Evaluating Directors’ Responsibilities To Stakeholders In Corporate Governance 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 submitted to the 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. The AICD has advised you that they intend to make your report a public document and it will be uploaded to the website so it can be read by both corporate governance specialists and non-specialists.

Directors’ Responsibilities and Duties towards Shareholders

A company is an artificial person created by law and operates through the two groups of people namely, the members of the company and the directors (Tricker and Tricker, 2015). The members of the company elect the directors and constitute the board of the directors. According to the section 198A (1), of the Corporations Act, 2001 (Cth), the directors are required to manage the overall business of the company. Thus, it can be said that the board of the directors are entrusted with the responsibility of formulation of the strategic policies of the company, overseeing the day-to-day operations; overall management and meeting the regulatory and the compliance requirements for the company, on behalf of the shareholders and the other members (Get on Board, 2018).

The term director is defined in the section 9, which is as follows (Federal Register of Legislation, 2018). A director refers to a person who is appointed as such, or a person acting as an alternate director. The term also includes the de facto directors and the shadow directors. The executive directors of the company govern the organisation, while the non-executive directors are not employed in the executive capacity. All the directors of the company are required to comply with the legal requirements as laid down by the said act (Australian Institute of Company Directors, 2018). The four main general duties of the directors are prescribed in the section 180 to 184, which have been discussed as follows.

Duty to take care and exercise due diligence while discharging the managerial functions: As per the section 180, the directors of the company must exercise due care and diligence, while performing their managerial functions.

Duty to act in good faith: The directors of the company are in a fiduciary relationship with the company and hence, must act in the best interest of the company and in good faith, state the section 181. It is the duty of the directors to avoid the conflicts of interest, and manage the conflicts in the in the light of interest and trust of the company.

Duty of not making an improper use of the position in the company: As stated by the section 182, it is the duty of the directors to not to enrich themselves or someone else by making personal benefits while using their position in the company.

Duty to not to make the improper use of the information: As stated by the section 183, directors must not make use of the information obtained during the course of his duties, for their own benefits or of someone else, which may be detriment to the interests of the company.

Directors’ Responsibilities towards other Stakeholders

Thus, a director is bound by the above listed general duties towards the company and the shareholders.  However, a director’s responsibilities are not limited towards the shareholders only. Directors are required to follow some additional duties as well, prescribed for the well-being of the stakeholders as a whole, the evidence of which has been described as follows.

Additional Duties as per the other sections of the Corporations Act: There have been listed a number of additional duties in various sections of the Corporations Act, 2001 (Hall and Wilcox, 2016). Some of the duties are listed as follows:

• Section 588G: Directors are required to ensure that company does not engage in the insolvent trading practices.
  
  
• Section 344: Directors must ensure due compliance with the financial reporting requirements.
  
  
• Section 191: Directors of the company must ensure proper maintenance of financial books and records.
  
  
• Section 208: Directors are required to disclose their personal interests to the market.
  
  
• Section 205G: Directors must disclose their personal interests with respect to the related party transactions and contracts.
  
  
• Section 188: It is the duty of the directors are required to lodge the information with ASIC, as and when required.
  
  
• Section 674: Directors of the company are required to make disclosures of information that may affect the share prices of the company. The same must be done on continuous basis.
  
  
• Section 1043A: The directors must ensure not to indulge in insider trading practices.

Legislations laid down by federal, state and the territory laws: A number of the federal, state and the territory laws regulate a company as well, depending upon the operations and the industry in which the company is engaged. Some of the examples of these laws are occupational health and safety laws, environmental laws, competition law, labour law, taxation and many more (Institute of Community Directors Australia, 2018). Failure to abide by the said laws, would result in civil and criminal liability for the directors. Thus, it can be said that these laws and regulations bind the directors as well. These legislations are enacted keeping in mind the concerned stakeholders.

Globalization and Corporate Governance: With the increased focus on the globalization, the companies are required to design their corporate governance code. The ASX Corporate Governance Council Principles and Recommendations were enacted in the year 2003 and are binding on the listed companies (Australian Stock exchange, 2018). While these are mandatory for the listed companies on the lines of the transparent business practices, the other companies may also follow them as a part of the design of their own code of conduct for improved governance practices. The said principle and recommendations are based on the principles such as to act ethically and responsibly, respecting the rights of the security holders, payment of proper and fair remunerations, proper disclosure of the matters affecting the price of the securities, safeguarding integrity in financial reporting and more. Hence, it is evident that the directors of the listed companies specially are required to follow other work ethics too apart from wealth maximization and profit earning approaches (Eccles and Youmans, 2015).

The committee stated in the year 1989 that wherever provided by the law to do so, in relation to the interests of the employees, environment, safety and health measures, the directors must take in to account the same (National Library of Australia, 2018). The reason being, the interests of the employees are the part of the overall well-being of the company. Thus, the committee recommended that taking the employees interest is part of the duties of the directors.

Additional Duties as per the Other Sections of the Corporations Act

The reports of the PJC and CAMAC have stated that the directors are free to choose a range of the activities external of the shareholders’ interests, if these benefit the shareholders collectively (Marshall and Ramsay, 2012). In addition to this, the reports stated that in order to maximise the profits, to survive in long run, and to maintain the ethical conduct reputation, the Australian companies must properly consider all the stakeholders.

The trends of the past few decades have shown that, the happy and skilled work force is the most critical asset of the company (SAGE Publications, 2011). Talented individuals with the increased efficiency and lower turnover have resulted in the longer term increased profits. In addition to this, the trends are evident of the fact that paying attention to the consumer needs allows the companies to have a competitive edge in the market. Thus, it can be concluded that engaging into the activities other than the bare minimum legal requirements will ultimately increase the shareholders’ value in long run. The top companies of Australia such as Wesfarmers, Commonwealth Bank, Rio Tinto and many more are consistently engaging in the corporate social responsibility practices and the same are also being displayed on the company’s websites as well.  The Australian mining giant BHP Billiton had also stated to the PJC the CSR activities shape the success of the company (Parliament of Australia, 2018). It had also stated that CSR activities have been a critical element in the company’s success.

Thus, it is evident that the directors’ duties range outside the general duties as well. The additional duties as prescribed by the other sections of the Corporations Act, 2001, the legislations laid down by the other statues, the recommendations of the Parliamentary Joint Committee, and the Corporations and Market Advisory Committee; and the emerging trends on terms of the healthy corporate governance practices and the corporate social responsibility also govern the directors’ conduct. In order to sustain in the long term, the directors would have to take into account the interests of the other stakeholders as well.

Following recommendations are being made to the directors to carry the corporate functions in an efficient manner.

• The two Australian Government Reviews have been conducted on the ambit of the directors’ duties, and it has been established that the prime duty of the Australian directors is to consider the interests of the shareholders. However, the directors must also take a broader approach while making decisions and the overall management of the company. The broader approach is in in relation to the interests of the employees, consumers, creditors and other stakeholders, while considering the best interests of the shareholders, so far as these things are relevant in terms of the shareholder interests (Austlii, 2008).
  
  
• The directors must abide by the specifically listed general duties comprised in the Corporations Act, 2001 while carrying out their corporate management responsibilities.
• The directors must also ensure to follow the additional duties as and wherever listed in the various sections of the Corporations Act, 2001.
  
  
• In addition to the above, the directors are required to follow the industrial laws and regulations as applicable to the particular companies, depending upon the size and the nature of the industry, in which the company is operating.
  
  
• The directors of the listed companies are specifically required to follow the Australian Stock Exchange Corporate Governance Principles and related recommendations, as part of the corporate governance practices.
  
  
• For the directors of the non-listed companies, not-for-profit organisations and government departments, it is recommended to follow the set of standards as published by the Standards Australia.
  
  
• It is also suggested to the directors to engage in corporate social responsibility practices to maintain the reputation of the company and have a competitive advantage in high competition scenario in the businesses of present.

Conclusion

To bring this discussion to the conclusion, it can be said that the company being an artificial person created by law, acts through its directors and shareholders. The chief role of the directors of the company is to govern the company keeping in mind the instructions and interest of the shareholders. The directors of Australia are governed by the section 180 to section 184 of the Corporations Act, 2001, in terms of the general duties towards the company. However, director’s duties are not limited to mere shareholders, when it comes to the practical applicability of the duties and responsibilities. The directors are wholly responsible towards various stakeholders such as the suppliers, regulators, employees, customers and more. A number of evidences in the report have supported the same view. The reports of the PJC and the CAMAC are suggestive of the same fact that paying attention to the needs of the stakeholders is critical for the company’s success in long run. Whether mentioned specifically or not, the directors owe to the above listed groups as well, in light of the emergent corporate governance culture in Australia and the globalization.  A company cannot succeed in long run by merely working towards the shareholders interest and motive of wealth earning. Trends have accorded the fact that employee and consumer satisfaction play a significant role in the earning of higher profits and thus the wealth maximization goal of the shareholders. A brief list of recommendations has been provided as well on the same lines. Thus, it can be said that the chief responsibility of the directors is to consider and protect the interests of the shareholders; however, the directors must balance the same with the interests of the other stakeholders, wherever relevant and necessary to do so.

References

Austlii. (2008) Corporate Social Responsibility: Legislative Options for Protecting Employees and the Environment [online] Available from: https://www5.austlii.edu.au/au/journals/AdelLawRw/2008/2.pdf [Accessed on 03/08/18].

Australian Institute of Company Directors. (2018) [online] Available from: https://www.awlnsw.com.au/assets/Latest%20news/Duties%20of%20Directors.pdf [Accessed on 01/08/18].

Australian Stock exchange. (2018) Corporate Governance Principles and Recommendations. [online] Available from: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf [Accessed on 02/08/18].

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 on 02/08/18].

Federal Register of Legislation. (2018) Corporations Act 2001 [online] Available from: https://www.legislation.gov.au/Details/C2018C00275 [Accessed on 01/08/18].

Get on Board. (2018) [online] Available from: https://getonboardaustralia.com.au/board-of-directors-management-committee-advisory-board-or-board-committee-where-are-you-sitting/ [Accessed on 01/08/18].

Hall and Wilcox. (2016) Legal obligations of directors of Australian companies. [online] Available from: https://hallandwilcox.com.au/legal-obligations-of-directors-of-australian-companies [Accessed on 03/08/18].

Institute of Community Directors Australia. (2018) Overview of your legal responsibilities. [online] Available from: https://www.communitydirectors.com.au/icda/tools/?articleId=1362 [Accessed on 03/08/18].

Marshall, S., and Ramsay, I. (2012) Stakeholders and directors' duties: Law, theory and evidence. UNSWLJ, 35, 291.

National Library of Australia. (2018) 1989, English, Article edition: Company directors' duties : report / by Senate Standing Committee on Legal and Constitutional Affairs. [online] Available from: https://trove.nla.gov.au/work/17497734?q&versionId=45239651 [Accessed on 03/08/18].

Parliament of Australia. (2018) Chapter Three - Drivers and principles of corporate responsibility. [online] Available from: https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Completed_inquiries/2004-07/corporate_responsibility/report/c03 [Accessed on 03/08/18].

SAGE Publications. (2011) SAGE Brief Guide to Business Ethics. USA: SAGE.

Tricker, R. B. and Tricker, R. I. (2015) Corporate governance: Principles, policies, and practices. USA: Oxford University Press.