The Value Of Shareholders In Australian Institute Of Company Directors

Discuss asbout the Value of Shareholders in Australian Institute of Company Directors.

The Australian Institute of Company Directors (AICD) is a non-profit organization that is intended for directors. It is a founding member of the Global Network of Director Institutes (GNDI). AICD is said to have a business unit, which is international and includes seven divisions that are state level. The board of directors also includes national directors, divisional representatives, CEO, and MD. The AICD is said to provide excellent governance education and development for director role and advocacy thereby making a positive impact on the economy and society.

This report discusses about the board of directors of AICD. The directors associated with this institute consider the shareholders more than they consider their stakeholders and thus this report will reference that fact by providing certain examples and explanations for implementing that idea. 

Description of the organization:

The AICD is a non-profit organization intended for directors. The origins of AICD track its course to the Institute of Director (IOD) in United Kingdom, which was formed in 1906 by the Royal Charter. AICD is said to have a business unit, which is international and includes seven divisions that are state level. The board of directors also includes national directors, divisional representatives, CEO, and MD (Ali, Ng & Kulik, 2014). AICD members are based on six categories depending on their professional network, events and personal development. These categories include the affiliate, member, graduate member, and fellow, life fellow and international. The national organization AICD has seven territory and state divisions. The governing body of AICD is made up of 12 directors. The national office is in Sydney, Australia. It is made to deliver detailed courses and events. It also develops director issue policies and is responsible for publishing magazines on Company Directors and practice books. The office is also used to represent the views of the members nationally.

Stakeholders are individuals who show an interest in the activities of the company. They can be directly affected or affect the company. The basic stakeholders are the investors, employees and customers of the company (Torres et al., 2012). The modern theory also includes the community, trade activities and the government as the additional stakeholders. Stakeholders are either internal or external depending on their relationship with the company. If they are directly related to the company, which includes employment or investment, then they are internal stakeholders. If the stakeholders are not directly connected to the company, then they are called external stakeholders. They are the customers and the community.

Stakeholders

Shareholders are any individual, other company or institution that owns a minimum of one share of the company. As they are directly related to the stocks of the company, they will enjoy the benefit of increasing stock value during the good performance of the company (Kieschnick, Laplante & Moussawi, 2013). In case the company performs poorly, the loss will also be shared with the shareholders. Shareholder rights allow them to inspect the records of the company and sue them during any misdeed recorded. They will also get a right to vote in case of any corporate policies.

In a market economy based country, organizations and companies work to get economic profitability. Though many people think that a company must have social responsibilities, responsibility and profitability should be combined for the success of the company. The shareholder perspective aims to think only about economic profitability (Gifford, 2012). They only think about the company as an instrument to generate profit. The success of the company is defined by share price, dividends and profit. They believe that companies should not focus on their social responsibilities but only focus on the means to generate profits. Thus, by pursuing the self-interests and by maintaining the relationship between the company and the stakeholders, targeting to shareholder’s need will help in maximizing the societal benefits. On the other hand, stakeholder perspective is aimed towards responsibility over profitability and aims to serve all parties equally (Fleischmann & Stary, 2012). Stakeholder management is not instrumental but is normative which means that stakeholders do not see the company as a source of income but as a method to get shared benefits. By maintaining high level of trust among all parties, aiming the interests of all stakeholders equally can result in maximum societal health.

Jack Welch once criticized that the shareholder interest model is a very dumb idea to be accepted by a firm (Chabrak, 2014). He believed that the employees, products and the customers who together form the stakeholders are most important in terms of priority than the shareholders. However, it is seen that to strive in the market, the capital gains of the company are the major driving force that will benefit the company more than the societal helps of the stakeholders. The interests other stakeholders get their rights from these organizations where the needs of the shareholders are also aligned. Thus, the interests of the stakeholders are reflected by the interests of the shareholders.

Shareholders

The suppliers and the vendors are also considered in a same way. Any changes in the product cost that will reduce the cost incurred by the company will also be reflected by the vendors as well. The interests of the consumers or buyers are also taken into account, as they are the ultimate potential profit makers that help to grow the company (Hui, Klasa & Yeung, 2012). The reputation of the company also helps to make a good relation while poor performance is reflected by affecting the relationship it makes.

For example, the management of a professional sports team is relevant to the fan of that team. The teams are definitely indulged in making higher profits for themselves and to making strong relationship with their fans (Késenne, 2014). This is the reason why they care about their fans who would buy their merchandises by making them more customer centered. In a similar way, they also think about their fans by broadcasting their matches in the television and radio so that their fans will enjoy the matches. These fans are the stakeholders who do not have a direct decision-making power on the team but will have reflected desires by the decisions made by the team.

Thus, it can be seen as the stakeholder rights precedes the shareholder rights where the decisions are imposed over the decision of the owner. In case of any violation of the shareholder policies, stakeholders often turn to aggression or violence to claim their rights (Jones & Harris, 2012). The claims of the stakeholders beyond necessary are termed as Ex Post. They wait for the proposition of a valuable policy by the shareholder and then try to leverage themselves to that policy even if they had no contribution for that policy.

The claims of the stakeholders are one-sided. These asymmetrical claims makes the stakeholders claim their rights of decision making over the owners or the leaders. However, in theories it can also be stated that the company will have equal decision-making rights over the stakeholders. The stakeholder approach also decreases the profitability of the evaluation of the managers (Erman, 2012). In places of submitting works that enhances and protects the shareholder rights, the managers often work by siding with the stakeholders to protect their rights. This unjust way of working not only allows the managers to survive in the business inefficiently but also makes them to see themselves as business representatives or philanthropists.

Perspective

By considering both the approaches of the policyholders, the approaches seem to have several flaws to make it less persuasive. For the shareholder perspective, it is not true to state the fact they are the only person to claim the rights in a company, especially during good performance. They are not the sole reason of success made by the company by providing capital investment, the employees and suppliers have suffered for every performances of the company. For the stakeholder approach, the main problem lies with power balancing during conflicts. The stakeholders often consider the company responsible for any policies implemented and this is the sole reason for not getting acceptance by the company.

A separate legal entity is an individual with unattached accountability. A business can be run as a separate legal entity to separate it from its owner. If a business exists as a separate legal entity, then they will enjoy their rights as an individual (Chaddad, 2012). This means that they will be able to get ownership or sue rightfully. This doctrine came into light with Salomon v Salomon (1897).

Many executives all over the world believe that a company needs to accept the shareholder rights above all. A research made on the board’s duty to accept shareholder perspective is rejected in many countries. Working as a separate legal entity, the main objectives is to survive and to thrive. Shareholders are said to be the outcome of a decision and not the objective. While shareholders invest large capital in the company, they are just a part of the whole audience of the company involved in business (Napoli, 2012). The audiences mainly include the stakeholders that may range from financial like bondholders to non-financial like employees, suppliers and customers. During times of financial crisis and limited resources, the directors of the company must take actions, which take into consideration the outcomes affecting these audiences.

In some countries like the United States, the duty of the director to separate corporate persons is equal to the shareholder duty. In some countries like the Brazil, the duty includes the obligations to stakeholders who are non-financial (Burke, 2017). The board of a company has many obligations to their audiences and thus it is required for a company’s board issue the Statement (Statement of Significant Audiences and Materiality) annually regarding their perceived audiences. These include those who are relevant as well as those who are not relevant to the board. These audiences may include employees, shareholders, bondholders and organizations representing the society.

Disadvantages of stakeholder perspectives

The Statement allows the board to think of their material issues and its addressing to the intended audiences over a period. The benefits are intended for corporate reports in material issues (Eccles, & Youmans, 2016). For example, if a company decides that the most significant audience are the short-term shareholders, then the material issues are only those issues that addresses the short term results.

The developing need to make a statement to know the financial and non-financial aspects made many companies adapt to these needs by making Statements. For example, the management board of Aegon, a Dutch insurance company, is the first one to complete the Statement (Strauß, Vliegenthart & Verhoeven, 2016). It includes several aspects including the financial and non-financial ones and its impact on various stakeholders. Their Statement made the role of the company clear in the society concerned and made the stakeholders realize their role in the company.

The most important advantages for a company to have shareholders are the gaining of capital investment. Companies need capital investments to do business properly. Small companies who need regular equity investments require the presence of shareholders. The shareholders are likely to take risks regarding certain investments that bank or bondholders will not (Kieschnick, Laplante & Moussawi, 2013). For a public traded organization, capital requirement is not always met by shareholders but the liquidity provided in the market. Although, the presence of buy and sell share marketers is a good thing to get funds, the most can be made by short-term investors.

The shareholders are also occupied in providing information to the directors of the company regarding the stock market (Collier, 2015). Shareholders who are too involved in the market about the prices provide adequate data that will help them to get results by implementing them. However, the price of the stock in the market does not always remain constant and there comes a time where intended price of the stock becomes different. For example, there is evidence that a group of companies whose stock prices dropped suddenly in the market after the naming of a new CEO.

The Enlightened Shareholder Value (ESV) is a concept that is followed by a company that is based on siding with the shareholder perspective and devoting themselves to the success of the company (Keay, 2012). This approach has been successfully implemented by many companies across the globe. The ESV approach was adopted in the Companies Act (2006) after the inclusion in the Company Law Reform Bill in 2005. In the section 172(1), it is clearly stated that the companies need to act in a way to interest the ways of the shareholders. Thus, it can be said that the ESV approach provides societal benefits to a company as the company implementing this approach is also considering the ways of giving success to other groups called shareholders. The company also is considered to make effective corporate decisions. Thus, the ESV approach is said to combine the shareholder perspective with the stakeholder theories.

Conclusion:

The control of shareholders on corporations is followed by accepting the private property rights and by living up to the contractual requirements. The firms or corporations need to live up to their contractual requirements to the shareholders as well as the customers, employees and suppliers, which will help in benefitting of all of them. An organization must think about those resources that are the most influential in their business. The most important resources may be the stakeholders or shareholders, which can be determined by adopting various approaches.

Considering all of the above points mentioned in the report, it is not possible to determine the most important aspect in an organization. Stakeholders are obviously the most import part in the company at certain times but it does not mean that they will be important every time. However, the shareholders are definitely the right choice as the company gets their main reasons of success through funding from them, which helps them to grow their business and get new stakeholders.

References:

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