence which needs to be evaluated for the context of this paper.
The Legal framework
According to the Corporation Act 2001 (cth), any person who wishes to be the director of the company of Australia must be subjected to the requirements of this act. There are certain common laws that states out the functions that are needed to be carried further by the director of the company. There are certain principles known as the principles of the corporate governance that must be followed by the directors of the company. In order to make the directors run the company, there are some recommendations that have een provided by the Australian Securities Exchange that states the guidelines to run the company (Ferrell and Fraedrich 2015). According to the section 181 of the Corporations Act 2001, it has been stated that the director’s duty is to act in the organization’s best interest so that they can run the company in the good faith and fulfil all the purposes of the company. It has been further stated that no information of the company must be misused or carry forward to the other company to make their own profit and put the company in the loss. In addition, the directors must take the decision according to the requirement of the company and in a careful way and be attentive towards taking the decision as provided by the section 180 of the Corporation Act 2001. There have been significant debate over the fact that whether the law provided under the provisions of section 181 should be amended or not to make the directors also take into consideration the interest of the stakeholders along with the shareholders while making decisions. It has been argued by Goodpaster (2015 pp 71) that “The provisions of section 181 should be amended and a law like that of section 172 of the Companies Act of the UK has to be introduced which would provide for rules to take into consideration the interest of various stakeholders such as the employees, creditors, society and investors while making decisions”. On the other hand it has been argued by Rossouw and Vuuren (2017) that imposing such a law on the directors would hamper the free way in which organizations are able to operate and fulfil their purpose of making profit. In addition, the provisions of section 181 are always seen as being flexible by the court. Various judgments have been made where the provisions have been interpreted according to the situation. For instance, in the case of Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited  FCA 1342 the court stated that when acting in best interest of the company the directors have the obligation of taking into consideration the interest of the creditors while the company is insolvent and the interest of the shareholders when the organization is solvent. Further, the court stated in the case of Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 that it is the duty of the directors to ensure that their decisions are taken to trigger profit of the organization only. The business judgement rule provides flexibility for the directors to make business decisions where such decisions are not absurd, do not have any form of material personal interest and the decisions are informed. Thus, it can be evidently stated upon evaluation that there is no need to alter the legal framework in regards to the decision making of the directors as the system is productive and efficient. However is does not signify that the directors cannot take into consideration the interest of the other stakeholders while making business decisions. There are several theories which provided that considering the interest of the stakeholders is beneficial for the best interest of the organization. These theories are further discussed in this report.
The theory of Corporate Social Responsibility
According to Pearson (2017 pp 332) CSR is a form of “private self regulation of business organizations”. At one point of time CSR was only regarded as a voluntary option for the organizations to indulge in, however in the contemporary period several international laws have been implemented which indirectly force the organizations to include the principles of corporate social responsibility within their operations. The organizations willingly indulge into incorporating the principles of CSR into their operations because of the benefits provided by them. The principles state that being a artificial legal person a company is also a part and member of the community within which it operates. Thus, being a member of the society it is the responsibility of the company to contribute towards it in a positive manner. This contribution may be made by acting ethically, taking care of the environment and investing in the betterment of the society. There are several business benefits which are provided to an organization while they indulge into CSR initiatives. As stated by Shaw (2016 pp 107) “every person in the society likes to be associated with an organization which is ethical and is concerned about the overall development of the society along with making profit”. Thus, when an organization indulges in CSR initiatives it enhances its reputation and make others associate with it, eventually enhancing the customer base, employee satisfaction, investor trust and productivity. These are the primary objectives of the organization through which they would be able to make profit. The integration of CSR policies within the operations of an organization would evidently include taking into consideration the interest of the other stakeholders as well with the owners and shareholders. Thus, in order to make profit in the contemporary period it is essential for the organization to indulge into CSR initiatives and eventually take into consideration the interest of the other stakeholders as well with the owners and shareholders.
The theory of Milton Friedman
Friedman has provided an alternative theory for the functioning of an organization in his book Capital and Freedom. This theory is also famous as the Narrow View of CSR. In this theory, Friedman argues that the only intent and goal of a company and its managers should be to derive the maximum revenue for its owners. There should be no requirement and intention for the directors and officers to indulge into social initiatives as an organization is not formed to fulfill such a purpose (Weiss 2014). It is added to the theory that although it is important to take into consideration the interest of the other stakeholders of the organization such as the society, such task should be best left to the owners of the company and not to the managers. The shareholders on a personal level should indulge into the betterment of the society and not by being behind the corporate veil. This is because the managers if provided the responsibility of taking into consideration the interest of the society would deviate from, their primary purpose which is to make profit for the owners. Thus, in the given situation, it can be stated that the directors should take into consideration only the interest of the shareholders while making a decision and strive for company profits. However, there has been significant criticism which has been provided against this approach by the proponents of the broad view of CSR. One of the strongest arguments against which approach is that it would not be able to avail the advantages which are provided through the CSR initiatives such as increased customer loyalty, employee satisfaction, enhanced brand reputation and recognition, stronger financial programs, easier access to capital and organization growth though enhanced profit and productivity (Weiss 2014).
Good Governance Principles
A company which is registered with the ASX has the option of selecting the good governance principles provided by the ASX or showing reasons why they are not using them. These principles indirectly provided for taking into consideration the interest of the other stakeholders while making business decisions. For instance, it provides for acting with integrity and honesty, remunerating fairly and having in place a system for risk management. In addition, as stated by (Crane and Matten 2016) in situations where the interest of the stakeholders are also taken into consideration along with the shareholders it provides for various long term benefits for the organization as its objective is also to survive along with striving.
In conclusion, it can be stated based on the above evaluated evidence that it is the legal requirement of the directors is most cases to provide importance to the interest of the shareholders only while making decisions. However a few theories like corporate governance and CSR provide for taking into consideration the interest of the other shareholders as well. The principles of corporate governance are an essential part of operations of an organization. The integration of CSR policies within the operations of an organization would evidently include taking into consideration the interest of the other stakeholders as well with the owners and shareholders. Thus, in order to make profit in the contemporary period, it is essential for the organization to indulge into CSR initiatives and eventually take into consideration the interest of the other stakeholders as well with the owners and shareholders. There is no need to alter the legal framework in regards to the decision making of the directors as the system is productive and efficient. Although the law prioritizes the interest of shareholders it in no way signifies that the directors cannot take into consideration the interest of the other stakeholders while making business decisions.
- The directors have been imposed with the responsibility of managing the organization to make profit by the shareholders. Thus, they must prioritize shareholder interest over any other interest.
- The directors have the knowledge of how to run the business and make profit and it is best left to them to decide that whether taking into consideration the interest of the stakeholders would be beneficial for company
- The directors should be well versed with the implications of not taking into consideration the interest of the stakeholders as it may have considerable ill effect on the objective of the company to strive and survive in the long run.
Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited  FCA 1342
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
Crane, A. and Matten, D., 2016. Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.
Ferrell, O.C. and Fraedrich, J., 2015. Business ethics: Ethical decision making & cases. Nelson Education.
Goodpaster, K.E., 2015. Business ethics. Wiley Encyclopedia of Management, pp.1-6.
Pearson, R., 2017. Business ethics as communication ethics: Public relations practice and the idea of dialogue. In Public relations theory (pp. 111-131). Routledge.
Rossouw, D. and Van Vuuren, L., 2017. Business ethics. Oxford University Press.
Shaw, W.H., 2016. Business ethics: A textbook with cases. Nelson Education.
Trevino, L.K. and Nelson, K.A., 2016. Managing business ethics: Straight talk about how to do it right. John Wiley & Sons.
Weiss, J.W., 2014. Business ethics: A stakeholder and issues management approach. Berrett-Koehler Publishers.