Corporate Governance: Why Directors Should Not Prioritise Shareholder Interest

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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