Corporate Governance: Directors' Duties and Stakeholders' Interests

This report, prepared for the Australian Institute of Company Directors (AICD), examines the framework of corporate governance in Australia, focusing on the duties and responsibilities of company directors as outlined in the Corporations Act. It explores the evolution of directors' duties, moving beyond solely shareholder interests to encompass the interests of a broader range of stakeholders including employees, customers, and the community. The report analyzes the impact of over-regulation on company interests and discusses the role of self-regulation and imposed laws in shaping corporate behavior. Using case studies such as the James Hardie case, the report highlights the importance of considering stakeholder interests in business decision-making. It also considers the impact of the Corporations Act. The report concludes with recommendations aimed at promoting effective corporate governance practices and ensuring that directors fulfill their duties responsibly while balancing the interests of all stakeholders.

Running head: CORPORATE GOVERNANCE
Corporate Governance
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................2
Present Framework Related to the Directors’ Duties......................................................................2
The Impact of Over-Regulation on the Interests of the Companies................................................5
Self-Regulations and Law Imposed.................................................................................................6
Conclusion and Recommendations..................................................................................................8
References........................................................................................................................................9

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Introduction
The principles of Corporations Act put the obligation on the company directors to release
their duties, responsibilities and powers with the aim to act for the business interest of the
companies. The underlying fact is that the directors need to discharge their duties and powers for
maximizing the organizational wealth for the best interest of their shareholders (Tricker and
Tricker 2015). However, the occurrence of some recent disputes has raised the concern related to
clarify the existing laws of Corporations Act that will include the consideration of the interests of
all stakeholders beyond the shareholders. On a more specific note, the clarification will include
whether the directors ought to take into account other stakeholders’ interests like employees,
customers, suppliers, people of community, environmental groups and others (Claessens and
Yurtoglu 2013). This report considers the inspection of the directors’ responsibility for
considering the interests of all stakeholders. This report is made with the intention to present it to
the Australian Institute of Company Directors (AICD).
Present Framework Related to the Directors’ Duties
A recent call has been made related to the Corporations Act improvement in the areas of
the directors’ duties and the sole focus of the directors on the interest of the company
shareholders is the main reason for this reformation (sloanreview.mit.edu 2018). The case of
James Hardie’s controversial decision can be presented as example in this context. As a result of
the fall in the share prices, there was both the reputational and financial loss of the company; and
the directors of the company ignored the asbestos victim’s interest in the process to safeguard the
interest of the company (Moerman and van der Laan 2015). In the later situation, the company
was able in increasing their share price along with the financial stability by taking the decision to

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consider the stakeholders’ interest that are the asbestos victims with the assistance of NSW
Government and ACTU. This process also led to service the shareholders of the firm due to the
boost in financial stability. Thus, the above-discussed situation of James Hardie as well as the
recent corporate governance improvements indicates towards the fact that the companies are
discouraged from not to consider the interest of all stakeholders. The companies can uphold their
financial performance by fostering relationship with all the stakeholders (Moerman and van der
Laan 2015).
There is presence of many laws and regulations to take into account the stakeholders’
interest in the process to make business decisions. This aspect leads to the compliance of the
Australian Securities Exchange (ASX) companies with the ASX Corporate Governance
Council’s ‘Principles of Good Corporate Governance and Best Practice Recommendations’ and
it puts the obligation on the Australian to show their extent of compliance with the above
principle in the published annual report (Tricker and Tricker 2015). Apart from thus, according
to this principle, the Australian firms ought to disclose their schemes for handling the interest of
the stakeholders under the section named ‘Code of Conduct and Ethics’ in their official company
website (Tricker and Tricker 2015).
These Codes of Conducts assist the companies to form important policies as well as
values for assisting the company directors to take into account all stakeholders’ interest in the
processes of business decision-making and risk management. Under the ASX ‘Good Corporate
Governance Principles’ the firms can access 28 recommendations where the 10th
recommendation or principle is mostly relevant to the company stakeholders (Beekes, Brown
and Zhang 2015). This particular principle puts the obligation on the company directors to
recognize the interest of each stakeholders group for the establishment of successful corporate

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governance mechanism. At the same time it is the role of the company directors to maintain
required supervision on the maintenance of these standards.
The aim of different segments of the Corporations Act indicates towards the directors’
responsibility for considering each stakeholder’s interest. According to Section 180 of the
Corporations Act, the directors are needed to ensure the best performance of the businesses
(Schultz, Tian and Twite 2013). According to Section 180 (1) of the Corporations Act, it is the
obligation on the directors of the companies to use their power as well as duties when there is
adequate degrees of care and diligence (Kraakman 2017). The case of Rocky Lamattina and Sons
Pty Ltd can be use as an example in this context. In the year of 2009, a fine of $220,000 was
imposed on the company as they were cleaning the trees that were the nesting habitants of the
endangered bird species of South-eastern red-tailed black cockatoo. According to the court
judgment, the large amount of fine was imposed on the company with the aim to demonstrate the
seriousness of the environmental activities in the community as it would not to further tolerated
(Grigg 2017).
It can be seen from the above example of Rocky Lamattina and Sons Pty Ltd that the
company directors made a mistake by not taking into account the community people’s interest
and it created a negative impact on the company. The above case also indicates the importance of
the requirement of the directors to think beyond the shareholders’ interests. The Australian courts
hold the successful application of the directors’ duties in various critical situations in the
business organizations. As per these regulations, it is utmost important for the company directors
to consider the shareholders as well as other stakeholders in the business decision-making
process. It requires the directors to sustain the balance in the interests of all stakeholders
(Armstrong et al. 2015).

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The Impact of Over-Regulation on the Interests of the Companies
In the process of the clarification of the Corporations Act related to the responsibility of
the directors to consider the stakeholders’ interest, the additional requirement is to consider the
objectives of the companies and the objective is to operate for the best interest of the companies
(Mason and Simmons 2014). This aspect leads to the extended responsibilities of the directors to
take into account the interest of both the existing and future stakeholders. In this process, they
will be able to make strategy for ensuring both the short-term and long-term business growth.
Additionally, the directors are also needed to consider both the internal and exporter corporate
governance (Mason and Simmons 2014).
It is the responsibility of the company directors to make the required business decisions
in good faith by taking care of the purposes and benefits of environment, consumers and
communities. For this reason, paying less attention to the interest of these stakeholders is
considered as a major violation of directors’ responsibilities (Rao and Tilt 2016). In addition, it is
considered as the breach of the duties of the directors in case there is fault in the process of
handling the interest of all the stakeholders. The operations of the companies can be at severe
risk due to the major consequences of these breaches of duties. With the aim to sustain the
growth as well as corporate image of the firms, the directors ought to recognize the importance
of stakeholders’ interests and their communication to the organizational employees and staffs for
making them understand the benefit of this for sustain the long-term growth of the businesses
(Setó‐Pamies 2015).
The discussion papers of both ABA and CAMAC for the amendments of the
Corporations Act consist of certain arguments. According to the subject of the argument, the
presence of a obligatory function of the company directors to take into account the stakeholders’

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interest in the Corporations Act can strangle the way to make business decisions due to the fact
that it can contribute to unproductive business decisions that can have negative effect on the
directors’ duty for acting in the best interest of the firms. For this reason, Section 181 (1) of the
Corporations Act can be mentioned in this context as it puts the obligation of the company
directors for considering the stakeholders’ interest with the aim to serve for the best of the
companies. The presence of all these factors shows the small likelihood that there will be change
in the corporate behavior of the company directors due to further amendments in the
Corporations Act (Waligo, Clarke and Hawkins 2013).
At the same time, there is negative impact of the inclusion of legal obligation on the
directors to take into account the interest of all stakeholder groups in the decision-making
process. More specifically, in the presence of this kind of legal obligation of the company
directors, there might be challenge on the directors regarding the interest of certain small
minority group of stakeholders that do not have any impact on the company proceeding and
decision-making process of the business (Waligo, Clarke and Hawkins 2013). Moreover, at the
time to comply with these proposed legal requirements, the company directors might involve in
long court proceedings that can affect the actual duties and responsibilities of them and it can
lead to the compromise of the primary jobs and responsibilities of the directors. This whole
aspect can affect the business growth of the firms.
Self-Regulations and Law Imposed
It can be seen from the current situation that the respective authorities are discouraging
the business organizations in excluding all stakeholders’ interest; and the current aim is to move
towards developing amity with all stakeholders by addressing their needs and issues through

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effective decision-making. This will also discourage the presence of any legal obligation for the
directors in engaging with all stakeholders (De Schepper, Dooms and Haezendonck 2014). The
earlier discussion discussed about the responsibility of the directors to serve in the best interest
of the businesses; and it implies that the board and directors have the responsibility to address the
issues and concerns of all stakeholders as the success of the companies lies in it. In addition, the
above discussion of the case of James Hardie indicates towards the crucial fact that the directors
of the company were not under any imposed laws and regulations for considering the interests of
the asbestos victims, but the decision was their own to revive the situation of the company (De
Schepper, Dooms and Haezendonck 2014).
In addition, business organizations have the option to ensure effective business outcome
in case they have the required flexibility to implement the necessary approaches for the company
stakeholders as the main element of the decision-making process; and the situation could be
ineffective in case there is any mandatory legal obligation (Klettner, Clarke and Boersma 2014).
Under the presence of any mandatory legal obligation, the directors may not value all
stakeholders’ interest and it can be considered as a major negative impact of the presence of
mandatory legal obligation. Thus, with the aim to diminish all these negative impacts, the
directors of the companies need to go for establishing an effective corporate culture in the
presence of stakeholder oriented approach for ensuring the consideration of the interest of the
stakeholders (Klettner, Clarke and Boersma 2014).
The implementation of corporate culture will ensure the effective performance of the
business organizations; and the imposition of the mandatory regulations will create difficulty for
the companies and the directors. In order to ensure the sustainable long-term growth of the
companies, the directors are needed to consider the interest of all stakeholders as the main

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corporate objective. More effectively, business organizations have the option for including
stakeholders’ interest in their vision and mission statement. In this way, the directors will be
encouraged to consider them as a part of the company’s business objective (Ben Barka and
Dardour 2015).
Conclusion and Recommendations
The present legal framework under the Corporations Act of Australia along with the
principle of ASX has put the commitment for the directors of the ASX listed companies to
address the interest of the stakeholders with the aim to serve in the best possible way for the
businesses. In addition, the directors can ensure sustainable business growth of their businesses
by considering the interest of every group of stakeholder.
Based on the above discussion, it is recommended to the directors of the ASX listed firms
for the development of friendly relationship with the company stakeholders with the help of
establishing a corporate culture as this culture will allow the directors to consider addressing the
issue of the stakeholders as their company objectives. Accomplishment of these objectives can
ensure the creation of organizational value. On the other hand, it is also recommended to the
respective authorities not to put any legal obligation by the amendment of Corporations Act. It is
also recommended to the company directors to include the stakeholders’ interests in business
strategies so that they can be effectively achieved.

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