Discuss about the Corporate Governance for Australian Institute of Company Directors.
According to the Corporations Act, the main duties of the directors can be found in discharging their duties and power in order to act in the best interest of the business (Chan, Watson & Woodliff 2014, p.59-73). It implies that the directors are needed to perform their responsibilities in the best interests of the shareholders for the maximization of organizational wealth. However, in the presence of some recent disputes, there is a major question whether there is any need for the clarification of the laws so that the responsibility of the directors becomes to consider all the stakeholders’ interest beyond the shareholders (Bottomley 2016). More specifically, it is, whether the directors should take into consideration the interest of all the stakeholders like customers, employees, suppliers, community people, environment and others. The main aim of the report lies in the analysis of the responsibility of the board of directors for taking into account every stakeholder of the companies. The report is developed aiming to the Australian Institute of Company Directors (AICD). The report takes into consideration all the relevant examples and recommendations related to the duty of the directors in order to come to a suitable conclusion.
Present Framework for the Duty of the Directors
There is a recent call for the reformation in the Corporations Act related to the duty of the directors; and the key reason is that the directors are simply focusing on the shareholders instead of all the stakeholders (Hiller 2013, p.287-301). In this context, the example of the controversial decision of James Hardie, a company, can be presented. The company suffered a reputational loss as well as financial loss for the fall in the share price; and the management ignored the interest of the asbestos victims for protecting the interest of the companies. However, later, the company’s decision to recognize the interests of the stakeholders that is the asbestos victims with the help of NSW Government and the ACTU did boost the financial downfall of the company by increasing the share prices along with the overall financial stability (Moerman & van der Laan 2015, p.32-48). This whole aspect served to the best interest of the company’s shareholders as well. Thus, from the crisis of James Hardie and the recent reformation in corporate governance, one aspect is clear that the companies are deterred from excluding the stakeholders’ interest; it is required for them to foster the relationship with all the stakeholders for efficient performance of the companies.
In companies, the presence of many laws can be seen for considering the interest of the stakeholders for the purpose of organizational decision making. For this reason, it is needed for the Australian companies to comply with the Australian Stock Exchange (ASX) Corporate Governance Council’s ‘Principles of Good Corporate Governance and Best Practice Recommendations’ and it is the obligation on the companies to publish the annual reports by showing the extent to which they are complying with the principles. Apart from this, it is also obligation on the Australian companies to disclose their various initiatives to deal with the stakeholders in their official website under the sections of ‘Code of Conduct’ and ‘Ethics’ (Christensen et al. 2015, p.133-164). Hence, the Code of Conducts involve in establishing values and crucial policies help the directors of the companies to consider the interest of the stakeholders in the decision making as well as the risk management process.ASX ‘Good Corporate Governance Principles’ has provided the companies with twenty eight recommendations and the number tenth principle have most relevance with the stakeholders of the companies. According to this principle, business organizations are needed to ensure the recognition of the interest of the stakeholders in order to establish effective corporate governance. It further indicates towards the responsibility of the directors to keep adequate watch on these standards (Beekes, Brown & Zhang 2015, p.931-963).
Different sections of the Corporations Act put obligation on the directors to take into consideration the interest of all stakeholders. As per Section 180 of the Corporations Act, the directors are needed to act in the best interest of the companies. As per Section 180 (1) of the Corporations Act, the directors have the obligation for exercising their powers as well as discharging their duties in the presence of required degree of care and diligence. In this regard, the case of Rocky Lamattina and Sons Pty Ltd can be presented as example. In the year 2009, the company was fined $220,000 as they cleared the trees that were nesting habitat of the endangered South-eastern red-tailed black cockatoo. It was said in the verdict of the court that the main reason for putting the large amount of fine is to demonstrate the seriousness of the conduct with regard to the community and they would not be tolerated further. Thus, the whole incident indicates towards the fact that the directors of the company did not take into consideration the interest of the community people that affected the company as well. It can be clearly understood from the case that the directors are required to thing beyond the interest of the shareholders. In the Australian courts, there has been successful application of the duties of the directors in different types of circumstances along with successful adoption of laws. In the current laws, the directors of the companies are required to take into account the interests of stakeholders other than the shareholders. In this situation, it is needed for the directors of the Australian companies for maintaining a balance in the interests of all the stakeholders of the businesses (Du Plessis & Rühmkorf 2015).
The Effects of Over-Regulation on the Interests of the Companies
At the time to clarify the Corporations Act for the directors while considering the interests of the stakeholders, it is needed to discuss about the company’s objectives; and the objective is to best act for the interest of the company. For this reason, the directors are needed to take into consideration the interests of both the existing as well as future shareholders of the company; and it leads them to consider both the long-term and short-term growth of the business. For this reason, it is the responsibility of the directors for the consideration of the internal as well as external governance of the company (Camilleri 2015, p.210-222).
The directors are responsible for making the business decisions in good faith while considering the purpose and benefits of the community, consumers and environment. At the same time, it is considered as the breach of duties of the directors in case they pay lack of attention to the interests of the stakeholders. At the same time, in case, defects can be spotted in considering the interest of the stakeholders, it is also considered as a breach of director’s responsibility. All these aspects have drastic consequences and all of them put the companies in great risk. In order to ensure the corporate image and growth of the company, the directors are required to recognize the significance of the interest of the stakeholders and to communicate them the employees as well as the shareholders so that they can understand how the company will be beneficial from this in the long-run (Camilleri, 2015).
The presence of arguments can be seen in the discussion paper of both ABA and CAMAC related to the amendment of the Corporations Act. As per the argument, the presence of a mandate duty for the directors for considering the interest of the stakeholders in the Corporations Act can stifle the way to make the corporate decisions as it can lead to ineffective corporate decisions and can affect the duty of the directors to act in the best interest of the company. In this context, it needs to be mentioned that Section 181 (1) of the Corporations Act puts enough obligation on the directors to consider the interest of the stakeholders and to act in the best interest of the company (Bachoo, Tan & Wilson 2013, p.67-87). It indicates towards the presence of regulation that allows the directors to consider the interest of the stakeholders. For this reason, there is a little possibility that the further amendment in the Corporations Act related to the duty of the directors towards the stakeholders can change the corporate behavior of the directors (Tricker & Tricker 2015).
On the other hand, the inclusion of legal requirement for the directors to take into consideration the interest of the stakeholders can create risk in the decision making process as the directors can be challenged with the interest of a small minority group that does not correspondence with the best interest of the company. At the same time, in the process to satisfy the legal requirements, the directors of the companies can become involved in the court proceedings that can affects the original duties and responsibilities of them; and the compromise in the primary duties of the directors can stifle the spirit of the company (Garcia-Sanchez, Cuadrado-Ballesteros & Sepulveda 2014, p.1014-1045).
Self-Regulations and Law Imposed
In the present scenario, the companies are slowly discouraged from the exclusion of the interest of the stakeholders; and they are now moving towards the development of a cordial relationship with the stakeholders by taking into account their interests in the process of corporate decision-making (Claessens & Yurtoglu 2013, p.1-33). It implies that the directors will be engaged with the stakeholders in the absence of any law. As per the earlier discussion, the sole responsibility of the directors is to act in the best interest of the company; and thus, it is on the hand of the directors and the board that what stakeholders should consider. The directors must have this flexibility and ability of this. From the earlier-mentioned case of James Hardie, it can be seen that there was not any imposed law on them to consider the interest of the asbestos victims, but it was their own decisions to bring betterment in the situation of the company (Sivathaasan 2016, p.819).
At the same time, companies can ensure better outcomes in case there is the presence of the flexibility for the implementation of the approach based on the stakeholders as the central element of the decision-making process rather than replacing them with the legal requirements. One major negative impact of the implementation of mandatory provision is that the director would not appreciate the interest of the stakeholders, but would only comply with the provision (Benn & Dunphy 2013). In order to avoid all these issues, there is a greater need for the establishment of a corporate culture involving the stakeholder oriented approach that will ensure the consideration of the stakeholder’ interest. This aspect will lead to the better performance of the company rather than only complying with the imposed rules and regulations. Most importantly, it is required for the companies to consider the interest of the stakeholders as the corporate objective and approach as it can ensure the long-term sustainability of the businesses (Gerner-Beuerle & Schuster 2014, p.191-233). At the same time, the companies can include stakeholder’s interest in the statement of vision and strategy so that the directors become encouraged for the achievement of those objectives for the overall improvement of the business (Appuhami & Bhuyan 2015, p.347-372).
Conclusion and Recommendations
As per the above discussion, the existing legal framework of Australia in Corporations Act as well as the ASX principles put enough obligations on the directors to take into account the interest of the stakeholders for the best interest of the company. At the same time, the discussion shows that the companies can ensure the sustainability of business along with increase the profitability by taking into account the interest of the stakeholders over the shareholders.
For this reason, it is the recommendation to the directors of the companies to establish a cordial relationship with the stakeholders by developing a corporate culture where the directors will consider the interests of the stakeholders as the organizational objective. They will be able to create organizational value by achieving these objectives. At the same time, it is the recommendation to the Australian authority not to amend the Corporations Act by imposing law on the directors to consider the interests of the stakeholders as it has some major negative effects. Thus, also the recommendation is to put the interest of the stakeholders in the strategic objectives of the companies for their effective fulfillment.
Appuhami, R. & Bhuyan, M., 2015. Examining the influence of corporate governance on intellectual capital efficiency: Evidence from top service firms in Australia. Managerial Auditing Journal, 30(4/5), pp.347-372.
Bachoo, K., Tan, R. & Wilson, M., 2013. Firm value and the quality of sustainability reporting in Australia. Australian Accounting Review, 23(1), pp.67-87.
Beekes, W., Brown, P. & Zhang, Q., 2015. Corporate governance and the informativeness of disclosures in A ustralia: a re?examination. Accounting & Finance, 55(4), pp.931-963.
Benn, S. & Dunphy, D., 2013. Corporate governance and sustainability: Challenges for theory and practice. Routledge.
Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance. Routledge.
Camilleri, M.A., 2015. Valuing stakeholder engagement and sustainability reporting. Corporate Reputation Review, 18(3), pp.210-222.
Chan, M.C., Watson, J. & Woodliff, D., 2014. Corporate governance quality and CSR disclosures. Journal of Business Ethics, 125(1), pp.59-73.
Christensen, J., Kent, P., Routledge, J. & Stewart, J., 2015. Do corporate governance recommendations improve the performance and accountability of small listed companies?. Accounting & Finance, 55(1), pp.133-164.
Claessens, S. & Yurtoglu, B.B., 2013. Corporate governance in emerging markets: A survey. Emerging markets review, 15, pp.1-33.
Garcia-Sanchez, I.M., Cuadrado-Ballesteros, B. & Sepulveda, C., 2014. Does media pressure moderate CSR disclosures by external directors?. Management Decision, 52(6), pp.1014-1045.
Gerner-Beuerle, C. & Schuster, E.P., 2014. The evolving structure of directors' duties in Europe. European Business Organization Law Review (EBOR), 15(2), pp.191-233.
Hiller, J.S., 2013. The benefit corporation and corporate social responsibility. Journal of Business Ethics, 118(2), pp.287-301.
Moerman, L. & van der Laan, S., 2015. Exploring shadow accountability: The case of James Hardie and Asbestos. Social and Environmental Accountability Journal, 35(1), pp.32-48.
Sivathaasan, N., 2016. Corporate governance and leverage in Australia: A pitch. Accounting and Management Information Systems, 15(4), p.819.
Tricker, R.B. & Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.