It must be noted that directors of the organization play most important role in the management of the organization, as they are the only one who are responsible to conduct the operations of the business in effective manner. Generally, it is expected from the directors that they work for ensuring the wealth of the shareholders of the organization, but it is important to understand that directors are not only obliged towards the shareholders only, but they also own equal responsibility towards the stakeholders of the organization also.
There are number of recent case laws which show the directors responsibilities towards the wide range groups of the stakeholders. As all these case laws focus on the actual meaning of the director’s duties, and provide detailed analysis of the duties owned by directors of the company towards the stakeholders which also includes the shareholders.
Structure of this report includes the provisions of the Corporation Act 2001, corporate governance principles, ASX recommendations, and provisions of the corporate social responsibility. At the end, paper is concluded with the short conclusion.
As stated, role played by the directors and officers of the organization under the Corporation Act 2001 is important, as they own number powers but also own large number of duties also. Directors are responsible to discharge their duties and also possessed power to act in terms of the shareholder’s interest and for the purpose of conducting day to day activities of the business. It can be said that, it is expected from the directors and officers to conduct the actions of thee company in such manner as it increase the wealth of the shareholders. It is also seen in number of cases, in which Courts only focus on the interest of the shareholders of the company. For Example: ASIC v Vizard [2005] FCA 1037; (2005) is the case in which directors of the company fails to fulfil their duties stated by the Corporations Act 2001. In this case also, court only determine the impact of directors failure to fulfil their duties on the shareholders only, and they fail to consider the impact on the other groups of the stakeholders such as community, employees, etc.
However, this approach of the Court is now changed, and they initiate to focus on the interest of other stakeholders also. There are number of case laws in which Courts focus on the interest of other stakeholders also. For example, in the case of James Hardie Court consider the interest of the asbestos victims also and not only of the shareholders. In this case, court held that effect of the organization’s actions negatively affects the interest of the community and its employees (Marshall & Ramsay, 2012).
All these recent case laws raise the question, “whether there is any requirement to clarify the laws, and include more responsibilities in the relevant provisions of the law to make the directors and officers responsible to consider the benefit of other stakeholders group also. In other words, whether there is any need to make necessary modifications in the law for requiring the directors of the company to determining their responsibilities towards the community, environment, suppliers, employees, etc. while conducting any action.
Generally, it is argued by the legal critics that, existing laws have sufficient capability and there is no need to make any modifications in the existing laws. In other words, sufficient flexibility is present in the case laws which allowed the directors and officers of the organization to consider the benefits of stakeholder’s also conducting actions on behalf of the company and while ensuring the long term interest of the company. Amendments related to the law also impose obligations on the directors and officers of the company to determine the stakeholders benefit as important part of their statutory and fiduciaries duties they owns towards the company. However, increasing chaos confuse the actual and primary role of the directors, as directors think that they only required to focus on the wealth of the shareholders only and thy own no responsibility towards the other groups of the stakeholders (AICD, 2005).
On the other hand, there are number of non-shareholders activities which reflect that any activity related to the suppliers, environment, community, etc. are only conducted for the purpose of enhancing the reputation of the company. Furthermore, it is considered that these activities are not compulsory, as it depends on the discretion of the company. Directors and other legal expert’s thinks that activities related to the stakeholders are opposing and contrary to the best interest of the company, that means, best interest of the shareholders of the organization. However, it is necessary for the directors of the company to understand that there is no such case, as activities related to other groups of stakeholders cause positive impact on overall value and image of the organization, which ultimately provide benefits to the shareholders of the organization. Considering the account of the stakeholder’s interest is not determined as the compliance approach or a narrow concept, and as per one legal expert stakeholder’s interest is the part of the best interest of the company and this helps the company in the long run (Eccles & Youmans, 2015).
This can be understood through section 180 of the Corporations Act 2001, as this section impose duties on the directors and officers of the company to ensure best interest of the company while taking any decision and using any of their power. This best interest of the company does not only mean he interest of the shareholders of the company but it also includes the interest of the
Legal experts also stated that organizations need to focus on the stakeholder’s oriented approach in terms of the corporate governance also. This allowed the directors of the company to make such decision related to the business, as they are able to address the interest of the shareholder’s also and not only of the shareholders. As directors consider it as their discretion, and they consider the interest of stakeholders in terms of internal governance arrangements only. In their words, they do not take this concept seriously and conduct it as practice, but only consider it for complied with the external regulation only.
However, there is no benefit to include the stakeholder’s interest considerations in the mandatory duties of the directors because it does not result in promissory outcomes. In other words, such approach only motivates the directors of the company to comply with the law, and there is no genuine care on part of the directors of the company in terms of the stakeholder’s.
In other words, it is necessary to develop the self-regulation approach in the directors and officers of the company in terms of the stakeholder’s interest. In present world, organizations slowly understand the importance of the stakeholders in terms of survival and profitability of the company, and because of this they try to build strong relationships with the stakeholders and also focus on their interest also while making the corporate decisions. For example: directors of the company now considering the interest of the society and environment in which they conduct their operations, because now they understand that company’s survival lies in the hands of customers, and in case organization’s reputation is not good in the society then it becomes difficult for the organization to survive. In case of 7-Eleven, corporate failure of the company is the result of the failure of the company in considering the interest of different stakeholders groups such as community and employees. Company neglects the interest of both the stakeholders groups, which result in the collapse of the organization (Sullivan, 2018). This illustration clearly demonstrates the important of stakeholders in corporate survival. It proves that directors and officers of the company need to engage with the stakeholders and consider their interest genuinely while making corporate decision. It is stated by number of legal experts that all these requirements must be fulfilled by the organizations on solely basis.
As defined in the Corporations Act 2001, directors needs to ensure the good faith and best interest of the company while performing their duties, and because of this they have authority to decide when and what group off stakeholder’s interest needs to be considered. They must own the flexibility and power to make decisions in this context, because it is not possible for the organizations to fulfil the interest of each and every stakeholder’s group at the same time. As sated above, issue related to the James Hardie case, and decision of the Court in this context consider the interest of the asbestos victims, but this was not the obligation of the directors which was imposed by the law but it was their choice for the purpose of stabilizing the company (Redmond, 2012).
However, not only statutory duties under the corporations Act, but fiduciary duties imposed by common law also impose the duty n director to address the stakeholder’s interest while making the common decision.
It can be said that, better results can be achieved if flexibility in this context is ensured in the organizations. In other words, flexibility to the directors of the company must be given in terms of the stakeholder’s oriented approach as the most important part of the decision making procedure of the organization instead of introducing the mandatory provisions. As, implementation of the mandatory provisions impose unnecessary force of the directors and officers of the company to complied with these laws, and this cause adverse results in this context. In other words, directors does not genuinely address the stakeholder’s interest and only focus on comply with the law because of the fear of legal consequences.
Therefore, Directors and officers must focus on the building of such corporate culture which automatically ensures the interest of the stakeholders of the company, and also helps the organization in ensuring the long term survival of the company and profitability also. Organizations can also ensure best practices code in the organization which focus on the interest of each and every stakeholder’s group and also address their concerns if any (DSS, 2012).
Conclusion:
Above stated facts make one thing clear that there is no requirement to introduce new laws or make any modifications in the existing laws of the Corporations Act 2001. As existing laws have sufficient capabilities to deal with this issue. Existing laws have sufficient capability and there is no need to make any modifications in the existing laws. In other words, sufficient flexibility is present in the case laws which allowed the directors and officers of the organization to consider the benefits of stakeholder’s also conducting actions on behalf of the company and while ensuring the long term interest of the company. Considering the account of the stakeholder’s interest is not determined as the compliance approach or a narrow concept, and as per one legal expert stakeholder’s interest is the part of the best interest of the company and this helps the company in the long run.
Amendments related to the law also impose obligations on the directors and officers of the company to determine the stakeholders benefit as important part of their statutory and fiduciaries duties they owns towards the company.
References:
AICD, (2005). Directors duties and stakeholder interests Viewpoint. Available at: https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2000-to-2009-back-editions/2005/may/directors-duties-and-stakeholder-interests-viewpoint. Accessed on 5th August 2018.
ASIC v Vizard [2005] FCA 1037; (2005)
Corporation Act 2001- Section 181
DSS, (2010). Corporate Governance Handbook for Company Directors and Committee Members. Available at: https://www.dss.gov.au/sites/default/files/documents/05_2012/gov_handbook_2010.pdf. Accessed on 5th August 2018.
Eccles, R. & Youmans, T. (2015). Why Boards Must Look Beyond Shareholders. Available at: https://sloanreview.mit.edu/article/why-boards-must-look-beyond-shareholders/. Accessed on 5th August 2018.
Marshall, S. & Ramsay, I. (2012). Stakeholders and directors’ duties: Law, theory and evidence. Available at: https://law.unimelb.edu.au/__data/assets/pdf_file/0010/1709605/38-Stakeholdersanddirectorsduties-lawtheoryandevidenceUNSWLJ20122.pdf. Accessed on 5th August 2018.
Redmond, P. (2012). Directors’ duties and corporate social responsiveness. Available at: https://www.austlii.edu.au/au/journals/UNSWLawJl/2012/13.pdf. Accessed on 5th August 2018.
Sullivan, K. (2018). Federal Court Concludes That 7-Eleven Franchisees Are Not Employees of 7-Eleven. Available at: https://www.wagehourblog.com/2018/04/articles/california-wage-hour-law/federal-court-concludes-that-7-eleven-franchisees-are-not-employees-of-7-eleven/. Accessed on 5th August 2018.
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