Directors' Obligations towards Stakeholders in Corporate Governance & Ethics

This report discusses the obligations of directors towards stakeholders in corporate governance and ethics. It highlights the importance of considering the interest of all stakeholders while taking decisions. The report is submitted for the AICD.

Corporate Governance & Ethics 1
Corporate Governance & Ethics

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Part 2
Executive summary:
The main purpose of this report is to discuss the obligations of the directors towards the wide
range of audience known as the stakeholders of the organizations. Generally, it is seen that
directors of the company only focus on the interest and wealth of the shareholders of the
company while taking the decisions, but it is not fair as they are under obligation to consider the
interest of all the group members. This argument is discussed in context of number of provisions
and this report is submitted for the AICD.

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Contents
Executive summary:....................................................................................................................................2
Introduction:................................................................................................................................................3
Discussion:..................................................................................................................................................4
Conclusion:..................................................................................................................................................7
References:..................................................................................................................................................7

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Introduction:
Directors of the organization are considered as those individuals who are responsible to manage
the company, and they also hold all the powers which are imposed under the company. In other
words, directors of the company are under obligation to manage the business and operations
conducted by the organization. Directors possess number of powers for managing the company,
but in similar manner they owned number of duties towards the company also. Corporations Act
2001 impose number of obligations on the company’s directors such as, directors are under
obligation to take decisions related to the company in the best interest of the company. However,
company’s best interest not only lies in the interest of shareholders but it also lies in the interest
of other stakeholders such as community, environment, employees, etc. There are number of
case laws which highlight the duties and obligations of the directors towards the stakeholder’s
wide group, and guide the directors of the company in fulfilling this duty (ASIC, n.d.).
In this paper, duties of directors towards the stakeholders other than shareholders are discussed,
and it also reflects the importance of the interest of all the stakeholders while taking the decision
of the company.
Discussion:
It must be noted that, organization’s operations are conducted for the purpose of ensuring the
best interest of the shareholders of the organization, and as stated, shareholders value is not the
objective of the organization, but it is the result of the activities conducted by the organization. It
is necessary for the board of directors of the company to understand that shareholders of the
company are not the only audience which must be considered by the board while taking the
decision, but there are large number of audience which also be considered by the board of
directors while taking the decision.
This audience generally includes the bondholders, employees, customers, suppliers, and NGOs,
community, environment, etc., but in practice director’s only focus on the interest of the
shareholders of the organization.
There are number of cases which proves that, Court also focus on the interest of the shareholders
only while providing their verdict and taking the decisions of the court. For example; In ASIC v
Adler, Court only focus on the shareholder’s loss because of the actions conducted by Adler, and
not consider the interest of other stakeholders of the company. As their prime focus was on the
impact caused on the shareholder’s wealth, but they fail to consider the impact on other
stakeholders of the organization (Marshall & Ramsay, 2012).
Some exception to this approach of the court is also there, as in number of cases, courts focus on
the interest of the stakeholders of the organization instead of the only the interest of the
shareholders of the company. For example; in case law ASIC v Hellicar & Ors [2012] HCA17;
Shafron v ASIC [2012] HCA 18, Court consider the impact of organization’s action on the

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victims of the asbestos. Court stated, that company’s decision not only cause negative impact on
the shareholder’s interest but also cause negative impact on the interest of the other stakeholder’s
of the organization. It can be seen that, court consider the victims of the asbestos and impact on
these victims because of the issue related to the underfunding of the medical research and funds
related to the compensation.
It can be said that, court’s decision in the James Hardie case is the good decision because it
ensures the company’s survival and long term profitability of the organization, as it not only
gives important to the shareholders wealth but also gives importance to the stakeholder’s interest.
It is necessary for the organization to comply with the corporate governance principles, as these
principles introduce number of duties for the directors of the company to determine the
stakeholder’s interest while conducting any operation related to the organization. These
principles also help the directors in making strong connection with the stakeholders. Corporate
governance principles through its different approaches help the organization in ensuring the
performance in effective manner.
Numbers of provisions are introduced by the Corporation Act 2001 and other legal authorities
also, which help the organization in ensuring the consideration of the stakeholder’s interest while
deciding any matter of the organization. Those organizations which are listed on the ASX
required complying with the Corporate Governance Council’s ‘Principles of Good Corporate
Governance introduced by ASX and also with the recommendations related to the business
practice. All these principles and recommendations impose duty on the company’s directors for
preparing annual report which shows that directors and officers of the company follow the
recommendations and principles.
Organizations are also responsible to discuss on their official websites about the tools to ensure
the interest of the stakeholders while taking the decision of the company. Code of conduct
adopted by the organization also reflect the policies and measures identified by the organization
for the purpose of providing guidance to the directors and other officers of the organization in
terms of considering the interest of the stakeholders also while deciding any matter, and not only
of the shareholder’s interest. These policies and procedures also provide the guidance to the
directors and officers of the organization in terms of the risk management practices of the
organization.
In context of the ASX recommendations related to the ‘Good Corporate Governance Principles’,
also consider this matter of stakeholder’s interest and these recommendations also recognize the
importance of the stakeholder’s in terms of the organization. This can be understood through
example, 10th principle introduced by the ASX is determined as the critical principle in this
context, as this principle mainly focuses on the interest of the stakeholders and not only of the
shareholders. However, these principles also encourage the organizations to consider the legal
interest of the organization’s stakeholders. This principle also states that directors must prepare

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the framework which describes the procedures and standards for achieving the above stated
objectives, and they must ensure the monitoring of these standards (AICD, n.d.).
However, not only the listed company are obligated to comply with these provisions and
principles but the non-listed companies also. In other words, companies which are not listed on
the ASX are also under obligations to fulfil the duties imposed by the ASX principles,
Corporations Act 2001, and listing rules of ASX. A non-listed company also required to develop
the effective corporate governance in their organization.
Another important concept which recognizes the importance of the stakeholder’s interest and
benefit is the concept of the corporate social responsibility. There are number of provisions of
the CSR which helps the organization and its management in considering the stakeholder’s
interest also. CSR is the approach which mainly focuses on the community and environment, as
these are considered as most important stakeholders of the organization. Provisions of these
concepts enable the organization to maintain the culture of the CSR in the organization, and this
culture can only be maintained by the organization if they adopt the self-regulatory approach.
The approach of self-regulatory can be used by the organizations for the purpose of monitoring
these transactions. CSR approach also helps the companies in fulfilling their legal obligations
and other methods of this approach also ensure effective risk management in the organization.
In context of the define laws and provisions, other types of provisions are also there which
impose similar obligations on the directors and officers of the company. It must be noted that
these provisions are introduced in the Corporations Act 2001, because off which they are more
accurate in nature. There are number of provisions of the Corporate Act 2001 which consider the
interest and wealth of stakeholders other than shareholders also.
Provisions related to the director’s duties impose obligations on the directors to consider the
interest of the company while taking decision related to the business. Section 180 states that
director and officers are under duty to work in such manner and conduct their operations in such
manner as it result in the best interest of the company. However, it is necessary for the directors
of the company to understand that best interest of the company not fall in the interest of
shareholders only as it also fall in the interest of other stakeholders. Generally, directors consider
that shareholders of the company are the only important pillar of the organization, but in actual
there are some other pillars of the organization also such as employees, community, etc (ASIC,
n.d.).
Section 181 of the Act states that, while using their powers and performing their duties, directors
must ensure that they conduct their actions for the purpose which must be proper, in good faith,
and in the organization’s best interest.
However, all these section impose similar types of obligations on the directors as obligations
related to the fairness, good faith, equality, etc. In other words, the basic purpose of these
provisions is to ensure that directors and officers does not consider their material personal

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interest only while deciding any matter, and they must understand each and every aspect of the
matter before deciding it. These provisions which introduce the duties of directors and officers
while working in the organization certainly ensures that directors evaluates the loss occurred to
the other stakeholders also such as environment, society, etc. because organization’s long term
survival can only be ensured if all the pillars of the organization stay strong. As any one pillar
falls, then it is not possible for directors and officers to prevent the corporate failures.
Similar types of responsibilities are also imposed by the common law in the form of fiduciary
duties on the directors of the company. These duties states that directors own fiduciary
relationship with not only the shareholders of the company but also with the other stakeholders
of the organization. Therefore, it is important for the organizations to consider the interest of all
the stakeholders of the company.
Conclusion:
Directors and officers of the organization are under obligations to ensure the interest of the other
stakeholders also except the shareholders, because all the stakeholders are important for the
purpose ensuring the best interest of the company. Numbers of provisions are introduced by the
Corporation Act 2001 and other legal authorities also, which help the organization in ensuring
the consideration of the stakeholder’s interest while deciding any matter of the organization.
Those organizations which are listed on the ASX required complying with the Corporate
Governance Council’s ‘Principles of Good Corporate Governance introduced by ASX and also
with the recommendations related to the business practice. Similar types of responsibilities are
also imposed by the common law in the form of fiduciary duties on the directors of the company.
These duties states that directors own fiduciary relationship with not only the shareholders of the
company but also with the other stakeholders of the organization.

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References:
ASIC v Adler (2002) 41 ACSR 72; [2002] NSWC 171.
ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18.
ASX. Corporate Governance Principles and recommendations. Available at:
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-
edn.pdf. Accessed on 2nd August 2018.
Corporation Act 2001- Section 180
Corporation Act 2001- Section 181
Corporation Act 2001- Section 182
Marshall, S. & Ramsay, A. (2012). Stakeholders and directors’ duties: Law, theory and evidence.
Available at: https://law.unimelb.edu.au/__data/assets/pdf_file/0010/1709605/38-
Stakeholdersanddirectorsduties-lawtheoryandevidenceUNSWLJ20122.pdf. Accessed on 2nd
August 2018.
ASIC, The directors role in corporate governance, Available at: https://asic.gov.au/regulatory-
resources/corporate-governance/corporate-governance-articles/the-directors-role-in-corporate-
governance/. Accessed on 2nd August 2018.
ASIC. Directors' key responsibilities. Available at: https://asic.gov.au/for-business/your-
business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-
directors/directors-key-responsibilities/. Accessed on 2nd August 2018.
AICD. Managing your stakeholders. Available at:
http://www.companydirectors.com.au/director-resource-centre/publications/company-director-
magazine/2011-back-editions/february/feature-managing-your-stakeholders. Accessed on 2nd
August 2018.