Directors and the company
Corporation law has been enacted to govern the provisions related to operations of company. In Australia, corporation law is governed through the rules of the Corporation Act 2001 (Cth). Under this law there are special rights and liabilities which are imposed on officers and directors of the company. They have been given the power to make all decisions which are necessary for regulating the affairs of the organization. Under the light of these powers there are certain general duties which the directors have to obey while serving the company. These duties are specifically owed by them to the company according to the words of legislation. However, the company is also a separate legal entity and as it operates in the society its stakeholders include employees, environment and the community. The debate in this situation is that whether the duties of directors provided for in the CA should be extended to include employees, environment and the community. The thesis statement of this paper is that duties of directors provided for in the CA should NOT be extended to include employees, environment and the community.
The directors are the agents of the company and as agents they are considered to be in a fiduciary obligation with the organization. They have all powers which are needed to manage the affairs of the company and as provided in the case of Howard Smith Ltd v Ampol Petroleum Ltd and Imperial Hydropathic Hotel Co, Blackpool v Hampson that they can even make a decision which has not been authorised by the shareholders. Thus, they have to ensure that as fiduciaries to the company they do not indulge in any action which can cause detriment to the company. Thus, there only obligation is to ensure that they work in a way which is beneficial for the company. Taking into consideration to interest of other stakeholders may create a position of conflict of interest for the directors.
Under the CA there are primarily four duties which the directors needs to consider while discharging their functions which are known as the general duty of directors. These responsibilities are elaborated in the legislation via s 180 to s 183. The duties mandate the directors to discharge responsibilities with diligence and care, act in best interest of the company in a proper purpose in good faith, not to improperly use position held in company and not to improperly use company information to its detriment. There is no mention in the legislation that the directors should take into consideration the interest of the any other stakeholders rather than shareholders of the company.
Directors’ duties under corporation law
The primary argument which can be provided in support of the inclusion of employees, environment and the community into the directors duties is according to the broad view of CSR. The broad view of Corporate Social Responsibility states that as the company has been provided with a separate existence in the society it is the responsibility of the organization to take care of those who are affected by its operations. The primary groups which may be affected by the operations of an organization includes the employees who work for it, the environment which is deteriorated due to the operations of the organization and the community which is related to its functions such as the consumers and investors. The UK legislation which governs the affairs of the companies operating in UK expressly provides that the duties of directors must extend to taking into consideration the interest of other stakeholders as well such as employees, the environment and the community. However the CA does not have any provisions which deal with the interest of the other stakeholders. The primary section of the legislation which deals with the duty of directors in relation to best interest is that of s 181. In this section the directors have been asked to act in the best interest of the company which means the interest of the shareholders as a whole with an intention of making profit. Case laws such as ASIC v Hellicar has also provided that the directors are not allowed to get into an act which is takes into consideration aspects other than profit making. Thus, it is required to extend the duties of the directors to other stakeholders so that they are not exploited.
The narrow view of CSR provides the principles that a corporation is brought to existence to make profit. It is generally not formed to offer services to the community for free. The shareholders of a company invest in it and their main motive is to get appropriate returns from their investment. The directors are also in a fiduciary relationship with the company and they are the guardians of the money which has been invested by the stakeholders. Therefore the only goal which the directors must have is to carry out their functions in a way which would result in the maximum profit for the shareholders. The shareholders may be provided with a responsibility to take care of the other stakeholders such as employees, environment and the community. In case the interest of the other stakeholders is brought within the scope of directors duties, it would lead to a conflict of interest as to whose interest they should peruse. They are prohibited to act in a way which is in detriment to company and in the interest of any third party so that the interests of the stakeholders are protected.
Arguments for inclusion of duties to Employee, environment and community
The traditional common law cases also provide support to the narrow view of CSR and subsequently to not include interest of other stakeholders within the scope of directors’ duties. For instance the case of Hutton v West Cork Railway Co, it had been stated by the court that an action on the part of the directors of a company which was insolvent to compensate employer was not valid as it was not in the best interest of the company. In another case of Parke v Daily News Ltd it had been stated that the directors can only get into an act of charity or compensating the employees if the act is going to help the company make profit in the long run. In Re Lee, Behrens & Co Ltd the board of directors had made a resolution to provide 500 pounds to the widow of a former director. The court applied a three factor test to determine the validation of the action. These factors include whether the transaction is incidental reasonably for carrying out the business of the company, is the transaction done in good faith and has the transaction been done for the purpose of benefiting and promoting company prosperity. In this case the court held that the act was not valid. In the case of Woolworths Ltd v Kelly it had been stated by Mahoney JA that an organization may decide to be generous in relation to those with whom they deal. However in general terms they can do this only when the actions are for the interest or purpose of the company. Even of the outcome provided by such cases may be considered as harsh, in situation where they are considered in the relation to directors duties, it may be stated that they are correct. Directors are provided with wide powers in relation to how the assets of the company are to be used. Thus it is necessary that when they use such powers, they act in a proper purpose and only for the interest of the company instead of third party or personal benefits.
In addition it has been argued by Matuleviciene and Stravinskiene (2015), that even if the CA does not have express text that directors can consider interest of other stakeholders, it does not signify that they have no power to take into consideration such interest. This is because the consideration of other interest may be required for the purpose of company’s continuing wellbeing. They are allowed to consider such interest if they are in interest of the company rather than personal interest of the directors or interest of a third party. The narrow view of CSR does not state that the corporations are required to make profit at all cost rather they have to make profit under the circumference of legal restrictions. For the purpose of maximising profits, arguably the organizations are required to take into consideration the interest of the other relevant stakeholders as well. Organizations do not operate in a bubble. They provide goods and services to the consumers. For doing this they require a workforce. In addition the community in which their functions are based influences the opinions of the regulators, consumers and employees. Thus, even where the most constrained interpretation of directors duty is held by the corporation, in order to survive in the long run they must consider the interest of the other stakeholders. Therefore, it would not be feasible to make a continuing practice confusing by adding to it the consideration of other stakeholders as well which may create a conflict of interest position
Arguments against inclusion of duties to Employee, environment and community
There are various legislations which are available in Australia for the purpose of ensuring that the interests of the revenant groups are taken into consideration by the company for instance there is Australian Consumer Law which ensures that the company considered the interest of the consumers as much as required. There is the Fair Work Act 2009 (Cth) and the Work Heath and Safety Act 2001 (Cth) which ensure that the company takes into consideration the interest of the employees in relation to minimum working standards and their safety as required. The Competition and Consumer Act 2010 (Cth) provides a liability to the company of not indulging in anti-competitive agreements. This means that the legislation ensures protection to the market community as well. The Environment Protection and Biodiversity conservation Act 1999 deals with the provisions for providing environmental protection. In case it is found that the company has not acted in accordance to the legislation they can be liable along with the directors under the legislation. Thus, in this situation it can be stated that where there are express legislations which make the directors consider the interest of the other stake holders like the employees, environment and the community there is no need to extend the duties of the directors to include other stakeholder as the provisions of express legislations are better than any broad and vague text asking to consider stakeholder interest.
Conclusion
Therefore it can be stated evidently that there is no necessity of including the interest of stakeholders like employees, environment and the community within the scope of directors’ duties. The narrow view of CSR which is against the inclusion of these duties in the CA provides a stronger argument as compared to the argument provided in favour of the inclusion. The primary purpose of the company is to make profit legally. If the directors duties are extended it would lead to a conflict of interest. There are various legislations which are available in Australia for the purpose of ensuring that the interests of the revenant groups are taken into consideration by the company for instance there is Australian Consumer Law which ensures that the company considered the interest of the consumers as much as required.
ANDREW. KEAY, L. L. B. DIRECTORS’DUTIES. JORDAN PUBLISHING Limited, 2016.
ASIC v Hellicar [2012] HCA 17
Competition and Consumer Act 2010 (Cth)
Corporation Act 2001 (Cth).
Fair Work Act 2009
Garcia-Torea, Nicolas, Belen Fernandez-Feijoo, and Marta de la Cuesta. “Board of director’s effectiveness and the stakeholder perspective of corporate governance: (2016) Do effective boards promote the interests of shareholders and stakeholders?.” BRQ Business Research Quarterly 19.4: 246-260.
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
Hutton v West Cork Railway Co (1883) 23 Ch D 654
Imperial Hydropathic Hotel Co, Blackpool v Hampson (1883) 23 Ch D 1
Matuleviciene, Migle, and Jurgita Stravinskiene. “The importance of stakeholders for corporate reputation.” (2015) Engineering Economics 26.1: 75-83.
Parke v Daily News Ltd [1962] CH 927
Re Lee, Behrens & Co Ltd [1932] 2 Ch 46
Suliman, Abubakr M., Hadil T. Al-Khatib, and Sumina E. Thomas. “Corporate social responsibility.” Corporate Social Performance: (2016) Reflecting on the Past and Investing in the Future: 15.
The Environment Protection and Biodiversity conservation Act 1999(Cth)
Tran, Ben. “Corporate social responsibility.” (2018) Encyclopedia of Information Science and Technology, Fourth Edition. IGI Global,. 671-681.
Woolworths Ltd v Kelly (1991) 22 NSWLR 189
Work Heath and Safety Act 2001 (Cth)
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
