Corporate Governance and Ethics

This paper evaluates the evidence which suggests that the responsibility of the directors of the company is to prioritize the interest of the shareholders over the other stakeholders of the organization. It discusses the duties of directors, corporate social responsibility, narrow view of CSR, and recommendations for the directors.

Running Head: CORPORATE GOVERNANCE AND ETHICS
Corporate Governance and Ethics
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1CORPORATE GOVERNANCE AND ETHICS
Table of Contents
Introduction................................................................................................................................2
The duties of directors................................................................................................................3
Corporate Social Responsibility.................................................................................................4
Narrow view of Corporate Social Responsibility......................................................................5
Discussion..................................................................................................................................6
Conclusion..................................................................................................................................7
Recommendation........................................................................................................................7
References..................................................................................................................................9

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Introduction
In the case of Salomon v A Salomon & Co Ltd [1897] AC 22 it had been clarified by the
judicial system that a company is to be regarded as a separate legal entity and its existence has
nothing to do with its owners. There are various stakeholders of a company including its owners
referred to as shareholders. These stakeholders include suppliers, customers, employees,
investors, creditors and the community as a whole. It has been argued by Twomey, Jennings and
Greene (2016) that in order to survive and be successful, which is two of its primary objectives
the organization must be able to keep a balance between the needs of its shareholders and its
other stakeholders. On the other hand it has been stated by Eccles and Youmans (2015) that even
through the shareholders invest their money in the a company which is to be managed by the
board of directors, there merely act as audience like any other the consideration of whom the
board of directors will have with respect to making a decision on behalf of the company. The
other groups in the audience are the stakeholders including bondholders, financial stakeholders,
non financial stakeholders, Suppliers, customers and NGOs who are in favour of the civil
society. In the light of having limited resources, irrespective of the size of the corporation,
decisions have to be taken by the directors taking into consideration the interest of the audiences.
The purpose of this paper is to evaluate the evidence which suggests that the
responsibility of the directors of the company is to prioritise the interest of the shareholders over
the other stakeholders of the organization. The paper provides for examples, evidences and
recommendations for the directors of AICD which guides them while taking decisions for the
organization to ensure that they can address the needs of most stakeholder audiences.

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The duties of directors
Any person who intends to act as a director of an Australian company is subjected to the
provisions provided by the Corporation Act 2001 (Cth) and common law provides with respect
to the way in which their functions are to be carried out. Further the Australian Securities
Exchange provides for recommendations which guide the directors of the company with respect
to the way in which a company should be governance known as the corporate governance
principles. The CA among other things provided via the provisions of section 181 that it is the
duty of any director to act in the best interest of the company in good faith and proper purpose.
Further section 180 of the legislation asks the directors to take decision in a diligent and careful
manner. The directors are also prohibited from misusing the position and information of the
organization to make personal gains and cause loss to the company (Mann and Roberts 2015).
The primary question which arises in this context is that what is considered to be the best interest
of the company. Is it the financial interest of the owners and shareholders of the company or the
interest of the other stakeholders such as creditors, suppliers, customers and the community.
These questions have been discussed in various cases by the courts. As the section is very
flexible unlike the provisions of section 172 of the Companies Act of UK, it allows the judges to
have a wide interpretation in relation to what is to be considered as the best interest of the
company. Evidence of the same can be found in various cases such as in the case of Australian
Securities and Investments Commission v Australian Property Custodian Holdings Limited
[2013] FCA 1342 it had been clarified by the court that where the organization is solvent the best
interest of the organization is to be taken as the interest of the owners and when the organization
is no solvent the best interest is to be considered as the benefit of the creditors and investors. On
many instances the directors have been penalized for taking into consideration interest of the

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shareholders over the interest of the other stakeholders such as in the case of ASIC v Cassimatis
(No 8) [2016] FCA 1023. On the other hand it had been stated by the court in the case of
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1 that that only
responsibility of the director is to ensure that the organization is making profit.
The principles of good corporate governance as provided by the ASX also in a way state
that the board of directors should take into consideration the interest of various stakeholders
while making a decision for the organization. These principles include acting an ethical and
responsible manner, respecting the rights of the security holders and identifying and managing
risks. This suggests that when the directors are making a decision on behalf of the company they
should not only take into consideration the interest of the shareholders but also the interest of the
other stakeholders whole acting in an ethical and responsible manner (Davidson, Forsythe and
Knowles 2015).
Corporate Social Responsibility
According to Bulchandani (2017) it is the duty of the organizations to ensure that that
take the interest of the society as whole while making any decision. This is because the
organization is also a citizen of the society being an artificial legal person it is the duty of the
organization to contribute towards the betterment of the society as any good citizen would do. In
light of the theory or CSR it is the duty of the directors to ensure that the organizations function
in an ethical manner which would ensure the betterment of the society along with the motive of
making profit. It has been argued by Schwartz (2017) in the favour of CSR that when the
organization attempts to act in a manner which is considered to be ethical and in the interest of
the society it may lead towards the enhancement of the organization’s reputation. This is because

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the other stakeholders will known that they organization is not only interested in seeking profit
but is also concerned about the wellbeing of its other stakeholders such as its employees,
customers and creditors. The enhanced reputation of the organization directly contributes
towards more profits as the customer base of the organization along with employee satisfaction is
enhanced. It has been argued by (Tai and Chuang 2014) that where the employees have a feeling
that the organization is concerned about their development they ensure that they provide more
effort towards the organization which makes it more productive. There are several other benefits
which are associated with following the principles of CSR and taking into consideration the
interest of the other stakeholders along with the shareholders. These include a better brand
recognition, increased customer loyalty, better financial programs, organizational growth, easier
capital access and positive business reputation. Customers, suppliers and creditors often choose
to work with those organizations which have responsible policies which reflect the way in which
the other stakeholders are to be treated.
Narrow view of Corporate Social Responsibility
It has been argued by Morgan Friedman in his book Capital and Freedom that the
directors of the organization should not be taking into consideration the interest of any other
stakeholder other than the shareholders as the primary purpose of an organization is to make
profit (Orlitzky 2015). It has been further stated in the book that it is the responsibility of the
owners of the organization to indulge in betterment of the community. This view is also known
as the narrow view of CSR. Wagner and Disparte (2016) states that in order to take into
consideration the interest of other stakeholders of the organization the directors may have to
sacrifice of organization profit as indulging into CSR objectives is no cheap and takes significant
part of the profits and time which may not be beneficial for the owners of the organization. In

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addition it may also be argued that the directors of the organization may misuse the principles of
CSR to make personal gains at the cost of the organization. As discussed above the law in
Australia clarifies that it is the duty of the directors to make decisions in the best interest of the
organization while discharging their duties. Thus indulging into CSR activities may sometimes
not be under the protection of the Business Judgement rule as found under the provisions of
section 180(2) of the CA the evidence of which had been provided via the case of ASIC v Rich.
Discussion
It has been stated by Schwartz (2017) that the directors have the responsibility of
exercising their duties for the best interest of the owners and shareholders of the company and to
maximize their wealth. However there have been various disputes which have come up in recent
times which suggest that the law has to clarified in relation to requiring the directors to have
responsibility which is not limited to the interest of the shareholders. Tai and Chuang (2014)
argues that the present laws should not be changed as there is immense flexibility under common
law which allows the directors to take into consideration the interest of the stakeholders and
shareholders by exploiting opportunities which are in the long term benefit of the organization.
Various activities which are not related to shareholders but to customers and suppliers as well as
the community are taken as a way of enhancing the reputation of the company. It can be stated
that the activities of the stakeholders may be contrary to the interest of the company which is the
utmost interest of the shareholders (McWilliams 2015). However where the interest of the
stakeholders are also taken into consideration it has several long term benefits to the shareholders
as well and thus it should not be view through a narrow lens. Most of the legal commentators
have provided a suggestion that a stakeholder oriented approach has to be taken into
consideration by the directors with respect to corporate governance. Through this the directors

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are allowed to make company decisions while taken into account interest of the stakeholders at
their own decisions without having the pressure of any external legal environment. However if
the directors are mandated by law to take into consideration the interest of the stakeholders it
would not surely provide beneficial outcomes as this would exert a pressure on the on the
directors to have a compliance approach which would defeat the intention and purpose of CSR
(Suliman, Al-Khatib and Thomas 2016).
Conclusion
It can be concluded from the above discusses that it is the duty of the directors working
form an organization registered in Australia to take into consideration the interest of the
shareholders above any other stakeholder. However the law and the courts have a flexible
approach in relation to the situation. The directors are allowed to take a decision under the
provisions of the business judgement rule which would have a long term benefit for the
organization and does not seem like a direct decision helping the shareholders. However the only
requirement here is that the decision has to be informed and should not be for the personal
interest of the director or the board. The decision must not be decision which no other director in
a similar position would indulge in. The directors have all rights to take consider the interest of
the stakeholders along with that of the shareholders unless it is not totally against the interest of
the company. Thus it can be stated that due recognition has to be provided to the interest of the
stakeholders along with interest of the shareholders on occasions where it is in the best interest of
the organization. They must be clear that the requirement is to act for the best interest of the
company.

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Recommendation
Through the above discussion the following recommendations have been made for the directors
1. The directors have the primary obligation of ensuring the best interest of the organization
2. They must be inform themselves that what would be best for the interest of the
organization such as the interest of the stakeholders or shareholders or both
3. Taking into account the interest of the stakeholders will allow the directors to provide a
long term benefit to the company which will eventually interest the shareholder.

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References
ASIC v Cassimatis (No 8) [2016] FCA 1023
Australian Securities and Investments Commission v Australian Property Custodian Holdings
Limited [2013] FCA 1342
Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
Bulchandani, K.R., 2017. BUSINESS LAW FOR MANAGEMENT. Himalaya Publishing House.
Davidson, D.V., Forsythe, L.M. and Knowles, B.E., 2015. Business law: Principles and cases in
the legal environment. Wolters Kluwer Law & Business.
Jones, L., 2017. Introduction to business law. Oxford University Press.
Mann, R.A. and Roberts, B.S., 2015. Business law and the regulation of business. Nelson
Education.
McWilliams, A., 2015. Corporate social responsibility. Wiley encyclopedia of management,
pp.1-4.
Orlitzky, M., 2015. The politics of corporate social responsibility or: why Milton Friedman has
been right all along. Annals in Social Responsibility, 1(1), pp.5-29.
Salomon v A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22
Schwartz, M.S., 2017. Corporate social responsibility. Routledge.
Suliman, A.M., Al-Khatib, H.T. and Thomas, S.E., 2016. Corporate social responsibility.
Corporate Social Performance: Reflecting on the Past and Investing in the Future, p.15.
Tai, F.M. and Chuang, S.H., 2014. Corporate social responsibility. Ibusiness, 6(03), p.117.

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Twomey, D.P., Jennings, M.M. and Greene, S.M., 2016. Anderson's Business Law and the Legal
Environment, Comprehensive Volume. Nelson Education.
Wagner, D. and Disparte, D., 2016. Corporate social responsibility. In Global Risk Agility and
Decision Making (pp. 221-243). Palgrave Macmillan, London.