Directors and their General Duties

Discuss about the Albatross around the Neck of Company Directors.

On incorporation, a company becomes a legal artificial person, i.e. it has an identity of its own. However a company is not a natural person, i.e. it does not possesses the mind and body of its own to think take decisions and accordingly manage the affairs (Department of Industry, Innovation and Science, 2017). Consequently, a company cannot act by itself and it has to depend on some human agency to act in its name. A company acts mainly through the two groups of people namely, the directors of the company and the members of the company. In other words, the decision making power of a company vests in two organs, i.e. the board of the directors and the shareholder members. The board is the managerial body, to whom is entrusted the whole of the management of the company (Tricker and Tricker, 2015). The members constitute the board of the directors. It is the responsibility of the directors to act as a body as a whole, without improperly excluding any of the directors. The board of the directors are in a fiduciary relationship with the company and are responsible for the overall management of the business of the company on behalf of the shareholders. Moreover, the directors are also in charge of the compliance of the regulatory requirements in addition to making the strategic and operational decisions for the company (Australian Securities & Investments Commission, 2018).The report is an analysis of the role of the directors in the company, with regards to the responsibilities towards the shareholders and the other stakeholders of the company.

The Corporations Act, 2001 (Cth) defines the term directors in the Section 9 which reads as follows. Director refers to a person who has been appointed as a director, or is appointed and acting as an alternate director in the capacity of the same (Federal Register of Legislation, 2018).  The definition also includes the de facto directors and the shadow directors. In simple terms, it can be stated that directors refer to all the persons who are considered as such in a company. The Corporations Act also specifies the four main duties of the directors in relation to the company, which are as follows (Australian Institute of Company Directors, 2018). Firstly, as per section 180, a director is required to take care and exercise due diligence while discharging the corporate functions of the company. Second duty, as specified in the section 181 requires a director to act in good faith and in the best interests of the company. Third general duty of the directors, as specified in the section 182 is that a director should not use their position improperly in order to gain an advantage to enrich themselves or someone else that is detriment to the interest of the company. Lastly, as specified in the section 183, a director should not make the improper use of information gained during the course of their work, to enrich themselves or someone else which may cause detriment to the interest of the company.

Case Laws

The literal meaning of the duty means that a director must discharge his or her duty in order to maximise the wealth of the shareholders and in their best interests. However, in general practice, the above listed duties are applicable towards company as a whole, which includes not just shareholders, but also the customers, employee, suppliers, creditors, neighbours and the overall society in general.

Some recent leading corporate law cases on the lines of the director duties are as follows (Austlii, 2013).

• ASIC v Wizard (2005) 145 FCR 57; 219 ALR 714.
• AWA Ltd v Daniels t/as Deloitte Haskins and Sells (1992) 7 ACSR 759.
• ASIC v Fortescue Metals Group Ltd (2011) FCAFC 19.
• Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115; 9 ACLC 946. Elliott v ASIC 10 VR 369; 205 ALR 594.

In the above-mentioned cases, directors were found to be guilty and had faced severe consequences on lines of both civil and criminal liability because of the breach of their duties. While discharging the corporate functions, a director is required to be aware of the duties towards the company as specified by the various sections of the Corporations Act in this regard.

The concept of the Corporate Social Responsibility and the consideration of the interest of the stakeholders other than the members of the company has been a topic of the consistent debate in the corporate culture of Australia. Various developments have taken place in the light of the same, which are listed as follows.

• The fiduciary role and responsibilities of the corporations towards the society and environment is also depicted by the fact that several organisation have been created at the international level, on the lines of the sustainability reporting initiatives. Some of these organisations are the UN Global Compact, American Bar Association’s Sustainable Development Task Force and more. There are legal memos for the country Australia as well in addition to others (MIT Sloan Management Review, 2015).
• Various number of the legislations at the federal, state and the territory levels has also laid down specific legal obligations, in order to protect the wide range of the stakeholders. Some of these legislative schemes are employment laws, insolvency laws, environmental laws, occupational health and safety laws, taxation laws and the various trade practices. In addition to this, there are various industry specific laws such as Aviation Law. A director may be personally liable under the above-mentioned categories of the laws and therefore he or she must pay due regard to the rules and regulations mentioned in the other such applicable laws (Hall and Wilcox, 2016).
• Various reports have been published on the lines of the concerned issue. For instance, the report ‘Corporate Responsibility: Managing Risk and Creating Value” was prepared by the Parliamentary Joint Committee on Corporations and Financial Services in the year 2006, stating significant recommendations for the treatment of CSR in Australia (Austlii, 2008). The report also highlighted that the rate of social responsibility has increased in the business decision making in recent times. In addition to this, the committee mentions in the report that decision-making practices that involve social responsibility considerations, add an over value to the wealth of the shareholders. Some examples of reports and other developments are Hilmer Report, Ramsay Report, ASX corporate governance guidelines, and the Clerp 9 Act 2004 (Austlii, 2013).
• In the words of Cooney Committee, a director’s range of actions is crucial to the overall success of an entity for productivity in the corporate sector would lead to the economic wellbeing of the country of Australia. The committee stated that a balance must be achieved as in case of the corporate activities of mergers, acquisitions and alike and the bona fide interests of the shareholders, worker, consumer, financiers and the public at large (Weismann, 2017).
• Some recently developed theories at the global level such as the Team Production Theory recognises the board’s power, but is based on the underlying notion that in order to produce a single output, two or more individuals must add up their individual resources. The above theory also recognises the fact that the directors must act on behalf of all the members of the corporate group, and not just the shareholders group for a beneficial output as whole.
• One of the after effects of the global financial crisis and the resulting corporate collapse of 2000s was adoption of the governance code by the Corporate Governance Council of Australia, along with the recommendations for the best practices. These are formulated for the listed companies of Australia that are listed on the Australian Securities Exchange. It is important for the listed companies to link their director duties to the AXS principles (ASX, 2018). Thus, it can be said that the magnitude of the focus has been increased focus on the corporate governance and the related practices in the recent years in the Australian law. As a result, the companies on their own are acknowledging the various impacts of their corporate activities on the non-shareholder groups comprising of not just employees and the creditors, but also of the victims if any of their activities and the society and environment in general. In addition to this, there has been increased use of the terms like corporate citizenship in the Australian Corporate World in the past decade.

Following recommendations are being made to the directors, so as to enable them to fulfil their responsibilities towards the shareholders and the other stakeholders, while discharging their core functions.

• Directors must follow the general duties as prescribed by the Corporations Act, 2001, in order to avoid the criminal and civil liabilities and to serve the company in the best manner.
• Directors must abide by the additional director duties under the Corporations Act, 2001 that guide the directors towards their responsibilities (Moores, 2014). For instance, one of the additional duties as cast by the section 588G is that the directors must ensure that the company must not engage in the insolvent trading practices. Some other additional duties are prescribed in section 344, section 191, section 208, section 205G, section 188, section 674 and section 1043A. These are compliance with the financial reporting requirements, maintenance of financial records, disclosing of the personal interests to the market and disclosure in case of the related party transactions, lodging information with ASIC and disclosure of information on continuous basis in relation to the share prices of the company, and insider trading respectively.
• As stated by the two Australian Government Reviews, Australian directors must consider the broader interests (in relation to employees, consumers, creditors and such) while considering the best interests of the shareholders, so far as these things are relevant in terms of the shareholder interests.
• In addition to the above, the Australian Securities Exchange (ASX) guidelines and the principles of corporate governance must be followed by the directors while making decisions and managing the affairs of the company.

Conclusion

As per the discussion in the previous parts, it can be concluded that the director and the members of the organisation are the two most important groups of the organisation, as the decision power vests in the hands of the two. In Australia, director are regarded to have a fiduciary relationship with the company and are required to follow the general duties as laid down by the Corporations Act, 2001, additional duties mentioned therein and the responsibilities as envisaged by the other legislative laws and regulations. The case laws highlighted in the report assert the crucial role of the directors in the organisation. Though, prima facie it seems that the directors are primarily accountable to the shareholders and have the responsibility to guard their interests. But while it comes to the practical approach in the corporate world, with regards to the developments in the light of globalisation and transparent business practices, it can be said that the director owe to many other groups as well. These groups include that of the employees, consumers, regulators, and overall society. The various inferences as listed above in the report recognise the directors’ indirect liabilities on the lines of the efficient corporate governance practices, towards other stakeholders of the company. The list of recommendations provided in the report highlights the range of duties of the directors. Hence, it can be concluded that directors must aim to achieve a healthy balance between the interest of the shareholders and at the same time protecting the interests of the diverse group of stakeholders wherever relevant and necessary, in the capacity of the guardians of the affairs of the company as a whole.

References

Austlii. (2008) Corporate Social Responsibility: Legislative Options for Protecting Employees and the Environment [online] Available from: https://www5.austlii.edu.au/au/journals/AdelLawRw/2008/2.pdf [Accessed on 26/07/18].

Austlii. (2013) The Albatross around the neck of company directors. A journey through case law, legislation and corporate governance. [online] Available from: https://www5.austlii.edu.au/au/journals/JlLawFinMgmt/2013/6.pdf [Accessed on 26/07/18].

Australian Institute of Company Directors. (2018) General Duties of Directors. [online] 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 on 26/07/18].

Australian Securities & Investments Commission. (2018) Directors’ key responsibilities. [online] Available from: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-key-responsibilities/ [Accessed on 26/07/18].

Australian Stock exchange. (2018) Corporate Governance Principles and Recommendations. [online] Available from: https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf [Accessed on 26/07/18].

Department of Industry, Innovation and Science. (2017) Company. [online] Available from: https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/business-structures-and-types/company [Accessed on 20/07/18].

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 on 20/07/18].

Federal Register of Legislation. (2018) Corporations Act 2001 [online] Available from: https://www.legislation.gov.au/Details/C2018C00275 [Accessed on 26/07/18].

Hall and Wilcox. (2016) Legal obligations of directors of Australian companies. [online] Available from: https://hallandwilcox.com.au/legal-obligations-of-directors-of-australian-companies [Accessed on 26/07/18].

Moores. (2014) The Directors Series: Part 2- Fiduciary Duties. [online] Available from: https://www.moores.com.au/news/the-directors-series-part-2-fiduciary-duties [Accessed on 26/07/18].

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

Weismann, M. F. (2017) The Missing Metrics of Sustainability: Just How Beneficial Are Benefit Corporations. [online] Available from: https://heinonline.org/HOL/LandingPage?handle=hein.journals/decor42&div=4&id=&page= [Accessed on 26/07/18].