Corporates are one of the defined business structures. Law gives birth to corporations and these are the directors and officers of the company who runs the business thereto. A corporation is not a natural person but the same is a legal personality that is separately identified from it is stakeholders and directors and officers (Johnston, 2012). After formation, the lead objectives of a corporation are to survive and to develop. A corporation mainly consists of two bodies of individuals. One is Stakeholders and another one is Management. This would not be wrongful to say that Management must work for the benefits and growth of the stakeholders. These stakeholders are of two kinds majorly such as Internal and external. Where internal shareholders of a Corporation consists employees, shareholders, managers, and investors, on the other part government, suppliers, customers, and authorities are counted as external Stakeholders of the corporation (Surbhi, 2015). In many of the cases, it has noted that directors consider the interest of the shareholders over and above other stakeholders. This report, therefore, focused on the fact that directors are equally liable towards all shareholders and not only towards shareholders.
Firstly, this is to state that shareholders are no one but the stakeholders of the company. However, directors usually take interests of shareholders in the account and forget their liability in respect of other stakeholders. As mentioned earlier that shareholders are a part of the whole stakeholder community, this is self-understood that this is a narrow term in comparison to the term “stakeholder.” Board needs to understand that every stakeholder is important and they have their unique significance in the corporation, this is the reason that they are identified as stakeholders. Under section 180 to 184 of Corporations Act, 2001 (Cth) duties of directors are defined (Legal Services Commission of South Australia, 2018). These duties expect the board of directors to do the tasks in favor of all the stakeholders. These Sections requires the board of directors to work in the best interest of the company. Here word Company refers to stakeholders, not just the shareholders.
No doubt, shareholders of a company are usually the investors who introduce capital for the business, yet this is not fair to consider their interest only. Every stakeholder plays an important role. For instance, employees are the valuable asset of every organization, without whom a company cannot work. Further, without customers and suppliers, a company cannot run it is business. Capital is important but for the furtherance of business, other factors such as human efforts and authorities are also significant (Kokemuller, 2018). As only capital cannot run a business, similarly consideration of the interest of shareholders only cannot provide success to a company. Therefore, this can be stated here that in addition to the shareholder, directors are required to take care interest of every other stakeholder as this is a whole community, not the part thereof similar to shareholders.
Till today, many of the cases in this area has reported where directors of the company worked considering the interest of shareholders only and neglected other stakeholders. These companies, later on, held liable for such activities and actions of directors that they have taken for shareholders have counted as fraudulent one.
This company has established in the year 1961 by it is founder Calisto Tanzi. This company was a food company that was used to provide almost every dairy product from milk to yogurt, creams and so on (Rimkus, 2016). This company had a very good market value and the founder Mr. Tanzi was a person of value and reputation. People had faith in the products of this company. Situations were very well till the year 2003. Afterward, in the year 2003, it has revealed that this company has done manipulation in the presentation of financial statements of the same (Khader and Datta, 2018). This has come into knowledge that this company has followed and practiced fraudulent accounting techniques for years and hide it is actual financial conditions. This company was showing to the market, shareholders, and investors that the same is in a very sound financial situation, having enough assets and is capable to pay off all the pending liabilities. By doing faith in such fake status of the company, the shareholder has invested their funds in the company but later on, this has marked as a scandal because the company acted fraudulently. This case is a significant example to justify the fact that directors only considers the factor named shareholder from the community of stakeholder and plan the policies and decisions while considering this factor.
Similarly to Parmalat, another company named Enron also has proven that while making the policy and taking business decisions, the director only keep shareholder in their mind and ignore all other stakeholders. In the due course of business, they forget that the business decisions also affect to rest of the stakeholders. In this case, the subjective company Enron was a US-based energy and Service Company. Kenneth Lay founded this company in the year 1985 (Mohapatra, 2016). Foundation of this company was the result of a merger of two famous energy sector companies. In the starting years of it is the foundation, the company has performed well and built a high reputation in the market, but the same has started facing problem in the year 2001, due to high competition in the market. Cause of this heavy competition, the company’s profit started falling down but as this company had to retain the investor, the same has started preparing and publishing fake financial statements. To hide the troubles, this company has used a dubious accounting method known as “mark-to-market accounting” (Skilling, 2008). When this fraud has opened up and presented before the world, then it leads a very adverse impact on the share price of the company and lost the faith of investors as well public. This scandal shows that to meet out with the expectations of shareholders, many of the times directors do the unethical tasks.
In Australia, HIH insurance Limited was on the second position in the field of Insurance (Hulley, 2014). This company had a great profitability and client database. This is also to state that this insurance company had 217 subsidiaries at a time. Raymond Reginald Williams established this company in the year 1968 with another name “M W Payne Underwriting Agency Pty Ltd (Margret, 2011).” According to the HIH’s report published in the year 2000, the same owned assets worth $8 billion. Although in the year 2001, when it is assets has been offset with the debts, it has observed that this company has assets worth $ 133 million in actual. The liquidators have reviewed that company’s loss with it is debts were of $5.3 billion (Clarke, 2017). Due to this sudden report, the market value of shares of the company has diminished badly and shareholders faced a terrible loss. The reason behind this was that in actual, the company never evaluated the true worth of assets in comparison to it is liabilities. The company was only showing the asset side to it is investors and focusing on shareholders only. Similar to rest two of the cases discussed earlier, in this case also the focus of management towards shareholders was the lead reason behind the scandal.
It would not be correct to say that directors were used to considering the interest of shareholder over other stakeholders in past, but the reality is that in many of the companies, directors still focusing on shareholder only. They do not take the interest of other shareholders in the account and for this reason; they ignore their corporate social responsibility. What is the Corporate Social responsibility (CSR)? This can be answered as that every corporate work in a society. Ac Corporations have many of the stakeholders and for this reason, this is the responsibility of a corporation to take care interest of the social factors. Such responsibility is known as CSR (Sun, Stewart and Pollard, 2010). In the current scenario, CSR is the lead issue. This issue required the management of the company to consider the interest of all it is shareholders. Many of the companies are there that makes policies focusing on only one stakeholder such as it is shareholders.
The lead reason for which companies usually consider shareholder’s interest is that the lead and ultimate motive of every company is “Profit Maximization (efinancemanagement.com, 2018).” Shareholders are the most interested person in the Profits of the company because they provide capital and funds to the company. Further, the companies who have their securities listed over stock exchanges earn a huge amount of profit via secondary markets. Hence, in such a scenario it becomes necessary for the management to work in the favor of the shareholders and to center their concentration on the value of shares.
In the recent, few years many of the companies have been there that were preparing the vision and mission of the company considering shareholders. For instance, in the year 2015, Volkswagen, an automaker company has proven failed in following CSR (Dans, 2015).
Following are the recommendation for Board of directors of the company that they are required to consider while acting on behalf of the company and performing their duties.
Encourage Sustainable Development: – While providing recommendations in the concerned area, Sustainable development is one of the most important factors that a corporation should not ignore. The environment is also one of the stakeholders of the company (BMW Group, 2018). A corporate affect environment and get affected by the same. It is recommended for the directors to consider this factor and to behave accordingly.
Conclusion
After the aforesaid discussion and recommendations, this is to conclude that corporations have many stakeholders. For the board of directors, this is necessary to understand their value. Undoubtedly, shareholders have their huge significance but for this reason, the interest of other stakeholders cannot be ignored. Directors of a corporation have to focus on the duties mentioned under the act and they must work for the whole company rather than some target stakeholder i.e. shareholder. In the past, many of the cases have happened that lead unethical practices in the area of Corporations Law. Although the guilty parties have been penalized for the same, yet such cases describe that how much, directors think about only shareholders. In the recommendation section of this report, the required behavior in the art of directors is mentioned and at last again to state that directors owned their duties and responsibility towards all the stakeholders including the shareholders.
References
BMW Group., 2018. Sustainable Management. [Online] [online] Available from https://www.bmwgroup.com/en/responsibility/sustainability-at-the-bmw-group.html [Accessed 03/08/2018].
Clarke, T. (2017) International Corporate Governance: A Comparative Approach. London : Taylor & Francis.
Corporations Act, 2001 (Cth)
Dans, E. (2015) Volkswagen And The Failure Of Corporate Social Responsibility. [online] Available from: https://www.forbes.com/sites/enriquedans/2015/09/27/volkswagen-and-the-failure-of-corporate-social-responsibility/#62be45b34405 [Accessed on 03/08/2018]
efinancemanagement.com. (2018) Profit Maximization. [online] Available from: https://efinancemanagement.com/financial-management/profit-maximization [Accessed on 03/08/2018]
Hulley, K. (2014) Copy of The Collapse of HIH Insurance [online] Available from: https://prezi.com/quf5wi94czzn/copy-of-the-collapse-of-hih-insurance/ [Accessed on 03/08/2018]
Johnston, D. C. (2012) The Fine Print: How Big Companies Use “Plain English” to Rob You Blind. New York: Penguin.
Khader, A. and Datta, S. (2018) PARMALAT How the Milk Spilled. [online] Available from: https://www.icmrindia.org/free%20resources/Articles/PARMALAT1.htm [Accessed on 03/08/2018]
Kokemuller, N. (2018) How Does HR Add Value to an Organization? [online] Available from: https://smallbusiness.chron.com/hr-add-value-organization-50980.html [Accessed on 03/08/2018]
Legal Services Commission of South Australia. (2018) General Duties of Directors – Corporations Act 2001 (Cth) [online] Available from: https://www.lawhandbook.sa.gov.au/ch05s01s03s02.php [Accessed on 03/08/2018]
Margret, J. E. (2011) Solvency in Financial Accounting. Oxon: Routledge.
Mohapatra, S. (2016) Case Studies in Business Ethics and Corporate Governance. India: Pearson Education India.
Rimkus, R. (2016) Parmalat. [online] Available from: https://www.econcrises.org/2016/11/29/parmalat/ [Accessed on 03/08/2018]
Skilling, J. (2008) Lessons of Enron [online] Available from: https://www.creditpulse.com/accountingfinance/lessons-enron/enron-lesson-no-1-mark-market-fair-value-accounting [Accessed on 03/08/2018]
Sun, W., Stewart, J. and Pollard, D. (2010) Reframing Corporate Social Responsibility: Lessons from the Global Financial Crisis. UK: Emerald Group Publishing.
Surbhi, S. (2015) Difference Between Internal and External Stakeholders. [online] Available from: https://keydifferences.com/difference-between-internal-and-external-stakeholders.html [Accessed on 03/08/2018]
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