Directors Duties towards Stakeholders in Corporate Governance

This report discusses the duties of directors towards stakeholders in corporate governance. It highlights the importance of considering the interest of all stakeholders, not just shareholders. The report also covers the regulations and provisions that impose obligations on directors to focus on other stakeholder groups.

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Executive summary:
In this report the main topic of the discussion is the duties of directors towards the wide range of
groups such as employees, the environment and the community. Generally, it is considered that
directors hold the obligation only towards the shareholders and the organization, but this is not
the true fact. In reality, directors of the organization hold the obligation towards wide range of
stakeholders because all these stakeholders play very important role in the survival of the
organization.
Contents

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Executive summary:....................................................................................................................................2
Introduction:...............................................................................................................................................4
Directors Duties...........................................................................................................................................4
Conclusion:..................................................................................................................................................7
References:..................................................................................................................................................8
Introduction:

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Directors of the organization are considered as most important personnel of the organization,
because they are responsible to run the business of the organization. In other words, directors are
responsible to conduct each and every business of the organization. For conducting the business
of the organization, common law and statutory law imposed number of duties on the directors
and these duties are defined as the fiduciary duties and statutory duties. Fiduciary duties are
considered as those duties which arise between those parties in which relationship of trust is
resent, and there is relationship of trust between the directors and all the stakeholders of the
organization.
Statutory duties are imposed by the Corporation Act 2001, and as stated by this Act, director
must conduct the business of the organization with due care and diligence and also in the best
interest of the organization. These duties are introduced under section 180-184 of the Act, and all
these section defines the director’s obligations towards all the stakeholders of the organization
and not only towards the shareholders and organization. Generally, it is considered that main aim
of directors is to increase the wealth of the shareholders, but in reality they own obligation
towards each and every stakeholders of the organization such as employees, environment,
community, customers, etc. There are number of disputes which highlight the interest of
stakeholders other than shareholders of the organization, and these disputes impose obligation on
the directors to think about the interest of all the groups of the stakeholders. It can be said that,
directors duties stated under the Act are not interpreted in right manner, as these duties consider
the interest of all the stakeholders and not only of shareholders of the organization. High Court
of Australia gives their verdict in number of cases, in which interest of community, environment,
and other stakeholder groups are considered.
Directors Duties
As stated above, number of fiduciary and statutory duties is introduced by the common law and
statutory law in terms of the directors of the organization. Directors are considered as most
important organ of the organization because they are responsible to run the business of the
organization, and this is the reason some obligations are imposed on them. Generally, it is
interpreted that directors are under obligation towards these shareholders and organization and it
is their duty to run the business in such manner as it increase the wealth of the shareholders only.
While believing this fact, directors only focus on the interest of the shareholders and
organization, and avoid the interest of other stakeholders groups.
Usually, Court while deciding the cases only consider the interest of the shareholders and make
the directors liable towards shareholders only, and because of this no one focus on the interest of
other stakeholders of the organization. This can be seen through number of cases such as case
law ASIC V Adler (2002) 41 ACSR 72; [2002] NSWC 1711. In this case, Court held that
directors breach their duties under section 180-184 of the Act because actions taken by directors
cause loss and damage to the shareholders and organization. However, in this case Court fails to
1 ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171

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consider the effect of the Adler’s actions on the other stakeholders such as consumers and
community. It must be noted that, this is not the only case as other cases also focus on
shareholders only.
Recently, High Court decided some cases in which they focused on the other stakeholders of the
organization also such as they considered the interest of other stakeholders also as the prime
responsibility of all the directors of the organization. High Court gives their verdict in the case
law ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 182 which famously
known as James Hardie case.
This case is considered as perfect example of the fact that directors while taking their actions
must consider the interest of all the stakeholders and not only of the shareholders. In other words,
in this case court determines the duty of director towards both shareholders and other
stakeholders. As Court with the reputation loss and economic loss, also consider the effect of
directors actions on employees and community. In this case, actions taken by the directors not
only impose negative effect on the share price of the organization, but also on the victims of the
asbestos. Therefore, it can be said that court determines the interest of shareholders, employees,
community, and environment. 3
After some time this decision taken by the Court will be deemed as most beneficial decision for
the organization, which means, considering the interest of the stakeholders is considered as
beneficial decision for the James Hardie. This not only increases the share price of the
organization, but also enhances the company’s reputation in the eyes of community. After
considering the facts of this case, it is clear that considering the interest of all the stakeholders
will ultimately result in the betterment of the organization, and help the organization in the long
run.
This is the reason because of which number of regulations are introduced by the corporate
governance and Corporation Act 2001 which directly impose obligations on the directors to
considering the interest of all the stakeholders of the organization while running the business of
the organization. These regulations also encourage the organizations in terms of making the
strong relationship with each and every group of the stakeholders because this is the only way
through which organization can survive in the long run.
There are many experts who stated that there is need of new laws which impose compulsory
legal obligations on directors to consider the interest of every stakeholder group while running
the business. However, there is no need to introduce new regulations because Corporations Act
2001 and corporate governance provisions already introduce number of obligations on the
2 ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18
3 Norton, The James Hardie Decisions: Australian Securities & Investments Commission v Hellicar & Ors [2012]
HCA17; Shafron v Australian Securities & Investments Commission [2012] HCA 18, (2012,
<http://www.nortonrosefulbright.com/knowledge/publications/66582/the-james-hardie-decisions-australian-
securities-investments-commission-v-hellicar-ors-hca17-shaf>.

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directors of the organization through which they need to consider the interest of all the
stakeholders of the organization.4
These obligations are mainly imposed on those organizations which are listed on ASX, and as
per these obligations these organizations need to comply with the ‘Principles of Good Corporate
Governance and Bes Practice Recommendations, introduced by the ASX in association with the
Corporate Governance Council’s. These regulations clearly state that directors need to disclose
each and every matter in the annual report such as actions taken by directors in context of
community help, environment protection, etc., and also the manner in which directors complied
with these recommendations in the particular time period. It is necessary to understand that till
the time these recommendation are discretionary in nature.
Organizations also need to mention on their official websites about the compliance of the
recommendations stated by the ASX and also the actions which are taken by the organizations
for meeting the interest of the stakeholders at each and every stage. Another way through which
organization can shows their approach towards the wide range of stakeholders is the code of
conduct of the organization and ethical values adopted by the organization. Code of conduct
adopted by the organization is considered as that document which clearly reflects the activities
conducted by the organization and approach adopted by the organization in terms of all the
groups of the stakeholders and not only shareholders of the organization.
It must be noted that these duties are not only imposed on the organizations listed with ASX but
also on the organizations which are not listed with the ASX. In other words, organization not
listed with the ASX also needs to comply with the standards of the corporate governance, and
also the regulations of the Corporations Act or ASX Listing Rules. These standards and
regulations impose duty on the organization to enhance the effectiveness of the procedure of the
corporate governance.5
Australian government introduced the non-rigid guidance for the organizations of Australia in
2003, and this guide is called as ‘AS 8003’. This guide reflects number of recommendations
through which organization can achieve the targets of the corporate social responsibility (CSR).
CSR is defined as most important concept in this modern business world, because this is the only
concept through which organizations can consider the interest of community and society. This
guide help the organizations in maintaining the CSR culture in their organization by adopting the
approach of self-regulatory, because this approach ensures continuous monitoring of the CSR
4 Richard Whalebelly, The James Hardie Decisions: ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18, (2012).
<http://www.mondaq.com/australia/x/176336/Directors+Officers+Executives+Shareholders/
The+James+Hardie+Decisions+ASIC+v+Hellicar+Ors+2012+HCA17+Shafron+v+ASIC+2012+HCA+18>.
5 ASX, Corporate Governance Principles and recommendations, (no date), < https://www.asx.com.au/documents/asx-
compliance/cgc-principles-and-recommendations-3rd-edn.pdf>.

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culture in the organizations. Through this approach organizations can also ensure the compliance
of the legal duties and standards of the corporate governance.
There are some other regulations and provisions also which consider the importance of the
corporate governance and demand focus of directors in this areas for the survival of the
organization such as environment protection regulations, customer guarantees, customer
protections, society obligations. All these regulations and provisions impose obligations on the
directors of the organization to consider the interest of all the stakeholders and not only of the
shareholders of the organization. Following are the perfect examples of some of these standards
which directly require the focus of directors on other groups of stakeholders also-6
 Competition and Consumer Act 2010 impose obligation on directors to consider the
interest of the consumers while taking any decision in their business7.
 Environment Protection and Biodiversity Conservation Act (EPBC Act) 1999 require the
organizations to ensure such procedure in their working through which they can monitor
and manage the issues related to the environment.
 Standards related to the CSR impose obligation on directors to go beyond the concept of
profit and loss and conduct any such activities through which society get benefit.
As stated above, Corporations Act 2001 also introduces number of provisions through which
directors are under obligation to consider the interest of the stakeholders. Section 180 of the Act
states that directors of the company need to take the decisions of the organization with due care
and diligence, which means, they need to consider all the aspects of the organization in accurate
manner and all these aspects must be evaluate in proper manner. This section further states that
while making any judgement of the business all the necessary information related to that
judgement must be evaluated and judgement must be in the favour of all he stakeholders. In
other words, decision taken by directors must not be such nature, as it provide benefit to the
shareholders but it cause undue disadvantage to any other group of the stakeholders.
Clause 2 of this section defines the business judgement rule, and this rule is designed for
providing the protection to the directors of the organization. As stated by this section, in case
directors take any decision after considering all the aspects and in good faith then directors of the
organization are not liable for any wrong.
Another section which considers the interest of all the stakeholders is the 181, which states that,
directors must perform their duties and obligations and use their power for the right aim, in the
best interest of the organization, and also in good faith. This section further state, directors must
6 Norway Redmond, Directors’ duties and corporate social responsiveness. (2012),
<http://www.austlii.edu.au/au/journals/UNSWLawJl/2012/13.pdf>.
7 Paul Dermansky, Should Australia Replace Section 181 Of the Corporations Act 2001 (Cth) With Wording Similar
to Section 172 of the Companies Act 2006 (UK)?, <
https://law.unimelb.edu.au/__data/assets/pdf_file/0003/1709832/60-
Should_Austalia_replace_s181_of_the_Corporations_Act3.pdf

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not consider their own benefit while performing their duties and avoid the conflict of interest
with the organization.
This section clearly states that directors while considering the best interest of the organization
not only consider the interest of the shareholders and organization, but consider the interest of
all the stakeholders because organization includes all the stakeholders and not only the
shareholder8.
After considering all the above facts that this notion is completely wrong that directors only bear
responsibility towards the shareholders and organization, but in actual they bear responsibility
towards all the groups of stakeholders which includes community, employees, and society. In
reality, directors of the organization hold the obligation towards wide range of stakeholders
because all these stakeholders play very important role in the survival of the organization.
Conclusion:
Generally, it is considered that main aim of directors is to increase the wealth of the
shareholders, but in reality they own obligation towards each and every stakeholders of the
organization such as employees, environment, community, customers, etc. There are number of
disputes which highlight the interest of stakeholders other than shareholders of the organization,
and these disputes impose obligation on the directors to think about the interest of all the groups
of the stakeholders. Numbers of regulations are introduced by the corporate governance and
Corporation Act 2001 which directly impose obligations on the directors to considering the
interest of all the stakeholders of the organization while running the business of the organization.
These regulations also encourage the organizations in terms of making the strong relationship
with each and every group of the stakeholders.
There are many experts who stated that there is need of new laws which impose compulsory
legal obligations on directors to consider the interest of every stakeholder group while running
the business. However, there is no need to introduce new regulations because Corporations Act
2001 and corporate governance provisions already introduce number of obligations on the
directors of the organization through which they need to consider the interest of all the
stakeholders of the organization. There are some other regulations and provisions also which
consider the importance of the corporate governance and demand focus of directors in this areas
for the survival of the organization such as environment protection regulations, customer
guarantees, customer protections, society obligations.
8 Marshall & Ramsay, Stakeholders and directors’ duties: Law, theory and evidence, (2012},
<https://law.unimelb.edu.au/__data/assets/pdf_file/0010/1709605/38-Stakeholdersanddirectorsduties-
lawtheoryandevidenceUNSWLJ20122.pdf>.

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BIBLIOGRAHY
Website
Norton, The James Hardie Decisions: Australian Securities & Investments Commission v
Hellicar & Ors [2012] HCA17; Shafron v Australian Securities & Investments Commission
[2012] HCA 18, (2012,
<http://www.nortonrosefulbright.com/knowledge/publications/66582/the-james-hardie-
decisions-australian-securities-investments-commission-v-hellicar-ors-hca17-shaf>.
Richard Whalebelly, The James Hardie Decisions: ASIC v Hellicar & Ors [2012] HCA17;
Shafron v ASIC [2012] HCA 18, (2012).
<http://www.mondaq.com/australia/x/176336/Directors+Officers+Executives+Shareholders/
The+James+Hardie+Decisions+ASIC+v+Hellicar+Ors+2012+HCA17+Shafron+v+ASIC+2012
+HCA+18>.
ASX, Corporate Governance Principles and recommendations, (no date), <
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-
edn.pdf>.
Norway Redmond, Directors’ duties and corporate social responsiveness. (2012),
http://www.austlii.edu.au/au/journals/UNSWLawJl/2012/13.pdf.
Paul Dermansky, Should Australia Replace Section 181 Of the Corporations Act 2001 (Cth)
With Wording Similar to Section 172 of the Companies Act 2006 (UK)?, <
https://law.unimelb.edu.au/__data/assets/pdf_file/0003/1709832/60-
Should_Austalia_replace_s181_of_the_Corporations_Act3.pdf>.
Marshall & Ramsay, Stakeholders and directors’ duties: Law, theory and evidence, (2012},
https://law.unimelb.edu.au/__data/assets/pdf_file/0010/1709605/38-
Stakeholdersanddirectorsduties-lawtheoryandevidenceUNSWLJ20122.pdf>.
Case Law
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171.
ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18.
Statute

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Corporation Act 2001.
Environment Protection and Biodiversity Conservation Act (EPBC Act) 1999.