Obligations of Directors towards Stakeholders

Corporations Act 2001 imposed obligations on directors of the company to fulfil their obligations and use their power in the greatest interest of the organization and also for proper work.  Section 180-182 of the Act defines the obligations of the directors towards the shareholders of the organization. In other words, directors are responsible to maximize the wealth of the shareholders. However, recently number of disputes occurred which reflects the need to impose obligations on directors which go beyond the concern of the shareholders.  In other words, corporates law impose obligations on directors to consider the interest of all the stakeholders of the company and not only of the shareholders. There are number of cases which require the directors to deliberate the interest of the suppliers, customers, and the broader community also while taking their decisions.

This report discusses the directors duties of the company to reflect the notice of wide range of stakeholders while taking their decisions, and not only of the shareholder’s interest.

Recent case laws related to the corporations Act 2001 develop the overall confidence that directors of the company mainly focus on maximizing the wealth and interest of the shareholders only, and they ignore the interest of the other stakeholders of the company. In case law ASIC V Adler, court mainly consider the duties of the directors in context of best interest of the company only, and they fails to consider or discuss the interest of the other stakeholders of the company in this case.

However, this is not the only case, as there are number of cases which also focus on the interest of the stakeholders also, and discuss their interest in terms of the director’s responsibilities. This can be understood with the help of case law of James Hardie  that is ASIC v Hellicar & Ors [2012] HCA17; Shafron v ASIC [2012] HCA 18.

In this case, decision made by the company not only affects the interest of the shareholders only but also the interest of the stakeholders. In this case, Court considers the interest of both shareholders as well as stakeholders. In this case, Court not only considers the reputational lost and financial loss in context of share prices for the purpose of protecting the interest of the shareholders, but also considers the interest of asbestos victims in context of under-funding the research related to the medical and compensation fund (Norton, 2012).

Later decision of the Court in the case James Hardie will be considered as the beneficial decision for the company’s survival by recognizing the interest of the stakeholders of the company, and this was accompanied with the NSW government and the ACTU which in turn increase the share price of the company and also the financial stability of the company. Therefore, this decision of the Court not only provides benefit to the company’s shareholders but also to the other stakeholders of the business.

Therefore, this case and recent provisions related to the corporate governance impose obligation on the organizations to deliberate the stakeholders interest also while taking the decision of the company and it also encourage the organizations to make their relations stronger with the stakeholders of the company, and this is considered as the important components on the part of the company to ensure effective performance.

Recent Case Laws and Stakeholder Interests

As stated, Corporation Act 2001 and other important laws already include sufficient provisions which guard the organizations in context of considering the interest of the stakeholders while taking the decisions. Especially, listed companies in Australia are under obligation to confirm with the Australian Stock Exchange (ASX) Corporate Governance Council’s ‘Principles of Good Corporate Governance and Bes Practice Recommendations’, as these recommendations impose obligation on directors and officers to develop the annual report by enlightening the extent up to which they shadowed the given recommendations in the specific time.

It is obligation of organizations to mention on their websites about the measures they adopt for the purpose of dealing with the stakeholder’s interest as per the Code of Conduct’ and ‘Ethics’. A code of conduct which includes the important policies and values of the organization can also help the directors and other officers of the organization to consider the stakeholder’s interest while taking the taking the decisions related to the company and it also provide assistance to the organization in determining the risk management practices of the organization.

In terms of the recommendations stated by the ASX in the form of ‘Good Corporate Governance Principles’, 10^th principle of this code is the most important principle which focus on the interest of the stakeholders. This principle states that for the purpose of ensuring good corporate governance it is necessary that organization recognized the legal interest of the stakeholders also. This principle further stated that directors of the organization are under obligation to found the tone ad standards for the organization and also to monitor these standards on continuous basis.

It must be noted that, these obligations are not only imposed on the listed companies only in the Australia, but non-listed companies operated in Australia also needs to complied with the corporate governance standards either stated under the Corporations Act or ASX Listing Rules, such as departments operated in government, not-for-profit organizations, etc. All these organizations are under duty to improve the effective corporate governance procedures (ASX, n.d.).

In the year 2003, these standards of Australia result in the non-rigid guidance which is known as ‘AS 8003’. As this guidance frame the elements which help the organizations in implementing Corporate Social Responsibility. The most important purpose of these standards is to maintain the CSR culture in the organizations by the self-regulatory approach, as this approach can be used for the purpose of monitoring in the organizations. These standards also encourage the organizations in meeting their legal obligations and other provisions provide assistance to the organizations in terms of ensuring the corporate governance related to the risk management (Redmond, 2012).

In terms of standards and regulations stated above, some other regulations are also there which recognized the concept of the corporate governance, and it required the directors to consider the interest of the stakeholders in terms of fulfilling their duties related to the best interest of the company. Section 180 of the Act highlights the duties of the directors of the company for the purpose of performing their operation and taking their decisions in terms of best interest of the company. Particularly, Section 180(1) states that directors and officers of the organization must use their powers and discharge their obligations with the complete care and diligence that would be exercised by any reasonable person.

ASX Corporate Governance Council’s Principles of Good Corporate Governance

Additionally, section 181 of the Act states that while exercising their powers and fulfilling their duties, directors must act for proper purpose, in good faith, and in the best interest of the company.

Section 180(2) of the Corporation Act 2001 deals with the rule related to the business judgment, and as per this rule business judgment taken by directors must be taken in good faith and for a proper purpose. Some other obligations of the director states that material personal interest of the directors must not be considered by the directors while taking the decisions, and directors must have full information about the matters conducted in the organization for the purpose of ensuring the reasonable believe that judgment taken by the company is in the best interest of the company. All these provisions related to the director’s duties impose direct obligations on the directors of the organization to consider the interest of the stakeholders while taking the decisions of the organization, because company’s best interest not only lies in the interest of the shareholders but also relates with the interest of all the stakeholders of the organization (Marshall & Ramsay, 2012; Dermansky, n.d.).

In terms of the fiduciary duties related to the directors of the company and recognized by the law also  impose obligations on the directors to complied with the laws of Commonwealth, State and Territory statutes. All these laws also required that directors of the company consider the interest of different stakeholders such as environment, community, etc..

This can be understood with the help of the example, laws related to the environment such as Environment Protection and Biodiversity Conservation Act (EPBC Act) 1999, states that organization must develop the framework for the purpose of managing and handle the matters related to the environment.

In case law, A&G Lamattina & Sons Pty Ltd V Commr Of State Revenue (Vic) (No 2), Supreme Court Of Victoria, 02 September 1996, Court imposes obligations directors of the company. In 2009, Court imposed the fine of $2, 20, 000 on the company Rocky Lamattina and Sons Pty Ltd in terms of cutting those trees which were considered as nesting habitat for the endangered south-eastern red-tailed black cockatoo. It was stated by the Justice Mansfield, it was necessary to fix the amount that cause strong negative impact on the environment, and this fine also reflect that such conduct would not be appreciated by the community and tolerated by the court. .Therefore, it is necessary for the directors of the company to exercise due acre and skill and take decisions in the best interest of the company. However, companies best interest includes the best interest of all the stakeholders and not only the interest of the shareholders of the company (Wolters Kluwer, 1996).

Conclusion:

After considering the facts of this paper, it is clear that Corporations Act 2001 and other relevant laws impose obligations on the directors of the company to consider the interest of all the stakeholders of the organization, and not only the wealth of the shareholders of the company while taking the decisions. There are number of corporate failures which affect the shareholders of the company, but these failures impose similar type of effect on the other stakeholders of the company also. All these provisions related to the director’s duties impose direct obligations on the directors of the organization to consider the interest of the stakeholders while taking the decisions of the organization, because company’s best interest not only lies in the interest of the shareholders but also relates with the interest of all the stakeholders of the organization.

References:

A&G Lamattina & Sons Pty Ltd V Commr Of State Revenue (Vic) (No 2), Supreme Court Of Victoria, 02 September 1996.

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

Dermansky, P. Should Australia Replace Section 181 Of the Corporations Act 2001 (Cth) With Wording Similar to Section 172 of the Companies Act 2006 (UK)?. Available at: https://law.unimelb.edu.au/__data/assets/pdf_file/0003/1709832/60-Should_Austalia_replace_s181_of_the_Corporations_Act3.pdf. Accessed on 2nd August 2018.

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

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.

Norton, (2012). The James Hardie Decisions: Australian Securities & Investments Commission v Hellicar & Ors [2012] HCA17; Shafron v Australian Securities & Investments Commission [2012] HCA 18. Available at: https://www.nortonrosefulbright.com/knowledge/publications/66582/the-james-hardie-decisions-australian-securities-investments-commission-v-hellicar-ors-hca17-shaf. Accessed on 2nd August 2018.

Redmond, P. (2012). Directors’ duties and corporate social responsiveness. Available at: https://www.austlii.edu.au/au/journals/UNSWLawJl/2012/13.pdf. Accessed on 2nd August 2018.

Wolters Kluwer, (1996). A&G lamattina & sons pty ltd v commr of state revenue (vic) (no 2), Supreme Court of Victoria, 02 September 1996. Available at: https://iknow.cch.com.au/document/atagUio540382sl16724033/a-g-lamattina-sons-pty-ltd-v-commr-of-state-revenue-vic-no-2. Accessed on 2nd August 2018.