Directors’ role in CSR activities
Discuss about the Corporate Governance for Business Strategy and Environment.
It is evident that the role of directors and officers in respect to CSR activities are vast. In this regard, the legal justifications on the part of the directors to engage in CSR activities can be emphasized. Therefore, it is expected on the part of the directors to exercise their duties for the best interest of the company for the purpose of maximizing their wealth. It is worthwhile to refer here that, legislative amendments have been made in regard to the interests of the directors for the benefit of the company and for the purpose of expanding the CSR activities (Galbreath 2017). It is worth mentioning that, the statutory duties vested upon the directors may have adverse consequences in regard to the primary role of directors, the nature of the creativity in the workplace which can have a detrimental effect on the decisions taken by the directors in regard to the functioning of the company (Mishra and Modi 2016). In this context, mention can be made of the activities of the shareholders and non-shareholders regarding the suppliers, consumers and the community as a whole which has been perceived in order to increase the prestige and the image of the company to the large extent.
It is noteworthy to mention here that, directors are responsible to take initiatives for the purpose of assessing and taking responsibility for the effects in relation to the environmental factors and the social wellbeing of the company (Galbreath 2017). It is worth noting that the directors are responsible for promoting the nature of positive social and environmental change of the company. It is evident that, corporations may have detrimental effects on the environment. The directors are at the responsibility to invest in local communities and research for the purpose of developing sustainable technologies even if the nature of the project is such that it might not increase the profitability of the company.
From the very beginning arguments has been raised regarding the fact that whether audit committees forms an essential feature of good corporate governance or it cannot prevent the prevailing corporate failure. It is important to note here that, the audit committees’ plays significant role in regard to the regulation of corporate governance. It has been argued that the nature of the audit committees must be such that it has to be formed by at least three independent non-executive directors. There lies a responsibility on the part of the members of the audit committees to monitor the financial statements of the company and in such process shall efficiently involve in any formal decisions in relation to the performance of the company. The audit committees efficiently review the internal and financial controls and systems of the company. it is known to all that most of the large companies has an internal audit function of its own and in such cases, the audit committees extends its monitoring functions for the effective functioning of the company (Eulerich, Velte and Theis 2015). The audit committee plays significant role in case of fraud prevention and detection which ensures that the employees of the company are concerned about the existing discrepancies regarding the matters involving financial reporting. The audit committees has certain responsibilities in relation to the external auditors of the company which involves recommendation of the appointment, removal and reappointment of the external auditors and approval of the fees paid for auditing and non-auditing services (Bhasin 2015). The only issues associated with the audit committees is that it does not evaluate the independence, objectivity and the efficiency of the external audit process in consideration of the ethical framework in the concerned jurisdiction in which the organization operates.
Directors’ responsibility towards environmental factors
In relation to the formation of an ideal board it is important to advise the potential board of I-Design by depending upon the Australian Securities Exchange Corporate Governance Councils Principles and Recommendations. Therefore, it can be advised that the potential board of I-Design that they cannot form an ideal board because prior to that they need to acquire in-depth knowledge regarding the formation and the composition of board of directors in regard to I-Design.
The composition and the formation of board of directors of a I-Design in relation to the Australian Securities Exchange Corporate Governance Councils Principles and Recommendations comprises of-
- The consideration of board size.
- The skill base of directors.
- Director synergies and independence.
- Tenure of directors.
- The transacting of directors and board chair.
It is worthwhile to refer here that, the board of directors’ acts as a central position of the organizational corporate governance strategies and practices. However, the nature of corporate governance is such that it can be set by the board. Therefore, it is not possible for an organization to involve in quality corporate governance if the nature of the board is such that it is dysfunctional and poor performing (Soltani and Maupetit 2015). There is no optimal board size. However, the board must have at least one director residing in Australia according to the provisions of Section 201A. According to the provisions of Section 201A, there must be at least three directors ordinarily residing in Australia. It is worthwhile to mention here that, there must be existing balance between the process of decision making and the nature of the board discussion.
Two main schools of thought are concerned with the optimal size of the company’s boards. There is an ability on the part of the board to monitor the executive management of the company which increases with the number of the directors overtime thereby scrutinizing the management (Hambrick, Misangyi and Park 2015). It can be stated that larger boards hinder management oversight and are considered to be less efficient. In this context, mention can be made about the executives because the board is solely composed of the executives that would have a good understanding about the nature of the company. It is worth stating that, an effective board shall comprise of ethical skilled, well connected and critically knowledge individuals who contributed enormously towards the expertise of the organization.
Non-executive directors are not necessarily considered to be an independent director. However, some non-executive directors may be independent if he is not a part of the present management team of the organization. The ASX CGC 2007 has provided a report for the purpose of providing the status of independence of the status (Beckman et al. 2014). The independence fails on the part of a director, if he is the substantial shareholder of the company or has been employed in any organization in an executive capacity for a consecutive period of three years. Therefore, it can be stated that he above mentioned provisions are not complied with by the potential board of I-Design and so they need to acquire adequate knowledge about the formation and composition of the board of directors.
Importance of audit committees
In the present case study, it can be observed that the directors of the company can be held personally liable for the losses of the company under the provisions of insolvent trading of the Corporations Act. In this regard, it is noteworthy to mention here that, debt takes place when the company is liable to pay liquidated sum (Brotchie and Morrison 2017). However, the directors of the company has a duty to avoid the process of insolvent trading as mentioned under the ACNC Act he Australian Charities and Not-for-profits Commission Act 2012 (Cth). There is a duty under the ACNC Act to avoid insolvent trading and penalties for the breach of the duty incorporated under the Act (Marsh and Roberts 2017). It is noteworthy to mention here that, the directors of the company can be held personally for insolvent trading according to the provisions of Section 588G of the Corporation Act (Cth). According to the provisions of Section 588G of the Corporations Act 2001 (Cth), a civil liability is imposed upon a director when the company has incurred debt and the person was acting as a director during that time. As a result of it, the company becomes insolvent due to such debt (Curry and Schorer 2016).
There are certain reasonable grounds based on which the nature of the insolvency can be suspected. One of the important grounds of suspect is that when such director fails to prevent the debt from occurring as any reasonable person of prudent nature would have been (Williams 2015). In this regard, it can be stated that, individuals can be held liable for insolvent trading if-
- The person is appointed as directors.
- Shadow directors.
- De-facto directors.
In the present case, it can be observed that, Karen, Bradley and Owen were not appointed as the sole directors of the company however, they were acting as the de-facto-directors.
It is important to emphasize upon the defenses available to the directors in case of liability arising as a result of insolvent trading. These can be categorized as-
- The directors reasonable knew or had expectation about the continued solvency according to the provisions of Section 588(2).
- The director relied upon another director or any third party for the purpose of receiving information and based upon such information the insolvency continued according to the provisions of Section 588H(3).
- Due to non-participation in the management operations of the company as a result of illness as depicted in Section 588H (4) of the Act.
- Reasonable steps were taken by the directors to prevent such debt from incurring according to Section 588H (5) of the Act.
It can be observed that Bradley and Owen did not provide any information to Karen regarding problems of cash flow and based upon such information Karen initiated financial operations. Therefore, the provisions depicted in Section 588H (3) of the Act are available to Karen to avoid liability.
References:
Galbreath, J., 2017. The impact of board structure on corporate social responsibility: a temporal view. Business Strategy and the Environment, 26(3), pp.358-370.
Mishra, S. and Modi, S.B., 2016. Corporate social responsibility and shareholder wealth: the role of marketing capability. Journal of Marketing, 80(1), pp.26-46.
Eulerich, M., Velte, P. and Theis, J., 2015. Internal auditors’ contribution to good corporate governance. An empirical analysis for the one-tier governance system with a focus on the relationship between internal audit function and audit committee.
Bhasin, M.L., 2015. Audit committee mechanism to improve corporate governance: Evidence from a developing country.
Soltani, B. and Maupetit, C., 2015. Importance of core values of ethics, integrity and accountability in the European corporate governance codes. Journal of Management & Governance, 19(2), pp.259-284.
Hambrick, D.C., Misangyi, V.F. and Park, C.A., 2015. The quad model for identifying a corporate director’s potential for effective monitoring: Toward a new theory of board sufficiency. Academy of Management Review, 40(3), pp.323-344.
Beckman, C.M., Schoonhoven, C.B., Rottner, R.M. and Kim, S.J., 2014. Relational pluralism in de novo organizations: boards of directors as bridges or barriers to diverse alliance portfolios?. Academy of Management Journal, 57(2), pp.460-483.
Brotchie, J. and Morrison, D., 2017. Insolvent trading and voluntary administration in Australia: economic winners and losers?. Accounting & Finance.
Marsh, S. and Roberts, S., 2017. Risk management: Insolvency safe harbour for’honest’directors. Governance Directions, 69(5), p.275.
Williams, R., 2015. What Can We Expect to Gain from Reforming the Insolvent Trading Remedy?. The Modern Law Review, 78(1), pp.55-84.
Marsh, S. and Roberts, S., 2017. Personal liability for insolvent trading: Company directors find berth in safe harbour. Governance Directions, 69(10), p.611.
Curry, D.S. and Schorer, J.U., 2016. The Effects of Business Insolvency on the Duties and Liabilities of Directors and Officers—A Comparative Analysis With Recommendations to Promote Good Decision—Making. In Global Insolvency and Bankruptcy Practice for Sustainable Economic Development(pp. 168-218). Palgrave Macmillan, London.
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