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ACC03043-Diverse Range of Stakeholders While discharging Duties

Discuss about the Role and Responsibilities of Directors in managing its operations. 

 

Answer:

Introduction

The Board of Directors in a company plays a crucial role in managing its operations. Although a corporation has a separate legal entity from its members, however, it is an artificial person that cannot take its decision on its own. Therefore, the board of directors acts as the brain of the company, and they take business decisions for the organisation. The board deals with third parties on behalf of the corporation and form contractual relationship in which the corporation is held liable. Similarly, the board also evaluates the interest of different stakeholders of the corporation to implement business strategies which are focused on fulfilling their interest (Tricker and Tricker, 2015). Traditionally, it was considered that shareholders are the key stakeholder of a company and the board has a responsibility towards them to ensure that their interest is prioritised before other stakeholders. It was because the shareholders take the most risk in the corporation by investing their capital in its operations. However, this is not true, and the board is equally responsible for the company and its stakeholders. As per corporate governance principles, the board have to ensure that the interest of all stakeholders is achieved based on the actions of the organisation (McCahery, Sautner and Starks, 2016). The purpose of this report is to prove that directors should not prioritise the interest of shareholders above others as per the concern of the Australian Institute of Company Directors (AICD). This report will evaluate examples of various other corporations to prove this theory. Various recommendations will be given in the report for directors to ensure that they consider the interest of a diverse range of stakeholders while discharging their duties.

Role and responsibilities of directors

The board of directors play a significant role in a company because they are responsible for managing the operations by the corporation by forming business strategies. Various powers are given to the directors because they act as the apex authority in the organisation (Eccles and Youmans, 2015). Along with these powers, a wide range of responsibilities is imposed on the board as well. These responsibilities are recognised under the Corporation Act 2001 in which duties are directors are mentioned (Hedges et al., 2016). In case the directors failed to comply with these duties while conducting the operations of the business, then they can be held liable under this act. Evaluation of these duties also highlights the role of directors towards stakeholders of the company. This evaluation will help in understanding whether directors should prioritise the interest of shareholders above other stakeholders or whether they should cater to the needs of a diverse range of stakeholders. 


Care and diligence (section 180)

The directors of a company are obligated to maintain a level of care and diligence while they are discharging their duties. This care comes with the powers which they have in order to form future business strategies for the organisation. They should maintain care and diligence which is expected from a person who is acting in a similar position (AICD, 2018).

Good Faith (section 181)

The directors are obligated to act in good faith for the company. They are responsible for prioritising the interest of the company above their personal interest, and they should discharge their duties for a proper purpose (Pugliese, Nicholson and Bezemer, 2015).

Improper use of position (section 182)

Since directors operate in an apex position in the corporation, they have to ensure that they use their position for proper purposes only. They have to ensure that they take business decisions and use their powers within appropriate limits and avoiding taking any business decisions which could result in affecting the company or its stakeholders in negative manner (Minter Ellison, 2018). 

 

Improper use of information (section 183)

The board of directors have access to all confidential information about the company because they need this information to form future business strategies. Therefore, they have to ensure that they use the information for proper purpose only and avoiding gaining personal benefits from the same. They should also not harm the company or its stakeholders by unfairly using the information.

Analysis

Based on the evaluation of these duties, it can be proved that no direct duty is owed by directors to the shareholders of the company. The board is responsible for the company and its stakeholders in an equal manner. While taking business decisions or using their powers, they did not have to ensure that the interest of shareholders is above than other stakeholders. This is further explained through judgement given by courts in various cases relating to director duties. The leading judgement given by the court in AWA Ltd v Daniels (1992) 13 ACLC 614 case proved that the board has a duty towards the company and its stakeholders, and they should avoid gaining personal advantage from their position (Yeo, 2016). In this case, the director was held responsible for violating his duties by using company’s capital for personal purposes. In this case, the director did not take appropriate care to ensure that the interest of a diverse range of stakeholders are met based on which the court imposed legal penalties on him (Balan, Gaun and Tan, 2018). Along with these duties, the importance of corporate governance policies is increasing in modern corporations. The directors are enforced to implement these provisions in the business to ensure that they adopt a stakeholder approach while forming business strategies to fulfil their needs (Berger, Imbierowicz and Rauch, 2016). Corporate governance is defined as a set of rules, policies and procedures which assist a company in directing and controlling its operations (Dhaliwal et al., 2014). It enables the directors to make a balance between the stakeholders of the corporation which include customers, employees, shareholders, suppliers, local communities, government and the environment.

Evidence from examples of companies

The implementation of corporate governance policies are enforced by government in many nations, however, the law is still flexible regarding strict implementation of these policies. However, this did not stop leading companies from doing their part and become a positive example to other businesses. There are many corporations across the globe in which the board of directors have adopted a Corporate social responsibility (CSR) structure in the business which enables them to make balance between their actions to ensure that the interest of all stakeholders is meet (Eccles and Youmans, 2015). These corporations are good examples for those directors who believe that promoting shareholders’ interest is the only way to achieve effectiveness of the organisation. 

 

Levi Strauss & Co

The America based clothing organisation, Levi’s, is a global brand which is known for its denim based products. The board of directors of the company understand the importance of corporate governance policies; therefore, they focus on achieving the interest of all stakeholders. For instance, the board has taken a pledge to reduce the carbon footprint of the company by investing in environmental friendly technologies rather than distributing dividends to shareholders. The company has launched and trademarked a campaigned titled “Water<Less” in which it uses alternative methods to use less water in its manufacturing process. It is estimated that by 2020, the corporation will save more than one billion litres of water which shows the commitment of the board towards its stakeholders (Levistrauss, 2018). The corporation has introduced a program titled “Worker Well-Being Initiative” which is focused on the interest of employees who are a key stakeholder of the company. It shows that commitment of the board towards stakeholders.

Apple Incorporation

Apple is the world’s first trillion dollar technology based company which is known for its commitment towards a diverse range of stakeholders. The company engage with local communities which its server its products to provide support to students and people who wanted to learn new things (Monyei and Jenkins, 2018). The corporation has also taken some drastic measures to adopt renewable energy in its production process. Currently, 100 per cent of the stores and production operations of the company are powered by renewable energy source which is not the case for most corporations (Statt, 2018). Although investment in these environmental friendly technologies reduces profits of the company, however, it positively influences its brand image which bring more customers and which is beneficial for its stakeholders as well. It shows that the board has effectively managed to incorporate the interest of a diverse range of stakeholder through business policies.

Starbucks

Starbucks is an America based coffee company which operates across many countries. The board of the corporation focuses on reducing its carbon footprint and providing effective services to its employees. The employees are called partners in the workplace, and they receive many career growth opportunities from the company to develop their academic skills (Wang and Horng, 2016). Moreover, the corporation also focuses on the interest of its suppliers as well. The company only purchase freshly grown coffee from Africa, and 100 per cent of its coffee comes from ethical sources. The organisation has also introduced a program called C.A.F.E for coffee farmers to ensure that they did not face biases or unethical behaviour from large organisations (King, 2012). The company also uses recycled cups while serving coffee. It shows that the board of the company focuses on the interest of the employees, customers, suppliers and the environment along with the shareholders of the company.

Recommendations

Examples of above mentioned corporation showed that companies showed that directors did not have to solely focus on fulfilling the interest of shareholders to become successful. Instead, they should adopt a stakeholder approach to keep a balance between the interests of each stakeholder. Following recommendations can assist directors in discharging their duties while fulfilling the interest of a diverse range of stakeholders.

Evaluation of duties

Directors should evaluate various duties which are given under the Corporations Act 2001 to ensure that they avoid violating them while discharging their duties. They should avoid using their position or information in an unfair manner to promote the interest of shareholders (Koh, 2018). A balanced stakeholder approach assists in ensuring that the company is able to achieve its organisational goals while maintaining a positive brand reputation.

Corporation Social Responsibility (CSR)

The directors should adopt a CSR structure which defines how the company manages its business procedures to contribute to sustainable development. The examples of other companies mentioned above also rely on this structure to ensure that they are able to sustain their future growth by fulfil interest of a diverse range of stakeholders rather than shareholders only (Lins, Servaes and Tamayo, 2017). 

 

Statement of Significant Audiences and Materiality

The board of directors should issue the ‘Statement of Significant Audiences and Materiality’ in order to identify the interest of different stakeholder (Eccles and Youmans, 2015). This statement assists the directors in combining information and details regarding different stakeholders which enable them to recognise the interest of each stakeholder. Based on the evaluation of their interest, the directors will be able to form business strategies which are targeted on fulfilling their needs in the future.

Conclusion

Based on the observations made above, it can be concluded that the directors did not owe a duty towards shareholders of the company. They are equally responsible towards all stakeholders based on which they should form business policies which are targeted on fulfilling the interest of a diverse range of stakeholders. The duties of directors given in the Corporations Act are evaluated along with the principle of corporate governance to understand what role does the board of directors’ play in organisations. Examples of three leading corporations from different industries are discussed to understand how their board focuses on maintaining a balance between the interests of all stakeholders. The success of these companies proves that a stakeholder approach assists companies in sustaining effectiveness in the future. Various recommendations are given for directors in this report which include evaluation of duties before making decisions, implementation of CSR structure and issuing Statement of Significant Audiences and Materiality to ensure that they maintain a balance between interests of stakeholders. 

 

References

AICD. (2018) General duties of directors. [PDF] Available from: https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-6-2-duties-directors_general-duties-directors_a4-web.ashx [Accessed 25/11/2018].

Balan, S., Guan, S.T. and Tan, S.Y.L. (2018) Directors’ Duties of Care, Skill and Diligence. Journal of Malaysian and Comparative Law, 41(2), pp.53-76.

Berger, A.N., Imbierowicz, B. and Rauch, C. (2016) The roles of corporate governance in bank failures during the recent financial crisis. Journal of Money, Credit and Banking, 48(4), pp.729-770.

Dhaliwal, D., Li, O.Z., Tsang, A. and Yang, Y.G. (2014) Corporate social responsibility disclosure and the cost of equity capital: The roles of stakeholder orientation and financial transparency. Journal of Accounting and Public Policy, 33(4), pp.328-355.

Eccles, R.G. and Youmans, T. (2015) Why Boards Must Look Beyond Shareholders. [Online] Available from: https://sloanreview.mit.edu/article/why-boards-must-look-beyond-shareholders/ [Accessed 25/11/2018].

Hedges, J., Bird, H., Gilligan, G., Godwin, A. and Ramsay, I. (2016) The policy and practice of enforcement of directors' duties by statutory agencies in Australia: An empirical analysis. Melb. UL Rev., 40, p.905.

King, B. (2012) Starbucks Increases Recycling; Backs Away from Reusable Mugs. [Online] Available from: https://www.sustainablebrands.com/news_and_views/articles/starbucks-increases-recycling-backs-away-reusable-mugs [Accessed 25/11/2018].

Koh, A.K. (2018) (Non?) Enforcement of Directors’ Duties in Corporate Groups: Goh Chan Peng v Beyonics Technology Ltd. The Modern Law Review, 81(4), pp.673-688.

Levistrauss. (2018) Sustainability. [Online] Available from: https://www.levistrauss.com/sustainability/planet/water/ [Accessed 25/11/2018].

Lins, K.V., Servaes, H. and Tamayo, A. (2017) Social capital, trust, and firm performance: The value of corporate social responsibility during the financial crisis. The Journal of Finance, 72(4), pp.1785-1824.

McCahery, J.A., Sautner, Z. and Starks, L.T. (2016) Behind the scenes: The corporate governance preferences of institutional investors. The Journal of Finance, 71(6), pp.2905-2932.

Minter Ellison. (2018) Doing business in Australia| Directors' duties. [Online] Available from: https://www.minterellison.com/articles/doing-business-in-australia-directors-duties [Accessed 25/11/2018].

Monyei, C.G. and Jenkins, K.E. (2018) Electrons have no identity: Setting right misrepresentations in Google and Apple’s clean energy purchasing. Energy Research & Social Science, 46, pp.48-51.

Pugliese, A., Nicholson, G. and Bezemer, P.J. (2015) An observational analysis of the impact of board dynamics and directors' participation on perceived board effectiveness. British Journal of Management, 26(1), pp.1-25.

Statt, N. (2018) Apple says it’s now powered by 100 percent renewable energy worldwide. [Online] Available from: https://www.theverge.com/2018/4/9/17216656/apple-renewable-energy-worldwide-climate-change [Accessed 25/11/2018].

Tricker, R.B. and Tricker, R.I. (2015) Corporate governance: Principles, policies, and practices. Oxford: Oxford University Press.

Wang, H.J. and Horng, S.C. (2016) Exploring green brand associations through a network analysis approach. Psychology & Marketing, 33(1), pp.20-35.

Yeo, V.C.S. (2016) Directors' Duty of Care and Liability for Lapses in Corporate Disclosure Obligations-Observations and Comments on Select Issues. SAcLJ, 28, p.598.

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