Busn7045 Corporate Governance For Company Assessment Answers
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.’
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 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.
Answer
Introduction
The principles of Corporations Act put the obligation on the company directors to release their duties, responsibilities and powers with the aim to act for the business interest of the companies. The underlying fact is that the directors need to discharge their duties and powers for maximizing the organizational wealth for the best interest of their shareholders (Tricker and Tricker 2015). However, the occurrence of some recent disputes has raised the concern related to clarify the existing laws of Corporations Act that will include the consideration of the interests of all stakeholders beyond the shareholders. On a more specific note, the clarification will include whether the directors ought to take into account other stakeholders’ interests like employees, customers, suppliers, people of community, environmental groups and others (Claessens and Yurtoglu 2013). This report considers the inspection of the directors’ responsibility for considering the interests of all stakeholders. This report is made with the intention to present it to the Australian Institute of Company Directors (AICD).
Present Framework Related to the Directors’ Duties
A recent call has been made related to the Corporations Act improvement in the areas of the directors’ duties and the sole focus of the directors on the interest of the company shareholders is the main reason for this reformation (sloanreview.mit.edu 2018). The case of James Hardie’s controversial decision can be presented as example in this context. As a result of the fall in the share prices, there was both the reputational and financial loss of the company; and the directors of the company ignored the asbestos victim’s interest in the process to safeguard the interest of the company (Moerman and van der Laan 2015). In the later situation, the company was able in increasing their share price along with the financial stability by taking the decision to consider the stakeholders’ interest that are the asbestos victims with the assistance of NSW Government and ACTU. This process also led to service the shareholders of the firm due to the boost in financial stability. Thus, the above-discussed situation of James Hardie as well as the recent corporate governance improvements indicates towards the fact that the companies are discouraged from not to consider the interest of all stakeholders. The companies can uphold their financial performance by fostering relationship with all the stakeholders (Moerman and van der Laan 2015).
There is presence of many laws and regulations to take into account the stakeholders’ interest in the process to make business decisions. This aspect leads to the compliance of the Australian Securities Exchange (ASX) companies with the ASX Corporate Governance Council’s ‘Principles of Good Corporate Governance and Best Practice Recommendations’ and it puts the obligation on the Australian to show their extent of compliance with the above principle in the published annual report (Tricker and Tricker 2015). Apart from thus, according to this principle, the Australian firms ought to disclose their schemes for handling the interest of the stakeholders under the section named ‘Code of Conduct and Ethics’ in their official company website (Tricker and Tricker 2015).
These Codes of Conducts assist the companies to form important policies as well as values for assisting the company directors to take into account all stakeholders’ interest in the processes of business decision-making and risk management. Under the ASX ‘Good Corporate Governance Principles’ the firms can access 28 recommendations where the 10th recommendation or principle is mostly relevant to the company stakeholders (Beekes, Brown and Zhang 2015). This particular principle puts the obligation on the company directors to recognize the interest of each stakeholders group for the establishment of successful corporate governance mechanism. At the same time it is the role of the company directors to maintain required supervision on the maintenance of these standards.
The aim of different segments of the Corporations Act indicates towards the directors’ responsibility for considering each stakeholder’s interest. According to Section 180 of the Corporations Act, the directors are needed to ensure the best performance of the businesses (Schultz, Tian and Twite 2013). According to Section 180 (1) of the Corporations Act, it is the obligation on the directors of the companies to use their power as well as duties when there is adequate degrees of care and diligence (Kraakman 2017). The case of Rocky Lamattina and Sons Pty Ltd can be use as an example in this context. In the year of 2009, a fine of $220,000 was imposed on the company as they were cleaning the trees that were the nesting habitants of the endangered bird species of South-eastern red-tailed black cockatoo. According to the court judgment, the large amount of fine was imposed on the company with the aim to demonstrate the seriousness of the environmental activities in the community as it would not to further tolerated (Grigg 2017).
It can be seen from the above example of Rocky Lamattina and Sons Pty Ltd that the company directors made a mistake by not taking into account the community people’s interest and it created a negative impact on the company. The above case also indicates the importance of the requirement of the directors to think beyond the shareholders’ interests. The Australian courts hold the successful application of the directors’ duties in various critical situations in the business organizations. As per these regulations, it is utmost important for the company directors to consider the shareholders as well as other stakeholders in the business decision-making process. It requires the directors to sustain the balance in the interests of all stakeholders (Armstrong et al. 2015).
The Impact of Over-Regulation on the Interests of the Companies
In the process of the clarification of the Corporations Act related to the responsibility of the directors to consider the stakeholders’ interest, the additional requirement is to consider the objectives of the companies and the objective is to operate for the best interest of the companies (Mason and Simmons 2014). This aspect leads to the extended responsibilities of the directors to take into account the interest of both the existing and future stakeholders. In this process, they will be able to make strategy for ensuring both the short-term and long-term business growth. Additionally, the directors are also needed to consider both the internal and exporter corporate governance (Mason and Simmons 2014).
It is the responsibility of the company directors to make the required business decisions in good faith by taking care of the purposes and benefits of environment, consumers and communities. For this reason, paying less attention to the interest of these stakeholders is considered as a major violation of directors’ responsibilities (Rao and Tilt 2016). In addition, it is considered as the breach of the duties of the directors in case there is fault in the process of handling the interest of all the stakeholders. The operations of the companies can be at severe risk due to the major consequences of these breaches of duties. With the aim to sustain the growth as well as corporate image of the firms, the directors ought to recognize the importance of stakeholders’ interests and their communication to the organizational employees and staffs for making them understand the benefit of this for sustain the long-term growth of the businesses (Setó?Pamies 2015).
The discussion papers of both ABA and CAMAC for the amendments of the Corporations Act consist of certain arguments. According to the subject of the argument, the presence of a obligatory function of the company directors to take into account the stakeholders’ interest in the Corporations Act can strangle the way to make business decisions due to the fact that it can contribute to unproductive business decisions that can have negative effect on the directors’ duty for acting in the best interest of the firms. For this reason, Section 181 (1) of the Corporations Act can be mentioned in this context as it puts the obligation of the company directors for considering the stakeholders’ interest with the aim to serve for the best of the companies. The presence of all these factors shows the small likelihood that there will be change in the corporate behavior of the company directors due to further amendments in the Corporations Act (Waligo, Clarke and Hawkins 2013).
At the same time, there is negative impact of the inclusion of legal obligation on the directors to take into account the interest of all stakeholder groups in the decision-making process. More specifically, in the presence of this kind of legal obligation of the company directors, there might be challenge on the directors regarding the interest of certain small minority group of stakeholders that do not have any impact on the company proceeding and decision-making process of the business (Waligo, Clarke and Hawkins 2013). Moreover, at the time to comply with these proposed legal requirements, the company directors might involve in long court proceedings that can affect the actual duties and responsibilities of them and it can lead to the compromise of the primary jobs and responsibilities of the directors. This whole aspect can affect the business growth of the firms.
Self-Regulations and Law Imposed
It can be seen from the current situation that the respective authorities are discouraging the business organizations in excluding all stakeholders’ interest; and the current aim is to move towards developing amity with all stakeholders by addressing their needs and issues through effective decision-making. This will also discourage the presence of any legal obligation for the directors in engaging with all stakeholders (De Schepper, Dooms and Haezendonck 2014). The earlier discussion discussed about the responsibility of the directors to serve in the best interest of the businesses; and it implies that the board and directors have the responsibility to address the issues and concerns of all stakeholders as the success of the companies lies in it. In addition, the above discussion of the case of James Hardie indicates towards the crucial fact that the directors of the company were not under any imposed laws and regulations for considering the interests of the asbestos victims, but the decision was their own to revive the situation of the company (De Schepper, Dooms and Haezendonck 2014).
In addition, business organizations have the option to ensure effective business outcome in case they have the required flexibility to implement the necessary approaches for the company stakeholders as the main element of the decision-making process; and the situation could be ineffective in case there is any mandatory legal obligation (Klettner, Clarke and Boersma 2014). Under the presence of any mandatory legal obligation, the directors may not value all stakeholders’ interest and it can be considered as a major negative impact of the presence of mandatory legal obligation. Thus, with the aim to diminish all these negative impacts, the directors of the companies need to go for establishing an effective corporate culture in the presence of stakeholder oriented approach for ensuring the consideration of the interest of the stakeholders (Klettner, Clarke and Boersma 2014).
The implementation of corporate culture will ensure the effective performance of the business organizations; and the imposition of the mandatory regulations will create difficulty for the companies and the directors. In order to ensure the sustainable long-term growth of the companies, the directors are needed to consider the interest of all stakeholders as the main corporate objective. More effectively, business organizations have the option for including stakeholders’ interest in their vision and mission statement. In this way, the directors will be encouraged to consider them as a part of the company’s business objective (Ben Barka and Dardour 2015).
Conclusion and Recommendations
The present legal framework under the Corporations Act of Australia along with the principle of ASX has put the commitment for the directors of the ASX listed companies to address the interest of the stakeholders with the aim to serve in the best possible way for the businesses. In addition, the directors can ensure sustainable business growth of their businesses by considering the interest of every group of stakeholder.
Based on the above discussion, it is recommended to the directors of the ASX listed firms for the development of friendly relationship with the company stakeholders with the help of establishing a corporate culture as this culture will allow the directors to consider addressing the issue of the stakeholders as their company objectives. Accomplishment of these objectives can ensure the creation of organizational value. On the other hand, it is also recommended to the respective authorities not to put any legal obligation by the amendment of Corporations Act. It is also recommended to the company directors to include the stakeholders’ interests in business strategies so that they can be effectively achieved.
References
Armstrong, C.S., Blouin, J.L., Jagolinzer, A.D. and Larcker, D.F., 2015. Corporate governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1), pp.1-17.
Beekes, W., Brown, P. and Zhang, Q., 2015. Corporate governance and the informativeness of disclosures in A ustralia: a re?examination. Accounting & Finance, 55(4), pp.931-963.
Ben Barka, H. and Dardour, A., 2015. Investigating the relationship between director’s profile, board interlocks and corporate social responsibility. Management Decision, 53(3), pp.553-570.
Claessens, S. and Yurtoglu, B.B., 2013. Corporate governance in emerging markets: A survey. Emerging markets review, 15, pp.1-33.
De Schepper, S., Dooms, M. and Haezendonck, E., 2014. Stakeholder dynamics and responsibilities in Public–Private Partnerships: A mixed experience. International Journal of Project Management, 32(7), pp.1210-1222.
Grigg, B., 2017. Environmental civil penalties—an Australian perspective. In Elgar Encyclopedia of Environmental Law (pp. 141-153). Edward Elgar Publishing Limited.
Klettner, A., Clarke, T. and Boersma, M., 2014. The governance of corporate sustainability: Empirical insights into the development, leadership and implementation of responsible business strategy. Journal of Business Ethics, 122(1), pp.145-165.
Kraakman, R., 2017. The anatomy of corporate law: A comparative and functional approach. Oxford 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.
MIT Sloan Management Review. (2015). Why Boards Must Look Beyond Shareholders. [online] Available at: https://sloanreview.mit.edu/article/why-boards-must-look-beyond-shareholders/ [Accessed 26 Nov. 2018].
Moerman, L. and van der Laan, S., 2015. Exploring shadow accountability: The case of James Hardie and Asbestos. Social and Environmental Accountability Journal, 35(1), pp.32-48.
Rao, K. and Tilt, C., 2016. Board composition and corporate social responsibility: The role of diversity, gender, strategy and decision making. Journal of Business Ethics, 138(2), pp.327-347.
Schultz, E., Tian, G.Y. and Twite, G., 2013. Corporate governance and the CEO pay–performance link: Australian evidence. International Review of Finance, 13(4), pp.447-472.
Setó?Pamies, D., 2015. The relationship between women directors and corporate social responsibility. Corporate Social Responsibility and Environmental Management, 22(6), pp.334-345.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Waligo, V.M., Clarke, J. and Hawkins, R., 2013. Implementing sustainable tourism: A multi-stakeholder involvement management framework. Tourism management, 36, pp.342-353.
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