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Report to AICD: Interest of Stakeholders

Assessment Task 2

Length:2,000 words total (+/- 10%). Reference list and cover sheet details are not included in this word-limit total.

Assessment Criteria:

  • Demonstration of knowledge of the issues and evidence of wide reading to support your analysis
  • Demonstration of your ability to apply the knowledge to identify keys issues leading to your recommendations
  • Evidence of sound reasoning and the exercise of professional judgement to support your recommendations
  • Development and statement of concise recommendations for presentation to the AICD
  • Overall structure and professional presentation of the report to the AICD
  • High quality written communication of concepts and terms in ordinary English as not all readers of the report can be assumed to be specialists competent in corporate governance

Case Study

‘As a separate legal person, a corporation has two basic objectives: To survive and to thrive. Shareholder value is not the objective of the corporation; it is an outcome of the corporation’s activities. While shareholders entrust their stakes in a corporation to the board of directors, shareholders are just one audience among others that the board may consider when making decisions on behalf of the corporation.

These audiences, typically called stakeholders, may also include other financial stakeholders, such as bondholders, and nonfinancial stakeholders, such as employees, customers, suppliers, and NGOs representing various concerns of civil society. In the face of limited resources, no matter how large the corporation, directors must make choices regarding the significance of the corporation’s many audiences.’

Source: Robert G Eccles and Tim Youmans (2015) ‘Why Boards Must Look Beyond Shareholders’, MIT Sloan Management Review

http://sloanreview.mit.edu/article/why-boards-must-look-beyond-shareholders/

Required

Assume you have been employed as a corporate governance consultant by the Australian Institute of Company Directors (AICD). The AICD is concerned that many company directors hold the opinion that the company’s board of directors has a responsibility to place the interests of shareholders above all other stakeholder interests.

Your assignment is to 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. Specifically, the AICD has requested that your report contain evidence, examples and recommendations for company directors that will guide them when making board decisions so they are responsive to diverse stakeholder audiences. The AICD has advised you that they intend to make your report a public document and it will be uploaded to the website so it can be read by both corporate governance specialists and non-specialists.

Answer

Report to AICD

Introduction

The fact is well established that the role of directors under the Corporations Act is to effectively discharge their duties and power for actingin the best possible interest of the corporation and albeit for a specific purpose. To put in other words, it can be mentioned that the directors of the company are expected to exercise their respective duties in the best interests of the shareholders and also for maximization of wealth. It is often believed that irrespective of business sectors, that the board of directors of the company has a ‘fiduciary duty’ when it comes to placing the interests of the shareholders above all others (Eccles and Youmans, 2015). However, disagreements and disputes have surfaced as to whether directors’ duties need to incorporate responsibilities which go way beyond the shareholder interest responsibility. From the authority of a corporate governance consultant, employed by the Australian Institute of Company Directors (AICD), this report is to be submitted to the AICD on account of making evaluation of the evidence that the responsibility of a company director lies in placing shareholder interests above the interests of other stakeholders. 

Demonstration of the issues

It is believed by many executives all across the world that directors of the company do have a specific fiduciary duty when it comes to place the respective interests of the company shareholders above the other stakeholders of the company(Goranova and Ryan, 2014). But this is to be mentioned in this regard that this particular notion regarding shareholder primacy is merely an ideology and certainly not a law.The dispute is inclusive of the fact that the Corporations Act needs to be clarified in course of requiring the directors of the companies in taking into account the different interests of customers, suppliers and the broader community of decision makers respectively (Adams et al. 2011). 

When it comes to the role and responsibilities of directors, they are duty bound to the corporation above everything else. This duty is all seeped in basic principles concerning good faith, stewardship and accountability. Directors are found to be required by quintessentially corporate statuses in discharging their duties with the idea of moving forward in lieu of keeping the best interests of the corporation. In traditional notion, the best possible interests of the corporation is largely interpreted to extent only to ‘the shareholders as a whole’; but in course of decision making processes, directors are often met with multiple confronting interests (Brochet and Srinivasan, 2014). In recent years, some legal provisions have been suggested for the directors in order to make them prepared for considering the varied interests of the wide ranged stakeholders who are in some way or the other impactedby corporate acts without tampering the principle of deciding and acting in the respectivebest interestsof the corporation (Cooper and Owen, 2012). 

On the other hand, shareholders are those who make financial investments in the business corporation and therefore they are entitled to voting shares for electing the directors. It is known that shareholders in general do not possess any right to be involved directly in the management of the company as their respective connection is established to the company management is to a great extent via the Board of Directors (Stout, 2012). The stakeholders are inclusive of financial stakeholders (i.e. bondholders) and non-financial stakeholders (i.e. suppliers, employees, customers, NGOs). In case of limited resources, the directors of the company need to make choice concerning the multi-layered audiences of the business corporation. 

It is quite obvious that as directors are chosen and recruited to their positions with the intervention of the shareholders, but that does not mean that they are accountable to the shareholder authority individually. Rather the directors tend to owe a duty to the corporation as a whole (Weir and Laing, 2013). But that does not mean directors take into account only the shareholders’ interests and look down upon any other interest related to the stakeholders who are significant part of the company as well. 

Evidence and analysis

Research studies reveal that the so called ‘fiduciary duty’ of the Board of Directors towards shareholders is in actual a convention without having any legal validity (Eccles and Youmans, 2015). Moreover, the primacy of the shareholder interests has been downright discarded by the law in multiple nations. As shareholder value is not the ultimate concern of the business corporation and is merely an outcome of the functionalities of the corporation; it can very well be mentioned that shareholders just a single party amongst other stakeholders who are taken into account in course of making decisions by the directors on behalf of the business corporation (Weir and Laing, 2013). 

As per the ABA website, instances have been aplenty where interests of the business corporation and interests of the shareholders have been synonymous with no significant distinction; as it is inevitable that what benefits the corporation would be benefitting the shareholders as well (Eccles and Youmans, 2015). Ensuring the return maximization to the shareholders is also in multiple cases found to be maintaining consistencywith the best possible interests of the business corporation. 

This is also true that there are numerous instances where the corporation interests are not at par with particular shareholders and thus conflict of interests occurs which may dampen the business objective to some extent (Cooper and Owen, 2012). In these cases, it can often be cited that the business stakeholders’varied as well as diverging interests may considerthe scope ofrealizing short term gains on their concerned investment which may be concluded by the directors as not necessary a goal in the business corporation’sbest interests of long term nature(Hillman et al. 2011). Moreover, majority of the shareholders may not share the interests as of the corporation and they may impose upon the corporation certain duties which require actions in fulfilling their own interests but not certainly in the best possible interests of the business corporation. The appropriatesolution to these sorts of issues is largely dependent on the facts and situations involved in the scenario and can be resolved only through considering all the facets (Ingley et al. 2011). 

It has been recognized by the court authorities that acting in regard with keeping the best interests of the corporation does not necessarily mean that directors would be disregarding the other stakeholders’ interests i.e. workers, creditors and the community which might be affected by the business corporation’s endeavors and actions (Ingley et al. 2011). Considering the varied interests of the stakeholders is often found to be at par with the long term best plausible corporation interests.  In course of discussing as per the ABA website, it is largely believed that to act in the best interests of the company is synonymous with acting in the best interests of the shareholders who are in a way owners of the company or company shares (Eccles and Youmans, 2015). As the directors are responsible towards acting in the best interests of the company, they need to consider both the current and future shareholders by dint of maintaining short term and long term growth of the company. 

Furthermore, directors need to take into serious consideration both the internal as well as external governance of the company (Aguilera, 2015). Although there is nothing obligatory on the part of directors in taking extraneous interests into account, which does not certainly mean that directors are not entitled legally to do so especially as it is done for ensuring the fact that the respective company is a good corporate citizen. 

It is contended that directors should be making decisions in good faith and fulfill the proper purpose which in turn is all for benefitting the company, the customers and the environment respectively. In case of paying lesser amount of attention to the company shareholders, it can well be considered as a breach of duties towards the respective Board of the company (Stout, 2012). Furthermore, in case of finding the interests of the stakeholders defective, it can be regarded as not to be acting in the best possible interests of the corporation which can lead to drastic consequences in terms of exposing the company in question to risk factors. 

It is well recognized by the directors that their respective decisions do have the power to impact others way beyond the business corporation and its concerned shareholders. The company management does not only contain the shareholders who have shares in the company and therefore, corporate decisions made by the directors are made in accordance with keeping in mind all the involved parties of the corporation and not just the owner section (Atherton et al. 2011). The employees and the community related to the concerned corporation are largely affected by the directors’ decisions which are inclusive of business strategies of high-risk nature or corporate reorganizations. 

Moreover, the national interest may well be impactedgreatly by the decisions of the directors when it comes to moving business operations offshore which in turn may be well beyond beneficial for the specific shareholders of the company (Bebchuk, 2013). But it is obvious that directors are responsible to a great extent for considering the interests of every stakeholder involved or related in some way or other with the company. As per the modernistic interpretation of the director’s duty towards the business corporation, the directors are allowed as well as permitted to consider the interests of the shareholders as well as stakeholders to come to a decision regarding what is appropriate in absolute best interests of the business corporation (Frias‐Aceituno et al. 2013). 

Though arguments have been made in favor of amending the Corporations Act in course of containing a significant provision for mandating the directors’ duty in considering the interests of the stakeholders; it has been found that this can lead towards stifling the process of corporate decision making and can result in inefficient decisions (Campbell et al. 2012). This in turn would be leading to have detrimental effect on both the shareholders and the stakeholders of the company. 

It can be mentioned in this regard that the Corporations Act precisely under Section 181(1) provides enough coverage to authorize the directors in considering shareholder interests as well as the other stakeholders in lieu of instructing the directors in acting in the best interests of the company to secure its future and to improve its growth (Clarke, 2013). Furthermore, this sectional provision is supportive of the argument that company law tends to allow the directors in having serious consideration for the interests of the stakeholders. Therefore it can be put forth that by means of amending or revising the Corporations Act in further obliging the directors will unlikely to cause change in their respective corporate behaviors when it comes to taking into account the varied interests of the stakeholders (Dent Jr, 2014). 

Recommendations

Considering the interests of shareholders above the interests of other stakeholders is certainly the part of the directors’ duties and therefore, over-regulating in terms of revising the Corporation Act can lead to damage the objective concerning ‘best interest of the company’. It can be recommended in this regard that upon recognizing the significance of stakeholder interests, both the shareholders and the employees should be communicated how the respective interests would be beneficial for the company in the long run, in improving the company growth scale as well as in enhancing the corporate image.

The ever growing need as well as demand for the cause of corporate accountability on the part of company directors should be proceeded towards producing statements with regard to identifying specified financial and non-financial issues. This alongside integrated corporate social reporting would help in establishing the fact with legal support that Boards of Directors are fiduciarily obligated towards the business corporation and not to the shareholders alone. 

It can also be recommended that companies need not be approaching the issue of stakeholder responsibility by means of a narrow lens but instead they should acknowledge their respective interests as part of what is beneficial for the company. This is to be considered in case of both short term and long term corporate responsibility. 

Summary

It can be summarized in this regard that directors of the company do have corporate accountability towards the corporation as a whole and not just to the shareholders, barring other stakeholders. This report discussed and analyzed the issue concerning shareholder interests and duty of directors alongside stakeholder importance. Whether the Corporations Act needs to be clarified as well as revised in order to require the directors in upholding the interests of the specific sections of stakeholders during the time of corporate decision making; it is important to pinpoint that the prime objective of a business company is to act in the best plausible interests of the company. But this has been mentioned as well that revising the Corporations Act for including the stakeholder interests to ensure directors pay heed to them as well would be a caseof over-regulating which may cause damage to the prime objective of the corporation which is nothing but taking actions in the best possible interests of the corporation.

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