Corporate Governance: A Stakeholder Approach for Directors

This report evaluates the relevance of a stakeholder approach for directors in corporate governance. It provides evidence from successful corporations such as Unilever, Starbucks, BMW and Levi Strauss & Co. and recommends compliance with duties, identification of interests and implementation of CSR model for directors.

Corporate Governance

Table of Contents
1. Introduction........................................................................................................................2
2. Object of a corporation.......................................................................................................3
3. Role of the board of directors............................................................................................3
4. Evidence from different corporations................................................................................4
5. Recommendations for directors.........................................................................................6
6. Conclusion...........................................................................................................................8
7. References..........................................................................................................................9
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1. Introduction
A company is an artificial person that has rights and duties just like a human. It has the right
to enter into a contract with third parties under its own name, and it can sue or get sued by
other parties. However, companies did not have a brain, and they cannot take business
decisions on their own. Thus, the board of directors of the corporations are responsible for
making decisions for the company. The directors have powers to take all the necessary
decisions in the company, and their primary focus is to promote the growth of the company.
However, many directors believe that they have a duty towards shareholders of the
corporation to secure their wealth and increase their shares value since they take the
highest risk in the company (Mason and Simmons, 2014). The amount invested by the
shareholders in the company is referred as capital which is used by the firm to perform its
operations.
However, this concept is not correct, and directors are equally responsible towards all
stakeholders of the company rather than just shareholders. The directors have to ensure
that while taking business decisions, they should not only focus on the interest of
shareholders, and they should take business decisions which are in the benefit of all
stakeholders (Ayuso et al., 2014). The objective of this report is to evaluate relevant
evidence for the Australian Institute of Company Directors (AICD) to prove that directors
should not place shareholder interests above other stakeholders. In order to prove the
statement, examples of various companies will be analysed in the report and
recommendations will be given for directors to consider the interest of a diverse range of
stakeholders while taking business decisions.
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2. Object of a corporation
A company is a separate person from its promoters and its shareholders. It has separate
rights and liabilities which is required to comply with during its operations. There are two
basic objectives of a corporation which include surviving and thriving in the market.
According to Eccles and Youmans (2015), the objective of a company and its directors is not
to expand the value of shareholders; the growth in shareholders’ value is just a positive
outcome of success of an enterprise. Although, shareholders take the highest risk in the
organisation and they entrust their share to the board of directors, however, they are not
responsible for focussing only on expanding shareholders value. Shareholders are a part of a
wide range of audience for the board of directors, and they are required to ensure that they
consider the interest of each stakeholder while taking business decisions. Previously, it was
a common belief that directors have to consider shareholders’ interest above all since they
are the owners and they bring capital to the business and takes risks (Hemmati, 2012).
However, with the introduction of ‘Corporations law’, this concept changed because it
provided a number of duties which are necessary to comply by directors while performing
their duties. The Corporations Act 2001 did not impose any duty on directors which provides
that they have to focus on shareholder value expansion above all.
3. Role of the board of directors
The board of directors are capable of utilising their powers to perform the functions of the
business. They are responsible for planning and organising the operations of a company by
delegating authorities between different levels of administration. Since they are the apex
authority in an organisation and they control all of its operations, it is relatively easier for
them to misuse their powers (Walls, Berrone and Phan, 2012). Thus, various provisions are
given in the Corporations Act 2001 which imposes duties on directors to ensure that they
did not misuse their powers and take decisions which are for the benefit of the whole
company. Following are four basis general duties of directors.
 Section 180: While performing their duties and taking business decisions, directors
have to ensure a level of care and diligence which any reasonable person would in
the particular position (AICD, 2018).
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 Section 181: Directors should act in good faith of the corporations, and they should
ensure the best interest of the company and use their powers for proper purpose.
They should also manage any conflict or issues arise in the company which could
adversely affect its interest.
 Section 182: The board of directors should not misuse their position to cause any
detriment to the company or gain an unfair advantage.
 Section 183: The board of directors should no misuse the information which they
have regarding the organisation in a way to cause detriment to the company or gain
an unfair advantage (AICD, 2018).
 Other duties: There are various others duties which are necessary to comply by
directors such as listing requirements, continuous disclosure and others.
It can be seen from the above duties that the directors have a fiduciary duty towards the
company rather than its shareholders. They did not have any duty or responsibility which
specifically requires them to take business decisions in order to expand the value of
shareholders. Each of these duties provides that the role of the director is to take business
decisions which are in the interest of the company and the growth in shareholders values is
just an outcome of it (Cooper, 2017). The AICD has recognised these duties of directors, and
it provides that the directors should take a diverse approach while taking business decisions
to ensure that the operations of the company are fulfilling interest of a wide range of
stakeholders.
4. Evidence from different corporations
Although the law is clear about these duties, still most directors focus on the interest of
shareholders because it brings more capital in the organisation. This concept has changed
with policies such as corporate governance and Corporate Social Responsibilities (CSR).
These concepts provide that a company has duties towards its stakeholders and directors
should recognise such duties and ensure that the company achieves the interest of different
stakeholders. These concepts focus on collaborative, engaging and purposeful operations of
a corporation rather than concentration on just profit maximisation (Jacoby, 2018).
Directors of organisations throughout the globe are implementing these theories to ensure
that they focus on fulfilling the corporate responsibility of the company towards
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stakeholders such as employees, environment, local community, government and others,
then just focusing on the interest of shareholders.
Unilever
It is a consumer goods company which provides that its organisational purpose is to make
sustainable living commonplace. The company provides that it works to create a better
future for everyone every day with its products and services which help people by feeling
and looking good to get more out of life. Nowhere in the organisational statement of the
company is written that it is focused towards “maximising shareholder value”. Instead, the
board of directors of this $60 billion company focuses on a higher sense of meaning for its
millions of customers, over 169,000 employees and others who are affected by its
operations to leave the world a better place (Pontefract, 2016).
Starbucks
It is an American coffee company which was founded in 1971, and it offers its services
across the globe. The company provide a friendly environment for its customers who
wanted to sit, relax and enjoy their coffee. As per the mission statement of the company, it
is focused towards inspiring and nurturing human spirit by providing one cup, one person
and one neighbourhood at a time. Its vision is to expand its operations worldwide by
offering finest coffee and maintaining its uncompromising principles while it grows. These
statements show that the board of directors of the company did to focuses on increasing
shareholders value; instead, they are focused towards improving local communities and
providing better services to its customers (Vandeveld, 2015). The company is also known for
its positive relationship with its employees who are treated as members of the company. It
also takes care of the environment by using eco-friendly procedures while making it coffee.
The corporation provides 100 percent ethical coffee, and it has implemented a program
called C.A.F.E which is focused towards helping coffee farmers (Starbucks, 2018). It also
provides coffee in recyclable cups which reduce environment wastage. The growth of the
company is proof that the implementation of stakeholder approach is beneficial for the
corporation.
BMW
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The company is known for being one of the most socially responsible companies in the
automotive industry. The corporation has set a high bar by setting a goal to help more than
one million people by 2020. The board of directors strictly focus on the complying with the
CSR model of the company. They create programs such as “The Schools Environmental
Education Development Project (SEED)” which are focused towards raising awareness
regarding social and environmental issues across the globe (BMW Group, 2018). The key to
CSR success of BMW has always been alignment. The corporation is a great example of
corporate governance because it has been able to create a balance between establishing a
good business model and helping social causes.
Levi Strauss & Co
Levi’s is another corporation which is known for its effective CSR model. The board of
directors of the company focuses on reducing the carbon footprint of the corporation rather
than increasing shareholders value of the company. Like BMW’s program, Levi’s has
implemented its own program called “Worker Well-Being Initiative” which concentrates on
helping and improving the life of employees (Peters, 2016). The directors of the company
also focus on supporting human rights and environmental causes. It has also trademarked a
campaign called “Water<Less” which is focused on using less water while manufacturing the
products of the company. Based on this campaign, the company will save over one billion
litres of water, and it is focused on improving the manufacturing process by 2020 (Business
Wire, 2016).
5. Recommendations for directors
The examples mentioned above show that corporations can receive success by focusing on
the interest of their stakeholders rather than just concentrating on maximising shareholders
value. Following recommendations can assist directors in focusing on a diverse range of
stakeholders while taking business decisions.
 Compliance with duties: While taking business decisions, directors should comply
with the duties imposed on them by the Corporations Act 2001. The duties provide
that they should act in good faith and maintain a level of care and diligence which
enable them to focus on the interest of stakeholders rather than just shareholders.
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 Identification of interest: The board of directors should evaluate the interest of each
stakeholder which is affected by the business of the enterprise. A good way of doing
this is by creating a “Statement of Significant Audiences and Materiality” as given by
Eccles and Youmans (2015). This statement includes information and details about
different stakeholders that are affected by the operations of the company. Based on
this statement, directors will be able to identify their interest and take business
decisions which are for the benefit of all stakeholders.
 CSR Model: The Corporate Social Responsibility structure is referred to a self-
regulating business model which helps a corporation in being more socially
accountable towards its stakeholders and the society. The board of directors can
implement this model to ensure that they are able to report the impact of the
operations of the company over the society and different stakeholders. This will
enable them to take initiatives and launch programs which are focused towards
achieving the interest of a diverse range of stakeholders rather than just maximising
shareholders value.
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6. Conclusion
From the above observations, it can be concluded that the board of directors of a company
are not responsible for maximising the shareholders’ value; instead, they have to take a
diverse stakeholder approach while taking business decisions. The goal of a company is to
strive and to thrive, and the maximisation of shareholders value is just its outcome. As given
in the Corporations Act 2001, the directors have to comply with a number of general and
statutory duties and none of which include maximisation of shareholders value. Various
successful corporations have implemented a stakeholder approach such as Starbucks, Levi’s,
BMW and Unilever which provide them a competitive advantage. Various recommendations
for directors are given in the report which can assist them in focusing on the interest of a
diverse range of stakeholders such as compliance with duties, the establishment of CSR
model and preparation of statement of stakeholders. Thus, directors should focus on
fulfilling the interest of a wider range of stakeholders rather than maximising shareholders
value to sustain their future growth.
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7. References
AICD., 2018. What are the duties of directors?. [PDF] AWLNSW. Available from
http://www.awlnsw.com.au/assets/Latest%20news/Duties%20of%20Directors.pdf
[Accessed 31/7/2018].
Ayuso, S., Rodríguez, M.A., García-Castro, R. and Ariño, M.A., 2014. Maximizing
stakeholders’ interests: An empirical analysis of the stakeholder approach to corporate
governance. Business & Society, 53(3), pp.414-439.
BMW Group., 2018. Sustainable Management. [Online] BMW Group. Available from
https://www.bmwgroup.com/en/responsibility/sustainability-at-the-bmw-group.html
[Accessed 31/7/2018].
Business Wire., 2016. Levi Strauss & Co. Open Sources Water Innovation Techniques to
Public. [Online] Business Wire. Available from
https://www.businesswire.com/news/home/20160322005444/en/Levi-Strauss-Open-
Sources-Water-Innovation-Techniques [Accessed 31/7/2018].
Cooper, S., 2017. Corporate social performance: A stakeholder approach. Abingdon-on-
Thames: Routledge.
Eccles, R.G. and Youmans, T., 2015. Why Boards Must Look Beyond Shareholders. [Online]
MIT Sloan Management Review. Available from https://sloanreview.mit.edu/article/why-
boards-must-look-beyond-shareholders/ [Accessed 31/7/2018].
Hemmati, M., 2012. Multi-stakeholder processes for governance and sustainability: beyond
deadlock and conflict. Abingdon-on-Thames: Routledge.
Jacoby, S.M., 2018. The embedded corporation: Corporate governance and employment
relations in Japan and the United States. New Jersey: Princeton 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.
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Peters, A., 2016. How Levi’s Is Building Well-Being Programs Where They Matter Most: In Its
Factories. [Online] Fast Company. Available from
https://www.fastcompany.com/3064477/how-levis-is-building-well-being-programs-where-
they-matter-most-in-its-factories [Accessed 31/7/2018].
Pontefract, D., 2016. Should Companies Serve Only Their Shareholders Or Their Stakeholders
More Broadly?. [Online] Forbes. Available from
https://www.forbes.com/sites/danpontefract/2016/05/09/shareholders-or-stakeholders/
#4ba0e62c13d2 [Accessed 31/7/2018].
Starbucks., 2018. Being a responsible company. [Online] Starbucks. Available from
http://www.starbucks.in/responsibility [Accessed 31/7/2018].
Vandeveld, K., 2015. Corporate Social Responsibility: How Starbucks Is Making An Impact.
[Online] Why Whisper. Available from
http://www.whywhisper.co/the-blog/2015/9/24/corporate-social-responsibility-how-
starbucks-is-making-an-impact [Accessed 31/7/2018].
Walls, J.L., Berrone, P. and Phan, P.H., 2012. Corporate governance and environmental
performance: Is there really a link?. Strategic Management Journal, 33(8), pp.885-913.
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