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Committee On Legal And Constitutional

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Question:

Discuss about the Committee on Legal and Constitutional.
 
 

Answer:

Introduction:

Adam Smith asked several questions into Inquiry into the Origins and Causes of the Wealth of Nations held in 1776, and one of the questions was whether it is possible for corporations to contribute public service in the form of human social and environmental capital at the same time while increasing their profits, and whether it is desirable or just foolish thing to try[1]. From that time, concept of corporate social responsibility is the hot topic of debate throughout the world. However, there is no universal definition of corporate social responsibility, and it is described as the ability of company to balance the impact of its operations on social, economic and environmental[2]. There are number of examples of multinational organizations which conduct their operations in such manner as it maximizes the profits of the company at any cost such as NIKE which operates their factories in the countries where working conditions are poor and they also employing children’s and also NESTLE which engage in marketing practices unethically and they utilize the child labor and they also receive electricity supply which is manipulating for the purpose of maximizing their profits at the cost of citizens of California[3]. In this essay, we consider whether Australia must amend its section 181 by considering the example of section 172 of the United Kingdom Act, and amend the section as per the wordings of section 172 of the Companies Act 2006. Subsequently, this paper is concluded with brief conclusion.

 

Importance of director’s accountability:

Because of the examples stated above, it is necessary to review the operations of the company on periodically basis for the purpose of preventing such things in the future. For achieving this target the important part for hitting is duties of director’s. In past years, directors of the company are considered as the guardian and protector of the amount invested by shareholders of the company, and as per various case laws and legislations it is necessary that directors must act in the best interest of the company. However, the main issue in this paper states whether duties of directors stated by Australian law allowed the directors to act in the best interest of the other stakeholders other than shareholders. According to the Austin J, the issue whether directors of Australian organizations are liable towards other stakeholders may be considered from last few years[4]. During the period of 1989, Senate Standing Committee on Legal and Constitutional Affairs (the ‘Senate Committee’) reviewed this issue in Australia, and this committee reached the conclusion that the corporation legislation at this time was recognizing the interest of all stakeholders.

On the other hand, in United Kingdom this issue was reviewed by the UK Department of Trade and Industry (‘DTI’) and they reached on different conclusion. This review result in the introduction of the Companies Act 2006 (UK) (‘Companies Act’), and this Act firstly codified the duties of directors in UK. However, Section 172 of the Act states some mandatory considerations for directors which is directly relates with the interest of other stakeholders such as employees, customers, suppliers, and environment. Provisions of section 172 also ensure that directors must protect the interest of shareholders and promote the company’s success[5].

Duties and powers of directors:

For the purpose of confirming the amendments in the current duties of director’s especially in section 181 of the Act, it is necessary to understand the current duties off directors stated under law and statute. In number of cases, management power of the company is imposed in the directors of the company. The power imposed under directors are derived from both constitution of the company as well as the corporations act. According to Section 198A of the Act directors are responsible to manage the business of the company under their directions[6]. However it must be noted that Section 198A is the replaceable rule, and number of constitution of the companies adopted the similar provision which state that authority to manage the business is delegated to the directors of the company. However, if such provision is not present in the constitution of the company then it limit the power of directors[7].

In large companies, directors have power over the large amount of assets, and as per the interpretation of the Court power of director’s are very wide for the purpose of managing the business. As the senate committee in 1989 stated directors of the organizations are both mind and soul of the company[8]. However, it was confirmed by Privy Council in two cases that is Smith Ltd v Ampol Petroleum Ltd [1974] AC 821[9] and Imperial Hydropathic Hotel Company Blackpool v Hampson (1882) 23 Ch D 1[10] that directors can also make decision against the will of the directors. In case management power of the company is imposed under the director then resolution passed by the shareholders of the company is not effective, and shareholders have only choice to amend the company’s constitution and put limitation on the power of the director for the purpose of preventing the future mistakes[11].

Section 180-184 of the Corporation Act 2001: Section 180-184 is explained by the Senate committee, and as per this the main purpose of director’s duties is to protect the interest of those peoples who entrust their interest in the care of other people, and act ensure this by introducing various provisions related to breach of conduct by imposing liability[12]. As per PJC introduction of such provisions allowed the shareholders to invest their money by believing that directors of the company works in the best interest of the company. While investing in the company, shareholders actually investing in the capacity of directors of the company[13]. As above stated, duties of directors stated in corporation law and general law mainly prevent the directors from misusing their power. However, it is clear that there is fiduciary relationship between the company and directors, and it is necessary that directors must use their power for the best interest of their shareholders rather than their own interest or for the interest of the third parties. Therefore, Section 181-184 usually imposed duties on directors towards shareholders.

 


However, it must be noted that directors are also responsible towards the other stakeholders other than shareholders of the company. Usually, Submissions made to CAMAC show that directors of the company are allowed to consider some external factors also, if such factors directly or indirectly provide benefit to the shareholders collectively. PJC also stated that various examples are stated in the submission related to current ability of the directors for the purpose of considering the interest of other stakeholders of the company. After analyzing the interpretation made by PJC it is clear that encouraging corporate social responsibility ultimately works in the best interest of the corporation and this is the reason directors are allowed to engage in corporate social responsibility. However, PJC also stated that directors of the company are mainly responsible towards the shareholders protection and not for the corporate social responsibility. While submission of report by Finance Sector Union of Australia (‘FSU’) to PJC and CAMAC, it was argued that there must not be a clear cut views which state that whether directors of the company are allowed to consider other matters which are not related to the financial performance and future of the company. This argument is considered as limitation because directors must be held responsible for the impact of their action on other stakeholders for the purpose of ensuring good future of the company. According to the Milton Friedman the ultimate responsibility of the directors is to increasing the profits of the company, but this statement face high level of criticism because it supports the idea that companies must make profit at all cost.

As stated above all the companies differently interprets their duties towards other stakeholders of the company such as number of organizations are there which incorporate the corporate social responsibility in their practices of business and some other companies consider the interpretation more restrictively[14]. While submitting its report to CAMAC, NSW attorney general stated that reform of Australian directors duties must be clarified by the interpretation made by directors of James hardy. However reviewed made by DTI in the UK was also considering the duties of directors towards the other stakeholders of the company[15]. Because of this review Companies Act 2006 is introduced and this Act contains the Section 172. Before” this review DTI never codified the duties of directors in United Kingdom. This review result in the introduction of companies’ act 2006 in the UK, and it also state section 172 which have very different approach towards director’s duties as compared to section 181 of the act. “The wordings of Section 172 is as follows: A director of a company must act in the way he considers, in good faith, would most likely promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to –

  • the likely consequences of any decision in the long term,
  • the interests of the company’s employees,
  • the need to foster the company’s business relationships with suppliers, customers and others,
  • the impact of the company’s operations on the community and the environment,
  • the desirability of the company maintaining a reputation for high standards of business conduct,
  • The need to act fairly as between members of the company.”
 


On first words stated in section 172 address maximum issues stated in section 181 of the Corporation Act, and it set the bar for all directors to acct I such a way as any responsible director do as per the NSW attorney general stated. It must consider the interest of shareholders but also keep in account the interest of other stakeholders and society. Additionally this section requires that directors must consider the long term interest of the company by balancing the interest of other stakeholders of the company. However some reports which are submitting to the PJC stated that section 181 must be replaced with section 172, but after considering the above arguments it is clear that any replacement of section 181 with section 172 negatively affect the business of Australia.

In the present case, directors of the company wants to build the conventional onshore coal mine from which the Great Barrier reef get affected. In this case, section 181-184 are sufficient because it state that directors must act in the best interest of thee company.

 

Conclusion:

After analyzing all the facts stated above it is clear that there is no need to amend the Section 181 of the corporate Act as per the Section 172 of the Companies Act in UK. Directors are responsible to protect the investment made by shareholders and they play the role of the guardian of shareholder’s money. Consequently, the main duties of directors are towards the shareholders of the company and they work in the best interest of the shareholders. Section 181 of the Corporation Act state that directors must work in the best interest of the company and for proper purposes, and it must be noted that lack of mention of interest of other stakeholders does not mean that director’s cannot take such interest into account. It is clear that for getting success for long run directors must consider the interest of the other stakeholders of the company. Those directors who are not managing their risk at accurate level and does not consider other factors are breaching their duty to act with due care and diligence. However, there are number of examples of the companies which are blindly engaged in the profit making and does not consider their other responsibilities, and it is necessary to look the negative impact of such thing on the growth is of such companies it must be noted that section 181 is criticized by number of directors for not imposing any obligation on directors towards other stakeholders, but this section provides huge flexibility which is considered as great strength of this section. In other words, section states that all actions of the directors must be in the best interest of the company which itself covers all the aspects of the shareholders and other stakeholders of the company. Therefore, there is no need to make any amendment in section 181 on the basis of section 172 of the UK companies act.

 

References:

Noel Purcell, ‘The Good, the Bad and the Ugly of Corporate Social Responsibility’, (Speech delivered at the 7th National Business Leaders Forum on Sustainable Development, Brisbane, 15-16 May 2006).

Parliament of Australia,’ Corporate responsibility: Managing risk and creating value’ (21st June 2006)< https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Completed_inquiries/2004-07/corporate_responsibility/report/index>. 

Kim Kercher, ‘Corporate Social Responsibility: Impact of globalisation and international business’ (2007) Corporate Governance e Journal, Bond University Facility of Law, Volume 1(4).

Paul Redmond. Directors’ Duties And Corporate Social Responsiveness. UNSW Law Journal, Volume 35(1)< https://www.austlii.edu.au/au/journals/UNSWLawJl/2012/13.pdf>.

David Greenberg, ‘making corporate social responsibility an everyday part of the business of business: offering realistic options for regulatory reform’, (2007)< https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1339&context=blr>.

Australian Institute of Company Directors, ‘What are the duties of directors’, https://www.companydirectors.com.au/membership/the-informed-director/what-are-the-general-duties-of-directors.

Chartered Secretaries Australia,’ Providing your board with comfort on the accountability mechanisms operating in your company’, https://www.google.co.in/url?sa=t&rct=j&q=&edata-src=s&source=web&cd=7&cad=rja&uact=8&ved=0ahUKEwiz--7ztLXTAhVIQY8KHbRMCp4QFghPMAY&url=https%3A%2F%2Fwww.governanceinstitute.com.au%2Fmedia%2F426164%2Fproviding_your_board_with_comfort.pdf&usg=AFQjCNGEK8qXwaNFiqaCvCns6NapTRRnKA&sig2=kI5pWqP4IqKHc9hHu7aidg.

Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.

Imperial Hydropathic Hotel Company Blackpool v Hampson (1882) 23 Ch D 1.

Professor Ian Ramsay, Professor H A J Ford and Justice R P Austin, ‘Fords Principles of Corporations Law’. Current to November 2008, (8.010).

Senate Standing Committee on Legal and Constitutional Affairs, n 9, 45.

Parliamentary Joint Committee on Corporate and Social Responsibility, n2, 44.

Milton Friedman, ‘The social responsibility of business is to increase its profits’ New York Times Magazine 13 September 1970.

Patricia Dermansky, ‘Should Australia Replace Section 181 Of the Corporations Act 2001 (Cth) With Wording Similar to Section 172 of the Companies Act 2006 (UK)’, < https://law.unimelb.edu.au/__data/assets/pdf_file/0003/1709832/60-Should_Austalia_replace_s181_of_the_Corporations_Act3.pdf>.

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