Rules and Application
The Australian law as it currently exists, it focuses more on the interest of an entity thou there are several calls for the duties of directors as outlined by legislations to be reviewed to determine directors power in regards to the taking into consideration interests of other stakeholders. In reference to the question, it concerns the issue of directors giving more priority to shareholders interests unlike of other stakeholders who include: employees, customers, creditors and the community at large. This concept was developed in the 1990s and got more support from business schools, reporters and various executives. With such it’s important to analyze the duties of directors as outlined in the Corporation Act in conjunction with relevant case laws to determine if this duties should be used only in promotion of shareholders interests unlike those of employees and community often referred to as stakeholders.
According to the Corporation Act, a director refers to any individual appointed to the head position of a company which includes an alternate director. It also provides that a corporation should comprise of at least 3 directors but not more than 9. Alternatively, a shareholder refers to an individual or entity recorded in the register of shareholders as one possessing a certain number of shares and includes any member of a company as stipulated by the Act while a stakeholder refers to any person contributing to the performance of any entity such as an employee.
Generally, in exercising duties of directors such individuals are required to observe the set objective standards as outlined in subsection 180(1) of the Act i.e. a director or any such officer of an entity should perform their powers & fulfill their duties with the required sense of care and diligence that would be employed by any reasonable man if he/she were in such a position regarding the circumstances of the company. Similarly, in the case of ASIC vs. Adler, Justice Santow of the New South Wales Supreme Court went through the relevant authorities and put in place a couple of principles that can be derived from sub-section 181(1). The most common include: directors to ensure a duty of care and skill, which should not entirely be a fiduciary duty; also upon becoming a director, an individual gives the impression that he/ she has the skills of a reasonable capable individual in his or her class of selection and that he or she will conduct him/herself with the required care, diligence and skill; and that he/she should take the required steps to place themselves in a position to direct and observe the administration of a corporation.
Provisions for Promoting Stakeholder and Shareholder Interests
The outlined provisions are rational provisions that allow investors/shareholders put their investment in a corporation on the perceptive that the corporate directors will administer the corporation in the best interests of its investors/shareholders. When shareholders invest in a corporation, they are technically investing in the capability of the company directors and managers to run the corporation. Accordingly, they should have confidence that the directors are utilizing their invested funds to the advantage of the corporation, and not for any other use. Similarly, they trust their savings to company managers on the implicit promise that they will be improved in value through a combination of earnings and capital gains. All coming up capital raisings and each constituent of the securities business are made in accordance with this major investor promise. If they didn’t believe in a promise of this kind, they would invest somewhere else or they wouldn’t invest at all.
Subsequently, Section 181 of the 2001 Corporation Act, in adding to the prerequisite of good faith. It states that: a director or other officer of a company must exercise their power and perform their duties: in good faith & in the best interests of the company; and for a good course. Therefore, it must be indicated that the section provides for the duty of good faith in the best interests of the company and not in the shareholders’ best interests, hence making the two concepts to adjacent to each other. Contrary to this, there are instances where directors advocating for the best interests of the company, will be doing so in a way that is against to the best interests of a certain number of shareholders. For example, if directors come to a stand which for a long period will be in the interests of the company, profiting shareholders with long period terms & future ones, but whose outcome contributes to a loss for short time shareholders (and a short time decrease in share value for the existing shareholders), therefore the decision will be in the company’s interest, but will not be welcomed by shareholders who hold short term shares. The observation made from this section is that the act by providing for the condition of directors acting in the best interest of the company, promotes the interests of both the shareholders and stakeholders but risks bringing some conflicts in regards to short term shareholders.
Further, as indicated by the Corporations Act under section 198A a replaceable law, which states that a commercial activity of a corporation, is to be administered by or under the guide of directors. Despite the fact that the section is a replaceable one, most business constitutions comprise such provision delegating power to administer the company’s business to its directors. Accordingly, there being no particular provision limiting such powers, it leaves the directors with the choice to decide how the company’s funds should be used. In addition, the courts have interpreted their powers to be vast. For instance in the case of Howard Smith Ltd vs. Ampol Petroleum Ltd, it was held that: directors have power to make decisions that contravene those of majority shareholders. Also in Imperial Hydropathis vs. Hampson case, the court was of the decision that: the member’s resolution is not effective to override the director’s decision if they have been given the power to conduct the affairs of a company. Therefore from this observation, the duties of the director should promote the interests of both shareholders and stakeholders as they have been given the discretion to determine how the company (comprising both shareholders and stakeholders) should be conducted unlike in a situation where their power would have been limited to only promote shareholders interests.
Exceptions to Promoting Shareholder Interests
In regards to the Companies Act which was the first legislation to introduce codification of duties of directors in Australia & therefore giving the Australian government some power through the Australian securities and investment commission to hold directors accountable for breach of their duties. This ensures directors promote the interests of both the stakeholders and shareholders unlike previously where the power of accountability was wholly vested in the company that could easily be influenced to overlook stakeholder’s interests. Therefore, director’s duties should aim towards promoting each individual interest including employees as they risk being held accountable of any breach through enforcement by Australian security commission.
In reference to section 182 of the Corporation Act which states that: a director should not wrongly use his/her position to either get an advantage for him/herself or any other person; or contribute to the disadvantage of the company, which indicate that the directors are to act in the best interest of the company. Although, in this instance the company is taken as the shareholders in whole it’s important to recall that, legally a company is always a separate entity from its owners/shareholders. In the case of Brunninghausen vs. Glavanics it was indicated that the general rule serves some good since if each individual shareholder held an individual right the directors would have many actions brought against them. Therefore, this implies that directors are entitled to come up with decisions that are in the best interest of the company regardless of whether they have the same implication on shareholders.
However, there exist some exceptions in to this provision that directors entirely owe their duties to the company. An example includes the one brought out in the case Coleman vs. Myers (New Zealand) where the court held a fiduciary duty is owed by directors to some shareholders because of the private relation they share such as shareholders relying on directors for some advice in regards to investment. Also in instance of insolvency of the company, the interests of creditors who fall in the category of stakeholders are to be given priority unlike those of shareholders. Taking into consideration this exception, it’s clear that in discharging their duties, directors in some instances like insolvency they have to give priority to the interest of creditors unlike those of the corporation and its shareholders.
Further, in looking at the concept of the best interest of the corporation’ as brought out by the common law system, the question in relation to when a director is to consider interests of other stakeholders is often brought up in regards to gratuitous payments as illustrated below: the case of Hutton v West Cork Railway. The case concerned a company which winding up after transferring its commercial activities to another. After the transfer the seller conducted a meeting which agreed on a resolution to compensate some employees of the company for losing their employment. The act having proposed by directors regardless of any legal claim was opposed by one of the shareholders. Upon suit it was held that the resolution was invalid as this was a company that was winding up and any capital was to be used only the interest of the company such as promoting it carrying on business. It was also held that, that giving the employees gratuitous pay would not impact on company’s future benefit and therefore refused.
Power of Directors to Make Decisions
In addition, in the case of Re Lee, Behrens & Co, the court was to determine an instance where company directors of a solvent corporation intended to pay a 500 pounds yearly pension to a widow of an ex- director. The proposal was rejected by a certain shareholder and asked the court to establish if the directors had correctly exercised their powers. It was held that, such payments involved spending the money owned by the company which can just be used for company’s purposes in regards to promoting its activities. Therefore adding to what Bowen CJ had stated by laying out 3 factors to be considered in regards to determining what’s it the best interest of a corporation : bona fide payment; done to benefit the success of a corporation & payment be immediate to conducting company activities.
In Australian application, in particular the case of Woolworths vs. Kelly is used in which it was held that: a corporation may come in agreement in regards to extending a hand of generosity towards those who play various roles in it. Generally, it might just and of generosity but basically be for the company’s benefit.
Conclusion
As observed from the above illustrations, in particular regarding the set precedents/ common law system, more emphasis has been put on focus on the best interest of the company as well as the interest of shareholders. Apart from that, it’s important to note that the existing Australian laws have been severally reviewed by the government and no recommendations for change have been made as the conclusion that has been made it that the laws are sufficient and flexible and adequate to permit directors to take into consideration all significant interests including those of other stakeholders. One is likely to concur with the statement since looking at all the provided laws both common law and statute laws, there is no existing provision that expressly limits the power of the directors when exercising their duties but rather it goes further into allowing then to consider any act that is in the best interest of the corporation. Also, there are those instances such as when a company is insolvent where priority is given to the interests of creditors unlike those of its shareholders and where flexibility is allowed in regards to gratuitous payment for people such as employees. In addition to that, at times when considering the interest of the corporation, the interests of short term shareholders is overlooked and therefore one cannot conclude that director’s duties wholly focus on shareholders & company interests over those of other persons such as creditors or employees.
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ASIC vs. Adler, 133 S. Ct. 1184, 568 U.S. 455, 185 L. Ed. 2d 308 (2013).
Howard Smith Ltd vs. Ampol Petroleum Ltd, 131 S. Ct. 1309, 563 U.S. 27, 179 L. Ed. 2d 398 (2011).
Hydropathis vs. Hampson., 552 U.S. 148, 128 S. Ct. 761, 169 L. Ed. 2d 627 (2008).
Brunninghausen vs. Glavanics. Corp., 617 F.3d 1072 (9th Cir. 2010).
Coleman vs. Myers. Oversight Bd., 130 S. Ct. 3138, 561 U.S. 477, 177 L. Ed. 2d 706 (2010).
Hutton v West Cork Railway, 130 S. Ct. 1784, 559 U.S. 633, 176 L. Ed. 2d 582 (2010).
Legislation
Companies Act 1958(Cth)
Corporation Act 2001
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