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.
The concept of corporate governance has emerged in the recent few decades but when the corporate governance was not there, the entire focus of the management was used to be on enhancing the shareholders wealth. However, after introduction of the concept of corporate governance, the focus of management has shifted from the shareholders wealth to fulfilling the needs of the other stakeholder also. It is the fact that a company operates to earn profits but earning the profits by disregarding the needs of other stakeholders does not lead to sustainability (Rosenbaum, Bonker, and Wagener, 2000). The other stakeholders of the business are the environment, society, and government. Thus, now the management of the company is not only required to take into account the needs of shareholders but it is also required to consider the needs of other stakeholders. It is argued that striking out the balance between the needs of all the stakeholders is the key to sustainable long term success (Rosenbaum, Bonker, and Wagener, 2000).
In the context developed above, a report has been presented in this document that provides discussion on the board of director’s role in fulfilling the stakeholder needs. Further, the discussion in this report is extended to corporate governance and its significance for the organizational success. The report provides examples and recommendations for the use of board of directors in addressing its objective of enhancing the shareholders wealth.
The need for corporate governance has been seen to be increasing in the corporate world in the recent decade. There have been observed various unethical and illegitimate practices that have laid the foundation of promulgation of the corporate governance rules (Wright et al., 2013). In the past two decades, there have been observed to be many corporate scandals causing reforms in the regulatory regime across the globe. The corporate scandals were the main reason for loss of faith of the investors in the organizations leading. Due to the investor losing faith, the capital market suffered badly all over the world. In order to stop the illegitimate practices and promote sustainable growth, the regulators have framed the corporate governance guidelines to be complied by the corporations mandatorily (Wright et al., 2013).
The sustainability is essential for the business to achieve its objectives and thrive in the long run. The triple bottom line framework which was developed years ago also states that it is crucial for the business to maintain sustainability. According to the triple bottom line framework, the management has to ensure that a proper balance is maintained between three essential areas such as society, environment, and finance (Henriques and Richardson, 2013). This implies that the management should not only focus on the achievement of financial goals but it should also fulfill the social and environmental needs. The triple bottom line framework emphasizes that contribution for the development society and environment is necessary enhance the sustainability. Further, it states that the financial objectives of the business would be automatically achieved if the business fulfills its commitment towards social and environmental development (Henriques and Richardson, 2013).
The corporate governance helps companies in framing structures, policies, and procedures in the best manner. Further, it promotes fairness and transparency in the company’s operations and stresses on enhancing the accountability of the management. Enhancing the accountability of the management is in the context of its duties for social and environmental development and increasing the wealth of the shareholders (Keay, 2015). The directors are the supreme governing body of the management in a company and thus, they are responsible to fulfill organization’s commitment towards all the stakeholders. The director’s are responsible to plan and supervise the company’s operations in such a manner that it meets the needs of all the stakeholders in a balanced manner (Keay, 2015).
The shareholders are owners of the business and they hold the right to claim profits earned by the company. However, the shareholders are generally not involved in managing the day to day business affairs. The shareholders are large in numbers which is the reason that they can not engage in the management of business affairs (Keay, 2015). The shareholders elect the directors of the company for management of the business affairs. The directors are given powers to supervise, control, and direct the business affairs. Simultaneously, the directors are also vested with responsibility to work in the best interest of the shareholders. It is the duty of the directors to direct the business affairs in such as manner that it leads to financial prosperity and increases the wealth of the shareholders (Keay, 2015).
The objective of increase in the wealth of the shareholder is now not so emphasized as it was used to be in the past. In the past when the corporations were not much focused on the sustainability and the corporate governance, the directors were used to work with the primary objective of increasing profits and thereby increasing the wealth of the shareholders (Henriques and Richardson, 2013). However, in the recent past two decades since when the companies have started focusing sustainability and the corporate governance, the focus of the directors have shifted from shareholder’s wealth. Now, the directors are not only required to ensure enhancement in the shareholders wealth but they are also required to fulfill needs of other stakeholders such as society, environment, government, employees, creditors and lenders of the company etc (Henriques and Richardson, 2013).
Needs of different stakeholders are different and the directors play a major role to balance these needs and satisfy every stakeholder not just the shareholders. The company usages environmental resources and thus, it owes to pay back to the environment. Further, the company operates and produces goods for the use of society (Henriques and Richardson, 2013). It is the responsibility of the company to contribute for development of the environment and society. The directors being the supreme governing body are duty bound to build a strong governance mechanism that ensures company’s commitment towards environment and society. Further, there are other stakeholders such as government, employees, and lenders. The government wants the financial statements of the company portraying true and fair picture of the state of affairs of the business (Henriques and Richardson, 2013).
The directors play a major role in framing policies and procedures and promoting good governance. Good governance is essential to promote good accounting and financial reporting practices within the company (Henriques and Richardson, 2013). Further, the employees expect that the company’s management works in an unbiased and fair manner. It is the prime responsibility of the board of directors to ensure that fair work practices are prevailing in the company. The lenders provide money to the company having the faith that the company would do good business and it would pay the money lent back within the agreed time frame. The directors are duty obliged to ensure that the company performs good and it fulfill its commitments towards the lenders (Henriques and Richardson, 2013).
Therefore, the directors are responsible not only to meet the shareholder needs but also the needs of other stakeholders. The directors can not give shareholders needs more importance than the needs of other stakeholders. The shareholders need increase in profitability and their wealth (Monetary Authority of Singapore, 2004). For the longer term view point, it is possible only when the directors fulfill their commitment towards the society and the environment. It is rightly said that the shareholders value should not be the primary objective of the directors rather they should take it as an outcome of company’s activities. It is inferred that if the company is complying with the corporate governance principles and it is fulfilling its commitment towards society, environment, and other stakeholders, it will automatically be able perform well and enhance the shareholders value (Monetary Authority of Singapore, 2004).
Considering the importance of corporate social responsibility (CSR), the companies from all over the world are taking measures to comply with CSR requirements. A survey report of KPMG depicts that 90% of the world’s top companies have adopted corporate social or sustainability reporting. The companies are taking pro-active action in regards to compliance with the corporate social norms (Sainty, 2016). Further, Lama (2013) has carried a research to explore the impact of compliance with corporate governance on the firm’s profitability. The empirical evidence from the research work depicts that it has a positive impact. This means that the companies complying with the corporate social responsibility are experiencing better growth in profitability (Lama, 2013).
Further, the research reveals that the firms complying with the corporate governance norms have been found to be registering increase in the net profits and return on equity. Further, due to increase in the net profits and the return on equity, the shareholders wealth has also been found to be affected positively (Lama, 2013). Further, the study reveals that the compliance with corporate governance helps in regaining investor confidence which is needed by the firms after various corporate scandals being happened. Regaining the investors faith in the capital market was crucial helping the market stimulate and bringing the economy back to the growth path (Lama, 2013).
There are empirical evidences that prove the importance of corporate governance and sustainability for a company. The adoption of corporate governance and sustainability practices is crucial for the long term survival for every company. The corporate governance principles and practices require that the company’s management give importance to the social and environmental development (Lama, 2013). This implies that the directors are required to give prominence to the development of the society and environment rather than increasing profits and shareholders wealth. The increase in profitability and shareholders wealth would automatically be achieved as a result of company’s activities being directed to the achievement of corporate governance and sustainability (Lama, 2013).
From the discussion carried out in the report, it could be articulated that to achieve the objectives of business that is to survive and thrive, it is essential for the firm to adopt the corporate governance and sustainability principles. The board of directors being the supreme governing body has to take proactive actions to create an environment of governance and lead the company to adopt the sustainability practices. It has been established through the empirical evidences that the prime focus of the management should be on fulfilling the needs of society and the environment. The objective of increasing the shareholders wealth would automatically be achieved if the company complies with the corporate governance and sustainability principles.
In regards to the achievement of company’s objectives of increasing the shareholders wealth and meeting the expectations of other stakeholders, following recommendations have been drawn for directors:
Recommedation-1: Frame a code of conduct
The directors are recommended to formulate a code of conduct that will guide the organization’s activities. The code of conduct must promote good governance in the organization and it should provide for the objectives to be achieved in relation to social, environmental, and economic development (Kocmanova, Hrebicek, and Docekalova, 2011).
Recommedation-2: Ensure proper independence in the management
The shareholders are recommended to compose a board in such a manner that it promotes independence. The Sarbanes Oxley Act 2002 also emphasizes the importance of independence in the board. The sufficient number of directors on the board must be independent (Zhao, 2011).
Recommedation-3: Ensure balancing between the needs of different stakeholders
The directors are recommended to pursue their goal of increasing the shareholder’s wealth through ethical and sustainable means. The directors should strike out a proper balance between the differing needs of different stakeholders such as shareholders, society, environment, government, employees, and lenders (Bals and Tate, 2016).
Recommedation-4: Focusing on long term
It is recommended to the directors of the company that they formulate the policies and procedures taking longer term perspective. Short term profiteering should not be the goals of the directors. The shareholders worth is created by adopting the long term sustainable business practices. The adoption of corporate governance and sustainability practices may result in loosing profits in the initial years but it will ultimately create wealth for the shareholders in the long term (Howell and Sorour, 2016).
References
Bals, L. and Tate, W. 2016. Implementing Triple Bottom Line Sustainability into Global Supply Chains. Greenleaf Publishing.
Henriques, A. and Richardson, A. 2013. The Triple Bottom Line: Does It All Add Up. Earthscan.
Howell, K.E. and Sorour, M.K. 2016. Corporate Governance in Africa: Assessing Implementation and Ethical Perspectives. Springer.
Keay, A. 2015. Board Accountability in Corporate Governance. Routledge.
Kocmanova, A., Hrebicek, J., and Docekalova, M. 2011. Corporate Governance and Sustainability. Journal of economics and management, 2011(16), pp. 543-550.
Lama, T.B. 2013. Empirical Evidence on the Link Between Compliance with Governance of Best Practice and Firms’ Operating Results. Australasian Accounting, Business and Finance Journal, 6(5), pp. 63-80.
Monetary Authority of Singapore. 2004. Review of Literature & Empirical Research on Corporate Governance. [Online]. Available at: https://www.mas.gov.sg/~/media/resource/publications/staff_papers/MAS%20Staff%20Paper%20No%2029.pdf [Accessed at: 04 August 2017].
Rosenbaum, E., Bonker, F., and Wagener, H. 2000. Privatization, Corporate Governance and the Emergence of Markets. Springer, 2000.
Sainty, R. 2016. Engaging boards of directors at the interface of corporate sustainability and corporate governance. [Online]. Available at: engaging_directors_sustainability_governance_march_2016.pdf
Wright, M., Siegel, D.S., Keasey, K., and Filatotchev, I. 2013. The Oxford Handbook of Corporate Governance. OUP Oxford.
Zhao, Y. 2011. Corporate Governance and Directors’ Independence. Kluwer Law International
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