Corporate Governance: Why Directors Should Not Prioritise Shareholder Interest

This report evaluates why directors should not prioritise the interest of shareholders over other stakeholders based on the principles of corporate governance. Various evidence and examples will be given in the report to understand the importance of compliance with corporate governance.

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Corporate Governance

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Table of Contents
Introduction................................................................................................................................2
Responsibilities of Board of Directors.......................................................................................3
Myth of Shareholder Supremacy...............................................................................................4
Examples of Companies.............................................................................................................5
Apple Inc................................................................................................................................5
Volkswagen............................................................................................................................5
Google....................................................................................................................................6
Enron Corporation..................................................................................................................6
Recommendations......................................................................................................................6
Conclusion..................................................................................................................................8
References..................................................................................................................................9

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Introduction
Corporate governance is referred to a system of procedures, rules and practices which direct
and control a company’s actions. The purpose of corporate governance is to balance the
interest of stakeholders in a corporation such as customers, shareholders, suppliers,
government, management, and society (Harford, Mansi and Maxwell, 2012). It is a common
misconception that shareholders are the most important stakeholder for a company and the
board of directors have to take actions by prioritising their interest. The principles of
corporate governance provide that each stakeholder is equal and directors cannot prioritise
the interest of shareholders over others. A company is an artificial person, therefore, its
decisions are taken by the board of directors, and they have a fiduciary duty to ensure that
they focus on the interest of the company rather than their personal interest. They are also
responsible for ensuring that they take business decisions which are in the interest of each
stakeholder rather than focusing on just the benefit of shareholders (Knudsen, Geisler and
Ege, 2013). This report will evaluate why whether directors should not prioritise the interest
of shareholders over other stakeholders based on the principles of corporate governance.
Various evidence and examples will be given in the report to understand the importance of
compliance with corporate governance. Furthermore, recommendations will be given for
directors to guide them towards making business decisions by considering the interest of each
stakeholder.

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Responsibilities of Board of Directors
The objective of a corporation is to survive and thrive in the market, and its decisions are
taken by its board of directors. Directors have substantial powers in order to manage the
operations of a company, and they are bound by different duties to ensure that they did not
take business decisions to fulfil their personal interest. The Corporations Act 2001 (Cth)
provides various duties which are necessary to comply by directors while discharging their
duties. According to AICD (2018), directors are required to comply with following duties
while taking business decisions in the company.
 Care and diligence
Firstly, directors have a fiduciary duty towards the company due to which they are required to
act with a certain degree of care and diligence which a reasonable person would in the
particular situation.
 Good Faith
Directors have to act in good faith of the company and its stakeholders, and they cannot
misuse their powers to gain an unfair advantage in the company.
 Not to improperly use position
Directors should not misuse their powers to gain an unfair advantage; they should perform
within limits and avoid taking any decisions which could adversely affect the corporation or
its stakeholders.
 Not to improperly use information
While discharging their duties, directors collect confidential information about the company
and its future operations. It is their duty that they should not use this information for personal
gain or to cause harm to the stakeholders.
These duties show that directors have to use their position carefully, and they are responsible
towards all stakeholders rather than just shareholders. It is not their duty to take actions which
benefits shareholders only by increasing their overall value (Jo and Harjoto, 2012). Based on
these duties, directors have to prioritise the interest of the company above all. In case
directors failed to comply with these duties, then it leads to negative consequences in which

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the court can punish directors for breaching their duties. For example, directors were
punished in case of AWA Ltd v Daniels (1992) 13 ACLC 614 because they took business
decision in personal interest rather than focusing on the benefit of shareholders (Yeo, 2016).
There are a number of corporations which have gained success and increased their
shareholders’ value by implementing effective corporate governance policies.
Along with director duties towards corporations, the role of Corporate Social Responsibility
(CSR) has increased. Organisations cannot just focus on increasing their profits without
taking appropriate measures to comply with their corporate responsibilities. Many countries
have made it mandatory for corporations to implement CSR policies and directors are
required to provide an annual report regarding their CSR actions. For example, in the
jurisdiction of Brazil, the fiduciary duties of directors include the corporation’s obligations to
its non-financial stakeholders (Eccles and Youmans, 2015). Effective CSR structure focuses
on the interest of different stakeholders such as environment, customers, government and
others. It shows that directors are responsible towards all stakeholders, and they should focus
on achieving their interest rather than just focusing on the benefit of shareholders.
Myth of Shareholder Supremacy
The AICD is concerned that most directors believe that they are responsible for putting the
interest of shareholders above all other stakeholder interests since they take the highest risk in
the enterprise. It is a common misconception among people. Traditionally, the purpose of the
incorporation of a company was to generate as must profit as it can for its shareholders and
directors achieve this target by any means necessary. However, this concept changed with
time, and the concept of corporate responsibility prevailed. It provides that a corporation is an
artificial person and it has corporate responsibilities just as a human being (Queen, 2015). A
company cannot generate profit by adversely affecting others such as people or the
environment. Although, this concept has become popular with the CSR model, however, still
many directors believe that they are required to focus on shareholder interest above all due to
lack of strict policies.
Furthermore, many directors argue that the generation of wealth for shareholders is beneficial
for the entire corporation and its stakeholders since more wealth leads to more opportunities
for everyone. However, this concept is not correct. As per Kakabadse and Kakabadse (2013),
directors take decisions which are in the interest of shareholders, but, they negative affect

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other stakeholders. For example, increasing the working hours of employees or not providing
them health benefits to reduce costs. They also misuse environmental resources which
negatively affect society as a whole. Thus, directors have responsibility to business decisions
which are in the benefit of all stakeholders rather than just shareholders.
Examples of Companies
Following are various examples of companies which have achieved success due to effective
corporate governance structure and which have failed because directors focused on the
interest of shareholders rather than all stakeholders.
Apple Inc.
Apple is currently the world’s most valuable company with a valuation of $923 billion
(Divine, 2018). The company also has a positive brand image in the market because it
complies with its corporate responsibilities effectively. For example, the corporation
manufactures 100 percent of its products by using green and renewable energy sources. It
avoids using harmful materials and chemicals in its products to reduce costs. The company
focus on reducing its carbon footprint, rather than saving money to increase its shareholders’
value. Due to its positive brand image and eco-friendly manufacturing process, customers
prefer to purchase its products even at high costs which provides them good quality products
and increase its shareholders’ value (Lehman and Haslam, 2013).
Volkswagen
It is a German automaker giant which offers a wide range of cars to its customers from high-
end luxury vehicles to affordable and efficient cars. Volkswagen group consist of large
brands such as Lamborghini, Skoda, Bentley, Audi, and many others. Recently, the company
was involved in a scandal in which it was found out that it has cheated on emission tests to
sell highly polluting cars in the market. Directors took this decision to increase shareholders’
value rather than fulfilling corporate responsibilities. The company had to pay a fine and
executives involved in the scandal were charged by the court (Hotten, 2015). However, most
importantly, the company lost its reputation in the market which adversely affected its
profitability. It shows that directors are responsible for considering the interest of all
stakeholders while taking corporate decisions (Crete, 2016).

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Google
Google is a multinational technology company which is the world’s third most valuable
company with a valuation of $754 billion (Divine, 2018). The corporation has achieved
significant success due to its innovative products such as YouTube, Android, search engine
and others. The company also has the best CSR reputation in the market due to its effective
corporate governance structure which focuses on the interest of different stakeholders. The
corporation uses renewable and green energy sources while performing its operations to
reduce its carbon footprint. Furthermore, the company has awarded as “the best place to
work” many times because its directors implement effective policies for its employees. For
example, it offers free lunch, free education facility, unlimited sick leave, long maternity
leaves, free vacations, time to work on personal projects and others (Miceli, 2015).
Enron Corporation
The bankruptcy of Enron was largest in the history of America because its director failed to
comply with its corporate responsibilities. Directors turned blind eyes, and they violated
various codes to hide the debt of the company to keep shareholders happy. Later,
shareholders filed a lawsuit of $40 billion against the company due to which its stock price
fell (CNN, 2018). It shows that directors should ensure that they focus on the interest of
diverse stakeholder audiences to ensure the success of the enterprise.
Recommendations
As discussed above, directors are equally responsible towards all stakeholders, and they are
required to implement policies while considering their interest rather than just focusing on the
benefit of shareholders. Following recommendations should be followed by directors to
ensure that they take business decisions by considering the interest of all stakeholders.
 Statement of Significant Audiences and Materiality
As per the study of Eccles and Youmans (2015), every company should issue a ‘Statement of
Significant Audiences and Materiality’ which is made by its directors, and it includes
information about all stakeholders of the company. This report can be just one page long, and
it should include information about stakeholders of the corporation and how they are affected
by the decisions of the company. Directors will be able to identify stakeholders of the
corporation based on this statement, and they would be able to consider their interest while
making business decisions.

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 Evaluation of the impact of the decision
While making a business decision, directors should evaluate various parties who will be
affected by such decision which would guide them in making decisions which are in the
interest of all stakeholders. Although, it is true that directors cannot make each stakeholder
happy, however, they can evaluate their decision to benefit a diverse range of stakeholders
than just shareholders. For example, directors of Microsoft evaluate the impact of their
decision on different stakeholders to ensure that they benefit a wide range of stakeholders
(Jizi et al., 2014).
 Strict CSR Policies
The governments across the world should make it mandatory for corporation to implement a
CSR structure in which they are required to made regulation disclosures regarding the actions
taken by directors regarding fulfilling company’s corporate responsibilities. Organisations
which did not comply with these policies should be punished which would ensure that
directors take business decisions towards the interest of all stakeholders (Jo and Harjoto,
2012). Directors should also strictly comply with CSR model to ensure that they fulfil the
interest of diverse stakeholder audience.
 Increasing Awareness
Organisations such as AICD should increase awareness among directors regarding their
duties towards stakeholders by organising seminars, meetings or others. Most directors
believe that they did not do any wrong if they take business decisions by prioritising
shareholders’ interest. This belief should be changed by increasing awareness among
directors regarding their duties towards all stakeholders (Klettner, Clarke and Boersma,
2014).

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Conclusion
In conclusion, directors have huge powers because they take business decisions for a
corporation and it is their responsibility to ensure that they take business decision which is in
the benefit of all stakeholder rather than just shareholder. Examples of various companies are
discussed in the report to understand the importance of a stakeholder’s approach. For
example, Apple and Google have succeeded in the market due to effective corporate
governance approach whereas companies such as Volkswagen and Enron have failed.
Various recommendations for directors are given to ensure the interest of stakeholders while
taking business decisions such as preparation of Statement of Significant Audiences and
Materiality, increasing awareness, strict compliance with CSR structure and evaluation of the
impact of decision. Based on these recommendations, directors can fulfil their duties and
become more responsive to diverse stakeholder audiences.

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References
AICD. (2018) General duties of directors. [PDF] AICD. Available at:
https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-
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July 2018].
CNN. (2018) Enron Fast Facts. [Online] CNN. Available at:
https://edition.cnn.com/2013/07/02/us/enron-fast-facts/index.html [Accessed on 28th July
2018].
Crete, R. (2016) The Volkswagen scandal from the viewpoint of corporate
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Kakabadse, N.K. and Kakabadse, A. (2013) Privatizing Vulnerability: The Downside to
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Klettner, A., Clarke, T. and Boersma, M. (2014) The governance of corporate sustainability:
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