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.
Corporate governance is a type of organization or working place that deals with the functioning of the various stakeholders with an aim of earning maximum profit. There is board of directors that run or govern the organization. Any problem occurs to the organization is undertaken by the board of directors in order to solve the issue. A board of directors includes group of those representatives who looks after the behavior and the performances of the stakeholders in the organization. These representatives appointed by the shareholders of the other company that are board members of the organization.
Stakeholder is a party who can be a shareholder, debtor, creditor, an investor, customers, and employees, one who does business with interest. Whole business or company’s performance depends on the activity of stakeholders. on the others side, shareholders are the ones who put money into the business thereby creating more capital leading to more profit , due to which they share the amount of company’s profit afterwards, play a dominating role.
The report deals with the discussion on the functions of stakeholders and shareholder of the organization. By providing various features about the other stakeholders with compare to shareholders, it gives a proper reason to place the interest of the shareholder above those other stakeholders. As the Australia institute of company directors is concerned with the opinion to place the interest of shareholder above that of other stakeholders.
Meaning
Stakeholder is a party who can be a shareholder, debtor, creditor, an investor, customers, and employees, one who does business with interest. Whole business or company’s performance depends on the activity of stakeholders. The decision of business is largely depends on the activities of stakeholders (Arjoon 2017). Stockholders are important because they create profit to the business or organization.
Nature of stakeholder
Stakeholders can be positive or negative depending on the organization work culture and environment. If the stakeholder gets success and satisfaction from the work then it is a positive stakeholder. Negative stakeholder means if an individual is unsatisfied, does not get enough success from the work and the organization. The organization is unable to fulfill the requirements of stakeholders therefore creates negative impacts on stakeholders (Boddewyn and Buckley 2017). Due to negative impacts, stakeholders might not help in the work of the organization, will not follow lean manufacturing practices. Stakeholders when acts as investors, then they deal with decision making, policies and plans of an organization to run smoothly. They also check the financial stability of the organization if the stakeholders are the committed investors.
Stakeholders can be internal as well as external. Internal stakeholders are the customers, employees. For instance, if the employees do not get proper facilities or good salaries in return of their efficient and hard work, they are bound to act as negative stakeholder for those organizations and they will not be motivated anymore to help that organization in generating profit.
Other way round, if the employees get good facilities and salaries, they are motivated to work more with utmost dedication and efficiency finishes their targets before time that in turn helps the organization to generate more output and profit (Coffee and Palia 2016). One who functions inside the organizational structure or in the business sphere is the internal stakeholders.
External stakeholders are the ones who perform their functions outside the organization (Cumming et al. 2017). Examples of external stakeholders are the consumers, shareholders, suppliers. For instance, consumers, if not satisfied with the products they use then become the negative stakeholders and they will not invest their money in that business anymore from where they do not get satisfaction.
On the other side if they are satisfied consumers then it is good for that business , because when consumer gets satisfaction, then there is more demand for that product leading to more production , as a result business earns more income (Dias, Rodrigues and Craig 2017).
Types of stakeholders
There are two types of stakeholders, financials stakeholders and non-financial stakeholders of an organization. Financial stakeholders are those like bondholders, whereas non-financial shareholders are the employees, customers, suppliers and non-governmental organization (NGO). Primary stakeholders are the internal stakeholders who are involved in financial transactions with the organization to earn profit. Internal stakeholders are customers, suppliers and employees. Secondary stakeholders are the external stakeholders that functions in an indirect way with the organization. They are business support group, public, media group.
Employees are the main source of creating profit to the organization. With their hard work and knowledge, they contribute their work to the organization. An organization appoints an employee through interview, then training and proper job designation with an aim to earn profit.
Customers are those when get satisfaction from their products, then their satisfaction creates more demand for the product to the organization. More demand leads to more production of that product leading to more sales and success to the organization.
Suppliers are the ones who are engaged in supplying of the resources and raw materials. It depends on the production unit, if there is growth in sales, there will be more demand for that product, thereby if there is more demands for production then there will be increase in the supply also (Denis 2016).
Nongovernmental organizations are that type of organization that runs with an aim to provide social benefit to the people.
Board of directors also comes under primary stakeholders or the internal stakeholders. They hold the strong powers and responsibilities to the organization. They keep the record of the workings and the functioning of the employees. Board of directors acts as pillars to the organization. It governs the organization, creates rules and regulations for the organization to maintain standards and discipline, it appoints new employees and it reviews the performances and functions of the employees. It provides finance for the resources required to meet the targets. It creates annual budget and accounting task for analyzing the performance of the organization. Finally, it provides the salary, compensation and extra incentives to the employees for their efficient work and output.
Shareholders are those types of stakeholders who hold the company shares and profits. They considered as the most powerful stakeholders compared to others. They have the right to sale and purchase the shares of the company to trade in the stock market. They nominate the directors and the shareholders for resolution purpose. If there is a declaration then the company earns dividend (Dimopoulos and Wagner 2016). They always purchase new shares given by the company. As they are the corporate heads of the organization, therefore they are the biggest dominators of the organization. They provide financial investment to the organization using the voting powers. A shareholder and a director of an organization are different. Both cannot replace each other.
Shareholder owes the company properties whereas a director directs and manages the entire system of the organization. Shareholders invest money in the organization therefore that is why they are the most dominating heads of the organization. The investment organization uses the money to purchase shares from different sectors in the market with the aim of achieving profit. Proper management in the trading and investments with efficiency will create good output and income to the organization.
A stakeholder plays a strong role in the functioning of the organization. To maintain organization profit and stability, employees must get proper benefits and recognition from their work. Efficiency in the production of the organization creates more profit. Organization must encouragement more and more in order to create employees interest. When employees are motivated, they tend to do their work with more interest and dedication. This can benefit the organization in a long way in terms of profit and reputation. Employee motivation and good working environment creates a strong positive impact on the organization.
Likewise, when the customers are satisfied with the service they get, they tend to make more and more purchase from the same business unit. More selling creates more business, leading to more profit to the business. Again, customer satisfaction adds a positive impact on the business (Filatotchev, Wright and Bruton 2017). Therefore, positive impact of stakeholders will create positive impact on the organization as well. Organizational performances determined on the functioning of the various stakeholders.
The subject of report is to provide some specific evidence regarding the decision of board for placing interest above the shareholders. The board of members makes the decision on the behalf of shareholders for the benefit of the organization. They act as a fiduciary body in order to look after the financial position of the company. They have the authority to hire the executives and to cancel their job designations. Their main functions are to set desired target to achieve maximum output and profit. The board also looks after the availability of adequate resources in order to meet the desired set targets successfully (Fox et al. 2016). The head authority also aims for efficient and efficiency of utilization of various resources and technology in order to avoid wastage of resources. It aims for creating more profit and output using the updated technology and resources.
In recent times, they are focusing more and more on the fiduciary activities for the betterment of the organization financial system (Goranova et al. 2017). To place the interest of the shareholders above all other stakeholders is not as per the law but an idea given by the organizational heads. The main objective of the organization is to achieve success by surviving for long term and to make profit. The aim of shareholder is not the ultimate purpose of the organization, it invest capital to the organization (Olson and Wright 2016). They act as one of the audience to the organization just like other stakeholders. Shareholders vote for the election of the board members with addition to other kinds of the stakeholders that also work for the concerns of society. From last one year, there are collection of legal memos given by law firms of 20 countries about the fiduciary powers and rights of the boards. The memos develop in collaboration with linklaters, a global organization of law (McConnell, jj and Qi 2016). These memos will be in G20 countries that are in collaboration with a motive to earn some profit. In case of United States, according to some law, board members, separate corporate person is equal to the duty and responsibilities of the directors to shareholders (Oyewunmi et al. 2017). Whereas on the other hand according to some jurisdiction, role of shareholder is more than just a corporate head. In Brazil, fiduciary rights mean corporation authority to non-financial stakeholders like customers, suppliers.
According to board members, there are many stakeholders with their rights and duties, therefore due to this there must be a statement of purpose to issue an annual statement on significant audience and materiality (Pratheepkanth, Hettihewa and Wright 2016). The statement includes company’s significant audiences or stakeholders and the non-financial stakeholders as well.
To elaborate the statement, it should include the workings of various organization in relation to fiduciary rights to the corporation others stakeholders, not only the shareholders (Whincop 2017). The legal memos is distributed across various countries that are Australia, Brazil, China, Chile, Columbia, Denmark, France, Germany, Hungary, India, Italy, new Zealand, Poland, Russia, Spain, Switzerland, Turkey, United Kingdom and United States. It will be available to other parts of the world soon.
There is another category principle of responsible investment for the investors regarding fiduciary authority. The principle that includes law and policy for investments on investors’ fiduciary authority will publish soon (Yermack 2017). In sum to build, the legal issue regarding the fiduciary rights to placed above the shareholder by the organization is a good step for the betterment and good financial growth of the corporate governance.
Conclusion
The report gives the meaning of corporate governance with addition to the nature and impact of various stakeholders on the organization. Corporate governance is a type of organization or working place that deals with the functioning of the various stakeholders with an aim of earning maximum profit. It provides brief note on the different types of stakeholders and their nature at the organization. As the report is to provide the reason of placing the interest of various other stakeholders above the shareholder, therefore it gives a brief summary on the shareholders and their impact and contributions to the organization. Therefore, corporate governance must place the interest of shareholders above other stakeholders in order to achieve the betterment and efficiency.
References
Arjoon, S., 2017. Virtues, Compliance, and Integrity: A Corporate Governance Perspective. Handbook of Virtue Ethics in Business and Management, pp.995-1002.
Boddewyn, J.J. and Buckley, P.J., 2017. Integrating Social and Political Strategies as Forms of Reciprocal Exchange into the Analysis of Corporate Governance Modes. British Journal of Management.
Coffee Jr, J.C. and Palia, D., 2016. The wolf at the door: The impact of hedge fund activism on corporate governance. Annals of Corporate Governance, 1(1), pp.1-94.
Cumming, D., Filatotchev, I., Knill, A., Reeb, D.M. and Senbet, L., 2017. Law, finance, and the international mobility of corporate governance.
Dias, A., Rodrigues, L.L. and Craig, R., 2017. Corporate governance effects on social responsibility disclosures. Australasian Accounting, Business and Finance Journal, 11(2), pp.3-22.
Denis, D., 2016. Corporate Governance and the Goal of the Firm: In Defense of Shareholder Wealth Maximization. Financial Review, 51(4), pp.467-480.
Dimopoulos, T. and Wagner, H.F., 2016. Corporate Governance and CEO Turnover Decisions.
Filatotchev, I., Wright, M. and Bruton, G.D., 2017. IPO s and Corporate Governance. The Oxford Handbook of Strategy Implementation, p.79.
Fox, M.B., Gilson, R.J. and Palia, D., 2016. Corporate Governance Changes as a Signal: Contextualizing the Performance Link.
Goranova, M., Abouk, R., Nystrom, P.C. and Soofi, E.S., 2017. Corporate governance antecedents to shareholder activism: A zero?inflated process. Strategic Management Journal, 38(2), pp.415-435.
McConnell, J.J. and Qi, Q., 2016. Just Talk? CEO Succession Plan Disclosure, Corporate Governance and Firm Value.
Olson, J.F. and Wright, A., 2016. The Nominating and Corporate Governance Committee. Corporate Governance: Law and Practice, 1.
Oyewunmi, O.A., Osibanjo, O.A., Falola, H.O. and Olujobi, O.J., 2017. Optimization by Integration: A corporate governance and human resource management dimension. International Review of Management and Marketing, 7(1).
Pratheepkanth, P., Hettihewa, S. and Wright, C.S., 2016. Corporate Governance and Financial Performance: The Case of Australia and Sri Lanka. Corporate Governance, 7(1).
Whincop, M.J., 2017. Corporate governance in government corporations. Routledge.
Yermack, D., 2017. Corporate governance and blockchains. Review of Finance, 21(1), pp.7-31.
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