Importance of Stakeholders in Corporate Governance

This article discusses the importance of stakeholders in corporate governance and how they influence decision-making. It explores the role of directors and officers in considering the interests of all stakeholders and the impact of good governance on the organization's success.

Running Head: BUSINESS AND CORPORATION LAW 0
Company Law
4/15/2019
Student’s Name

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Similar to a sole trader and partnership, a corporation is also a business structure, which is
available to people. The lead feature of this business structure is the separation of ownership and
management. Unlike the sole trader and partnership structure of the business, owners and
managers of the business in company structure are different. Shareholders are the actual owner
of the company who invests their money to their business. On the different side, directors are the
people who manage the affairs of the company. A corporation is an artificial person, the same
cannot act as a natural person, and therefore directors act on behalf of the company. In such a
situation, it becomes the duties of director of the company to act in the best interest of the
business. In addition to the shareholder, other stakeholders are also there which includes
suppliers, customers, business partners, employees, government, and the environment. Every
country has it is legislation which regulates the behavior of corporations. In Australia,
Corporations Act 20011 is the lead act that governs the companies in the nation. This act
prescribes general as well as specific duties of a director. These duties are known as statutory
duties. In addition to these duties, common law also prescribes certain duties.
Starting from the statutory duties of directors this is to state that sections 180-183 of the act
prescribe general duties of directors. Section 180 of the act says that every directors and officer
of the company must perform their duties with the diligence and care similar to a reasonable
person. Further subsection 2 of the act says that every director and officer of the company should
use best business judgment rule2. Here the best business judgment rule states that every director
1 Corporations Act 2001 (Cth)
2 Iknow.cch.com.au, Corporations Act 2001, Section 180 Care And Diligence — Civil Obligation Only <
https://iknow.cch.com.au/document/atagUio485896sl14504541/corporations-act-2001-section-180-care-and-
diligence-civil-obligation-only>

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of the company should take the decision for the proper purpose and in good faith of the
company. Further, the judgment should not consist of any personal interest of directors and
officers and the same should be appropriate. Section 181 of the act demands every director and
officer of the company must perform their powers and duties of the director for a proper purpose
and in the best interest of the corporation3. Every director and officer of the company takes
business decisions and keeps influencing position in the company. These people have all access
to sensitive business information and therefore they may misuse such information or position in
the company. Further section 182 of the act states that no officer, director, or employees of the
company should use their position in an inappropriate manner to gain self-advantages or
advantages of others4. Similar to section 182 of the act, section 183 of the same restrict directors
to use the information for self-benefits and benefits for others5. All the mentioned duties are
general duties that are applicable to every directors and officer of Australian companies. Here
this is necessary to state that for the purpose of the application of section 180-183, the term
company refers to stakeholders and not shareholders. The facts and decision given in the case of
ASIC v Cassimatis6 are required to discuss here. In this case, two of the directors of finance
company developed a financial advisory model, which was not in the best interest of the
investors of the company. Mr. and Mrs. Cassimatis developed a model consisting of “double
gearing” specification and believing in their advice investors adopted the same. In the decision of
this case, the court held that the directors of the company breached their duty under section 181
of the company. Directors on the different side stated that they have fulfilled their responsibility
3 Classic.Austlii.Edu.Au, Corporations Act 2001 - SECT 181 (Web Page) <
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html>.
4 Australia, Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related
regulations (CCH Australia Limited, 2011) 221.
5 Premiers.qld.gov.au, 7.3 Corporations Act 2001 (Cth) (the Corporations Act) (Web Page)
<https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-
duties/corp-act-2001-c.aspx>.
6 ASIC v Cassimatis (No 8) [2016] FCA 1023

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towards the shareholders. The court rejected the arguments of directors and provided that as per
general duties under Corporations Act 2001; directors are liable towards the corporation, which
includes all the stakeholders and not just the shareholders. The interest of a corporation is a
wider term and includes all the stakeholders.
Corporate governance is a subject that stats the responsibility of directors and officers of the
company. Australian Stock exchange developed the principles on corporate governance. Further
Australian Prudential Regulation Authority also produced its independent report in the matter of
governance, accountability, and culture of commonwealth bank. Both of these reports are
focused on the same point that the board has a broader responsibility and the same must consider
the interest of all the stakeholders. In recent times, many of the cases happened there where
directors only considered the interest of shareholders only or ignored the interest of other
stakeholders. Commonwealth Bank of Australia (CBA) is one of such example. Two of the case
studies related to this bank is presented hereunder.
1. The royal commission found that bank failed to notify 54000 account transactions that
were in against of the anti-money laundering policy of the federal government. In order
to create profits for the company and to consider the interest of shareholders only, the
bank did not comply with the legal requirements. The total value of these transactions
was more than $10000. These transactions were required to be reported and failure to
report the same was attracting a penalty of $18 million7. In this manner, there was a
penalty hundreds of billions of dollars on the bank. When the news went out into the
7 Matthew Doran and Michael Janda, Commonwealth Bank to pay $700m fine for anti-money laundering, terror
financing law breaches (Web Page, 04 June 2018) < https://www.abc.net.au/news/2018-06-04/commonwealth-
bank-pay-$700-million-fine-money-laundering-breach/9831064>.

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market, the share price of the bank faced an instant downfall that brought much loss to
shareholders. The bank became agree to pay $700 million as a penalty.
2. Another time when CBA failed to taken care of stakeholder interests is the time when the
same charged fee for no service from its customers. ASIC claimed that the customers of
the bank paid a fee for the services, which they did not even receive ever8. The lead
intention of the bank behind this act was to earn more and more profits. Here in this
manner bank, focused on profit factors and forgot the expectations and goodness of
customers.
3. In addition to the above two incidents, many others are also there when CBA developed
the focus on profits only and acted in the interest of shareholders only. Interest Rate
rigging is another act which this bank did. As per the allegation made by ASIC, this bank
manipulated bank bill swap reference rate three times in order to maximize its profits.
In such a manner, the bank did not consider the interest of other stakeholders such as authorities,
government, customers, and investors. Time is changing and with the development of corporate
governance principles, it is being clear that directors are required to consider the interest of all
the related groups and not just the shareholders. Profit should not be the only motive of the
organization. Every stakeholder plays an important role in the organization and to follow the
good governance, directors should treat all the stakeholders equally. Traditionally company
directors were used to be responsible towards shareholders only but now the situation has been
changed. Corporations are understanding the fact that in addition to shareholders, other
stakeholders are equally important9.
8 David Chau, Commonwealth Bank to stop 'fees for no service' for most customers (Web Page, 04 February 2018)
<https://www.abc.net.au/news/2019-02-04/asic-orders-commonwealth-bank-to-stop-charging-financial-fees/
10776870>.
9 corporatefinanceinstitute.com, Stakeholder vs Shareholder (Web Page)
<https://corporatefinanceinstitute.com/resources/knowledge/finance/stakeholder-vs-shareholder/>.

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Corporate Governance Principles and Recommendations
Australian Stock exchange published a report consisting of the principles and recommendations
on the matter of corporate governance. These principles state the manner in which the board of
director of a company should behave and respond. There are a total of 8 principles in this report
which are applicable to listed entities of Australia. Principle 3 of the act says that the company
should act responsibly and ethically. It means every director and officers of the company should
act in a fair manner which leads to good governance. Further principle 6 requires a company to
respect the rights of each security holders. Here it is clear that in addition to the shareholder, the
company is responsible towards each of the security holder10. Twenty-Nine recommendations are
also there in this report, which gives different ideas of good governance. This report is an effort
in the direction where the corporations are required to consider the interest of all the
stakeholders. Principle 10 seems to be the most relatable one, which says that to get a good
corporate governance level, companies are required to recognize the legitimate interests of
stakeholders.”
AS 8003
ASX principles of corporate governance are applicable to the listed entities but it does not mean
that other corporations are not required to comply with good governance. AS 8003 are the
Australian standards which put the liability to follow corporate governance on the nonprofit
organization and government departments. These are focused on corporate social responsibility11.
The main motive of these standards is to provide a guide to companies to make their corporate
social responsibility better. Risk management, environmental management and Occupational
10 Asx.com.au, Corporate Governance Principles and Recommendations (Web Page) <
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf>
11 Whistleblowing.com.au, Corporate Governance (Web Page) < https://www.whistleblowing.com.au/company-
protection/corporate-governance/>.

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Health and Safety (OH&S) are few of the areas, which these standards cover in respect of other
stakeholders.
Stakeholder theory
This theory of corporate governance says that the management of the corporation should work
for every stakeholder12. It looks ahead than the traditional members of a corporation such as
directors, officers, and shareholders and focuses on the interest of other members which has the
same dependency on the corporation. Stakeholders of a company may be external or internal.
Internal stakeholders are the people who are actually involved in the process of corporate
governance. This group of stakeholders includes the management and employees of the
corporation. On the other side, external stakeholders are not directly involved in the corporate
governance process but influence a corporation and get influenced by the same. This kind of
stakeholders includes customers, suppliers, auditors, debtors, creditors, and government. These
entire stakeholders have certain expectations from the corporation13. In such a situation, it
becomes the responsibility of the corporation to think about all of them as they are important
elements and affect the overall working and business of the organization.
Royal Commission Report
As mentioned above, the Banking Royal Commission detected many of the incidents of
misconduct by corporations of the financial and banking sectors. In all of the cases, the
subjective commission found a lack of good governance as directors and officers were only
focusing on profit factors. The banking royal commission released its report on the matter of
12 A. C. Fernando, Corporate Governance: Principles, Policies and Practices Pearson Education India, 2009) 50.
13 Thebusinessprofessor.com, Stakeholder Theory of Corporate Governance (Web Page) <
https://thebusinessprofessor.com/knowledge-base/stakeholder-theory-of-corporate-governance/>.

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governance for a financial institution in the year 201914. This report is well known as the Final
report by the Royal Commission into Misconduct in the Banking, Superannuation, and Financial
Services Industry. This report provides a recommendation on various matters such as banking,
superannuation, regulators, insurance, and many others. In the report, it is stated that entities,
which provides financial services, are nowhere different and in the longer terms interest of all the
stakeholders are concerned with the organization.
Importance of stakeholders
There is no doubt that shareholders are valuable people for every organization but apart from
them, other stakeholders are equally important for different reasons. For instance, employees are
the person who actually works for the corporation and plays an important role in the activities. If
employees of the organization would not be satisfied then they will not be able to perform well
and it will affect the overall productivity of the organization. Similarly, when a corporation does
not consider the interest of customer and investors, they lose faith in the respective business and
get diverted to other competitors. The government on the different side expects a level of
compliance and reporting from every corporation and therefore businesses should consider the
interest of authorities too. Debtors and creditors also expect good behavior and fair practices
from corporations while dealing with them such as ethical rate of interest and repayment policy
and affect the business of the corporation. In this manner, it is clear that all the stakeholders are
equally important for a business.
In the presented report, discussion has been made on the requirements of good governance to all
the stakeholders mentioned under CA 2001 and other rules, regulations, and guidelines. Many of
14 Treasury.gov.au, Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and
Financial Services Industry (Web Page, 04 February 2019) <https://treasury.gov.au/publication/p2019-fsrc-final-
report>.

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the cases happened there where directors considered the interest of shareholders over and above
all the other stakeholders and paid fines and penalties afterward. Different laws and policy
documents are there which says that directors are liable to every stakeholder. In addition to this,
the importance of other stakeholders also been discussed and this can be stated that accepting the
ownership of shareholders in a company, other stakeholders are equally important and general
duties of director mentioned under CA 2001 requires every director and officer to take care of all
the stakeholder and not just the shareholders. This is the reason that the board of directors should
not consider shareholders’ interests and instructions above all others.

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Bibliography
Cases
ASIC v Cassimatis (No 8) [2016] FCA 1023
Books/Journals
Australia, Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC
Act 2001, related regulations (CCH Australia Limited, 2011) 221.
A. C. Fernando, Corporate Governance: Principles, Policies and Practices Pearson Education India, 2009) 50.
Legislation
Corporations Act 2001 (Cth)
Other resources
Asx.com.au, Corporate Governance Principles and Recommendations (Web Page) <
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-
edn.pdf>.
Classic.Austlii.Edu.Au, Corporations Act 2001 - SECT 181 (Web Page) <
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html>.
Corporatefinanceinstitute.com, Stakeholder vs Shareholder (Web Page)
<https://corporatefinanceinstitute.com/resources/knowledge/finance/stakeholder-vs-
shareholder/>.
David Chau, Commonwealth Bank to stop 'fees for no service' for most customers (Web Page, 04
February 2018) <https://www.abc.net.au/news/2019-02-04/asic-orders-commonwealth-bank-to-
stop-charging-financial-fees/10776870>.

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Iknow.cch.com.au, Corporations Act 2001, Section 180 Care And Diligence — Civil Obligation
Only < https://iknow.cch.com.au/document/atagUio485896sl14504541/corporations-act-2001-
section-180-care-and-diligence-civil-obligation-only>.
Matthew Doran and Michael Janda, Commonwealth Bank to pay $700m fine for anti-money
laundering, terror financing law breaches (Web Page, 04 June 2018) <
https://www.abc.net.au/news/2018-06-04/commonwealth-bank-pay-$700-million-fine-money-
laundering-breach/9831064>.
Premiers.qld.gov.au, 7.3 Corporations Act 2001 (Cth) (the Corporations Act) (Web Page)
<https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/
welcome-aboard/member-duties/corp-act-2001-c.aspx>.
Treasury.gov.au, Final Report of the Royal Commission into Misconduct in the Banking,
Superannuation and Financial Services Industry (Web Page, 04 February 2019)
<https://treasury.gov.au/publication/p2019-fsrc-final-report>.
Whistleblowing.com.au, Corporate Governance (Web Page) <
https://www.whistleblowing.com.au/company-protection/corporate-governance/>.
Thebusinessprofessor.com, Stakeholder Theory of Corporate Governance (Web Page) <
https://thebusinessprofessor.com/knowledge-base/stakeholder-theory-of-corporate-governance/>.