Corporate Governance: A Stakeholder Approach 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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