A company is an artificial person that has rights and duties just like a human. It has the right to enter into a contract with third parties under its own name, and it can sue or get sued by other parties. However, companies did not have a brain, and they cannot take business decisions on their own. Thus, the board of directors of the corporations are responsible for making decisions for the company. The directors have powers to take all the necessary decisions in the company, and their primary focus is to promote the growth of the company. However, many directors believe that they have a duty towards shareholders of the corporation to secure their wealth and increase their shares value since they take the highest risk in the company (Mason and Simmons, 2014). The amount invested by the shareholders in the company is referred as capital which is used by the firm to perform its operations.
However, this concept is not correct, and directors are equally responsible towards all stakeholders of the company rather than just shareholders. The directors have to ensure that while taking business decisions, they should not only focus on the interest of shareholders, and they should take business decisions which are in the benefit of all stakeholders (Ayuso et al., 2014). The objective of this report is to evaluate relevant evidence for the Australian Institute of Company Directors (AICD) to prove that directors should not place shareholder interests above other stakeholders. In order to prove the statement, examples of various companies will be analysed in the report and recommendations will be given for directors to consider the interest of a diverse range of stakeholders while taking business decisions.
A company is a separate person from its promoters and its shareholders. It has separate rights and liabilities which is required to comply with during its operations. There are two basic objectives of a corporation which include surviving and thriving in the market. According to Eccles and Youmans (2015), the objective of a company and its directors is not to expand the value of shareholders; the growth in shareholders’ value is just a positive outcome of success of an enterprise. Although, shareholders take the highest risk in the organisation and they entrust their share to the board of directors, however, they are not responsible for focussing only on expanding shareholders value. Shareholders are a part of a wide range of audience for the board of directors, and they are required to ensure that they consider the interest of each stakeholder while taking business decisions. Previously, it was a common belief that directors have to consider shareholders’ interest above all since they are the owners and they bring capital to the business and takes risks (Hemmati, 2012). However, with the introduction of ‘Corporations law’, this concept changed because it provided a number of duties which are necessary to comply by directors while performing their duties. The Corporations Act 2001 did not impose any duty on directors which provides that they have to focus on shareholder value expansion above all.
The board of directors are capable of utilising their powers to perform the functions of the business. They are responsible for planning and organising the operations of a company by delegating authorities between different levels of administration. Since they are the apex authority in an organisation and they control all of its operations, it is relatively easier for them to misuse their powers (Walls, Berrone and Phan, 2012). Thus, various provisions are given in the Corporations Act 2001 which imposes duties on directors to ensure that they did not misuse their powers and take decisions which are for the benefit of the whole company. Following are four basis general duties of directors.
It can be seen from the above duties that the directors have a fiduciary duty towards the company rather than its shareholders. They did not have any duty or responsibility which specifically requires them to take business decisions in order to expand the value of shareholders. Each of these duties provides that the role of the director is to take business decisions which are in the interest of the company and the growth in shareholders values is just an outcome of it (Cooper, 2017). The AICD has recognised these duties of directors, and it provides that the directors should take a diverse approach while taking business decisions to ensure that the operations of the company are fulfilling interest of a wide range of stakeholders.
Although the law is clear about these duties, still most directors focus on the interest of shareholders because it brings more capital in the organisation. This concept has changed with policies such as corporate governance and Corporate Social Responsibilities (CSR). These concepts provide that a company has duties towards its stakeholders and directors should recognise such duties and ensure that the company achieves the interest of different stakeholders. These concepts focus on collaborative, engaging and purposeful operations of a corporation rather than concentration on just profit maximisation (Jacoby, 2018). Directors of organisations throughout the globe are implementing these theories to ensure that they focus on fulfilling the corporate responsibility of the company towards stakeholders such as employees, environment, local community, government and others, then just focusing on the interest of shareholders.
Unilever
It is a consumer goods company which provides that its organisational purpose is to make sustainable living commonplace. The company provides that it works to create a better future for everyone every day with its products and services which help people by feeling and looking good to get more out of life. Nowhere in the organisational statement of the company is written that it is focused towards “maximising shareholder value”. Instead, the board of directors of this $60 billion company focuses on a higher sense of meaning for its millions of customers, over 169,000 employees and others who are affected by its operations to leave the world a better place (Pontefract, 2016).
Starbucks
It is an American coffee company which was founded in 1971, and it offers its services across the globe. The company provide a friendly environment for its customers who wanted to sit, relax and enjoy their coffee. As per the mission statement of the company, it is focused towards inspiring and nurturing human spirit by providing one cup, one person and one neighbourhood at a time. Its vision is to expand its operations worldwide by offering finest coffee and maintaining its uncompromising principles while it grows. These statements show that the board of directors of the company did to focuses on increasing shareholders value; instead, they are focused towards improving local communities and providing better services to its customers (Vandeveld, 2015). The company is also known for its positive relationship with its employees who are treated as members of the company. It also takes care of the environment by using eco-friendly procedures while making it coffee. The corporation provides 100 percent ethical coffee, and it has implemented a program called C.A.F.E which is focused towards helping coffee farmers (Starbucks, 2018). It also provides coffee in recyclable cups which reduce environment wastage. The growth of the company is proof that the implementation of stakeholder approach is beneficial for the corporation.
BMW
The company is known for being one of the most socially responsible companies in the automotive industry. The corporation has set a high bar by setting a goal to help more than one million people by 2020. The board of directors strictly focus on the complying with the CSR model of the company. They create programs such as “The Schools Environmental Education Development Project (SEED)” which are focused towards raising awareness regarding social and environmental issues across the globe (BMW Group, 2018). The key to CSR success of BMW has always been alignment. The corporation is a great example of corporate governance because it has been able to create a balance between establishing a good business model and helping social causes.
Levi Strauss & Co
Levi’s is another corporation which is known for its effective CSR model. The board of directors of the company focuses on reducing the carbon footprint of the corporation rather than increasing shareholders value of the company. Like BMW’s program, Levi’s has implemented its own program called “Worker Well-Being Initiative” which concentrates on helping and improving the life of employees (Peters, 2016). The directors of the company also focus on supporting human rights and environmental causes. It has also trademarked a campaign called “Water<Less” which is focused on using less water while manufacturing the products of the company. Based on this campaign, the company will save over one billion litres of water, and it is focused on improving the manufacturing process by 2020 (Business Wire, 2016).
The examples mentioned above show that corporations can receive success by focusing on the interest of their stakeholders rather than just concentrating on maximising shareholders value. Following recommendations can assist directors in focusing on a diverse range of stakeholders while taking business decisions.
Conclusion
From the above observations, it can be concluded that the board of directors of a company are not responsible for maximising the shareholders’ value; instead, they have to take a diverse stakeholder approach while taking business decisions. The goal of a company is to strive and to thrive, and the maximisation of shareholders value is just its outcome. As given in the Corporations Act 2001, the directors have to comply with a number of general and statutory duties and none of which include maximisation of shareholders value. Various successful corporations have implemented a stakeholder approach such as Starbucks, Levi’s, BMW and Unilever which provide them a competitive advantage. Various recommendations for directors are given in the report which can assist them in focusing on the interest of a diverse range of stakeholders such as compliance with duties, the establishment of CSR model and preparation of statement of stakeholders. Thus, directors should focus on fulfilling the interest of a wider range of stakeholders rather than maximising shareholders value to sustain their future growth.
References
AICD., 2018. What are the duties of directors?. [PDF] AWLNSW. Available from https://www.awlnsw.com.au/assets/Latest%20news/Duties%20of%20Directors.pdf [Accessed 31/7/2018].
Ayuso, S., Rodríguez, M.A., García-Castro, R. and Ariño, M.A., 2014. Maximizing stakeholders’ interests: An empirical analysis of the stakeholder approach to corporate governance. Business & Society, 53(3), pp.414-439.
BMW Group., 2018. Sustainable Management. [Online] BMW Group. Available from https://www.bmwgroup.com/en/responsibility/sustainability-at-the-bmw-group.html [Accessed 31/7/2018].
Business Wire., 2016. Levi Strauss & Co. Open Sources Water Innovation Techniques to Public. [Online] Business Wire. Available from https://www.businesswire.com/news/home/20160322005444/en/Levi-Strauss-Open-Sources-Water-Innovation-Techniques [Accessed 31/7/2018].
Cooper, S., 2017. Corporate social performance: A stakeholder approach. Abingdon-on-Thames: Routledge.
Eccles, R.G. and Youmans, T., 2015. Why Boards Must Look Beyond Shareholders. [Online] MIT Sloan Management Review. Available from https://sloanreview.mit.edu/article/why-boards-must-look-beyond-shareholders/ [Accessed 31/7/2018].
Hemmati, M., 2012. Multi-stakeholder processes for governance and sustainability: beyond deadlock and conflict. Abingdon-on-Thames: Routledge.
Jacoby, S.M., 2018. The embedded corporation: Corporate governance and employment relations in Japan and the United States. New Jersey: Princeton University Press.
Mason, C. and Simmons, J., 2014. Embedding corporate social responsibility in corporate governance: A stakeholder systems approach. Journal of Business Ethics, 119(1), pp.77-86.
Peters, A., 2016. How Levi’s Is Building Well-Being Programs Where They Matter Most: In Its Factories. [Online] Fast Company. Available from https://www.fastcompany.com/3064477/how-levis-is-building-well-being-programs-where-they-matter-most-in-its-factories [Accessed 31/7/2018].
Pontefract, D., 2016. Should Companies Serve Only Their Shareholders Or Their Stakeholders More Broadly?. [Online] Forbes. Available from https://www.forbes.com/sites/danpontefract/2016/05/09/shareholders-or-stakeholders/#4ba0e62c13d2 [Accessed 31/7/2018].
Starbucks., 2018. Being a responsible company. [Online] Starbucks. Available from https://www.starbucks.in/responsibility [Accessed 31/7/2018].
Vandeveld, K., 2015. Corporate Social Responsibility: How Starbucks Is Making An Impact. [Online] Why Whisper. Available from https://www.whywhisper.co/the-blog/2015/9/24/corporate-social-responsibility-how-starbucks-is-making-an-impact [Accessed 31/7/2018].
Walls, J.L., Berrone, P. and Phan, P.H., 2012. Corporate governance and environmental performance: Is there really a link?. Strategic Management Journal, 33(8), pp.885-913.
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