Description

INTRODUCTION

As is, the law generally links the corporate interests to those of the shareholders.

Nevertheless, corporate management should take into account interests outside the company’s formal legal components, to that group known as stakeholder’s employees, suppliers, distributors, consumers, creditors, government and the community.[1]

The Corporations Act obliges directors and other corporate officers to exercise their powers and discharge their duties ‘in good faith in the best interests of the corporation’. [2]

The board should take account of the interests of workers in determining whether to pay a dividend because the impact of natural events such as a pandemic was not contemplated at the time the concepts of shareholder primacy and limited liability were established. Requirements have changed, as the world has developed. Commercial activity and the generation of wealth cannot be for only shareholders at the expense of other third parties in this case the employees.

DIRECTORS DUTIES TOWARDS SHAREHOLDERS AND STAKEHOLDERS

Directors’ duties are considered under the traditional rules of company law as being owed to the company and to the company alone and therefore the reason why company’s interests are equated with the interests of the members collectively. Directors on this view are not authorized to consider the interests of other groups, such as the company’s employees, creditors, customers and suppliers, or to have any concern for such matters as the community, the environment, welfare and charity, unless what they do has derivative benefits for their shareholders. [3]

The customary view of a company’s stakeholders is limited to those concerned with the inputs such as investors, employees, suppliers and outputs like customers involved in maximizing value [4]to the company and returning profits to shareholders.[5] Freeman’s stakeholder model, defines stakeholders as any group or individual who can affect or is affected by the achievement of the organization’s objectives.[6]

It is clear that the duties of a director have a number of sources, including common law, equity and statute. However, the fact that the scope of a director’s duties, and the standards which must be met in the discharge of those duties, are embodied in a statute and can be enforced by the exercise of the remedies conferred by a statute does not of itself mean that the duties have a public character, for example, to the duty to attend court in answer to a subpoena or the duty to care for

a dependent child. The duties of a director are owed to the company and are enforceable by the company. [7]

The argument against a shareholder primacy approach is that it is a corporate governance model that puts the private interest ahead of the public interest. 

In the shareholder primacy view the interests of shareholders are considered paramount by directors, over and above those of other stakeholders, such as employees. At its most extreme, this perspective suggests that directors will tend to favour the short-term financial interests of shareholders, being driven in that direction by capital markets fixed on share price and short-term returns.[8]

The only situation where the courts have clearly identified that the interests of non-shareholder stakeholders can be given higher priority by directors than the interests of shareholders is where the company is insolvent or is close to insolvency, or some contemplated transaction threatens the solvency of the company.[9]