Directors of the organization are considered as those individuals who are responsible to manage the company, and they also hold all the powers which are imposed under the company. In other words, directors of the company are under obligation to manage the business and operations conducted by the organization. Directors possess number of powers for managing the company, but in similar manner they owned number of duties towards the company also. Corporations Act 2001 impose number of obligations on the company’s directors such as, directors are under obligation to take decisions related to the company in the best interest of the company. However, company’s best interest not only lies in the interest of shareholders but it also lies in the interest of other stakeholders such as community, environment, employees, etc. There are number of case laws which highlight the duties and obligations of the directors towards the stakeholder’s wide group, and guide the directors of the company in fulfilling this duty (ASIC, n.d.).
In this paper, duties of directors towards the stakeholders other than shareholders are discussed, and it also reflects the importance of the interest of all the stakeholders while taking the decision of the company.
It must be noted that, organization’s operations are conducted for the purpose of ensuring the best interest of the shareholders of the organization, and as stated, shareholders value is not the objective of the organization, but it is the result of the activities conducted by the organization. It is necessary for the board of directors of the company to understand that shareholders of the company are not the only audience which must be considered by the board while taking the decision, but there are large number of audience which also be considered by the board of directors while taking the decision.
This audience generally includes the bondholders, employees, customers, suppliers, and NGOs, community, environment, etc., but in practice director’s only focus on the interest of the shareholders of the organization.
There are number of cases which proves that, Court also focus on the interest of the shareholders only while providing their verdict and taking the decisions of the court. For example; In ASIC v Adler, Court only focus on the shareholder’s loss because of the actions conducted by Adler, and not consider the interest of other stakeholders of the company. As their prime focus was on the impact caused on the shareholder’s wealth, but they fail to consider the impact on other stakeholders of the organization (Marshall & Ramsay, 2012).
Some exception to this approach of the court is also there, as in number of cases, courts focus on the interest of the stakeholders of the organization instead of the only the interest of the shareholders of the company. For example; in case law ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18, Court consider the impact of organization’s action on the victims of the asbestos. Court stated, that company’s decision not only cause negative impact on the shareholder’s interest but also cause negative impact on the interest of the other stakeholder’s of the organization. It can be seen that, court consider the victims of the asbestos and impact on these victims because of the issue related to the underfunding of the medical research and funds related to the compensation.
It can be said that, court’s decision in the James Hardie case is the good decision because it ensures the company’s survival and long term profitability of the organization, as it not only gives important to the shareholders wealth but also gives importance to the stakeholder’s interest.
It is necessary for the organization to comply with the corporate governance principles, as these principles introduce number of duties for the directors of the company to determine the stakeholder’s interest while conducting any operation related to the organization. These principles also help the directors in making strong connection with the stakeholders. Corporate governance principles through its different approaches help the organization in ensuring the performance in effective manner.
Numbers of provisions are introduced by the Corporation Act 2001 and other legal authorities also, which help the organization in ensuring the consideration of the stakeholder’s interest while deciding any matter of the organization. Those organizations which are listed on the ASX required complying with the Corporate Governance Council’s ‘Principles of Good Corporate Governance introduced by ASX and also with the recommendations related to the business practice. All these principles and recommendations impose duty on the company’s directors for preparing annual report which shows that directors and officers of the company follow the recommendations and principles.
Organizations are also responsible to discuss on their official websites about the tools to ensure the interest of the stakeholders while taking the decision of the company. Code of conduct adopted by the organization also reflect the policies and measures identified by the organization for the purpose of providing guidance to the directors and other officers of the organization in terms of considering the interest of the stakeholders also while deciding any matter, and not only of the shareholder’s interest. These policies and procedures also provide the guidance to the directors and officers of the organization in terms of the risk management practices of the organization.
In context of the ASX recommendations related to the ‘Good Corporate Governance Principles’, also consider this matter of stakeholder’s interest and these recommendations also recognize the importance of the stakeholder’s in terms of the organization. This can be understood through example, 10th principle introduced by the ASX is determined as the critical principle in this context, as this principle mainly focuses on the interest of the stakeholders and not only of the shareholders. However, these principles also encourage the organizations to consider the legal interest of the organization’s stakeholders. This principle also states that directors must prepare the framework which describes the procedures and standards for achieving the above stated objectives, and they must ensure the monitoring of these standards (AICD, n.d.).
However, not only the listed company are obligated to comply with these provisions and principles but the non-listed companies also. In other words, companies which are not listed on the ASX are also under obligations to fulfil the duties imposed by the ASX principles, Corporations Act 2001, and listing rules of ASX. A non-listed company also required to develop the effective corporate governance in their organization.
Another important concept which recognizes the importance of the stakeholder’s interest and benefit is the concept of the corporate social responsibility. There are number of provisions of the CSR which helps the organization and its management in considering the stakeholder’s interest also. CSR is the approach which mainly focuses on the community and environment, as these are considered as most important stakeholders of the organization. Provisions of these concepts enable the organization to maintain the culture of the CSR in the organization, and this culture can only be maintained by the organization if they adopt the self-regulatory approach. The approach of self-regulatory can be used by the organizations for the purpose of monitoring these transactions. CSR approach also helps the companies in fulfilling their legal obligations and other methods of this approach also ensure effective risk management in the organization.
In context of the define laws and provisions, other types of provisions are also there which impose similar obligations on the directors and officers of the company. It must be noted that these provisions are introduced in the Corporations Act 2001, because off which they are more accurate in nature. There are number of provisions of the Corporate Act 2001 which consider the interest and wealth of stakeholders other than shareholders also.
Provisions related to the director’s duties impose obligations on the directors to consider the interest of the company while taking decision related to the business. Section 180 states that director and officers are under duty to work in such manner and conduct their operations in such manner as it result in the best interest of the company. However, it is necessary for the directors of the company to understand that best interest of the company not fall in the interest of shareholders only as it also fall in the interest of other stakeholders. Generally, directors consider that shareholders of the company are the only important pillar of the organization, but in actual there are some other pillars of the organization also such as employees, community, etc (ASIC, n.d.).
Section 181 of the Act states that, while using their powers and performing their duties, directors must ensure that they conduct their actions for the purpose which must be proper, in good faith, and in the organization’s best interest.
However, all these section impose similar types of obligations on the directors as obligations related to the fairness, good faith, equality, etc. In other words, the basic purpose of these provisions is to ensure that directors and officers does not consider their material personal interest only while deciding any matter, and they must understand each and every aspect of the matter before deciding it. These provisions which introduce the duties of directors and officers while working in the organization certainly ensures that directors evaluates the loss occurred to the other stakeholders also such as environment, society, etc. because organization’s long term survival can only be ensured if all the pillars of the organization stay strong. As any one pillar falls, then it is not possible for directors and officers to prevent the corporate failures.
Similar types of responsibilities are also imposed by the common law in the form of fiduciary duties on the directors of the company. These duties states that directors own fiduciary relationship with not only the shareholders of the company but also with the other stakeholders of the organization. Therefore, it is important for the organizations to consider the interest of all the stakeholders of the company.
Conclusion:
Directors and officers of the organization are under obligations to ensure the interest of the other stakeholders also except the shareholders, because all the stakeholders are important for the purpose ensuring the best interest of the company. Numbers of provisions are introduced by the Corporation Act 2001 and other legal authorities also, which help the organization in ensuring the consideration of the stakeholder’s interest while deciding any matter of the organization. Those organizations which are listed on the ASX required complying with the Corporate Governance Council’s ‘Principles of Good Corporate Governance introduced by ASX and also with the recommendations related to the business practice. Similar types of responsibilities are also imposed by the common law in the form of fiduciary duties on the directors of the company. These duties states that directors own fiduciary relationship with not only the shareholders of the company but also with the other stakeholders of the organization.
References:
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171.
ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18.
ASX. Corporate Governance Principles and recommendations. Available at: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf. Accessed on 2nd August 2018.
Corporation Act 2001- Section 180
Corporation Act 2001- Section 181
Corporation Act 2001- Section 182
Marshall, S. & Ramsay, A. (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 2nd August 2018.
ASIC, The directors role in corporate governance, Available at: https://asic.gov.au/regulatory-resources/corporate-governance/corporate-governance-articles/the-directors-role-in-corporate-governance/. Accessed on 2nd August 2018.
ASIC. Directors’ key responsibilities. Available at: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-key-responsibilities/. Accessed on 2nd August 2018.
AICD. Managing your stakeholders. Available at: https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2011-back-editions/february/feature-managing-your-stakeholders. Accessed on 2nd August 2018.
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