Briefing Paper on legal Director’s Duties in Australia: Submission to CAMAC

  1. Introduction

Corporate governance has been given a major focus by both the general law and corporate law in Australia. These regulations on corporate conduct have caused a great impact on companies and communities in Australia. Corporations in Australia have the capacity to influence interests of the company and the society in general. As a result, corporate governance regulations have been provided to regulate company managements in order for them to meet shareholder needs.[1] However, the current legal provisions fail to take care of the interests of the community sufficiently. For instance, Section 181 of the Corporations Act provides duties of directors which mainly take care of the company’s interests rather than the community within which the company operates.

This briefing paper will provide CAMAC with the necessary information about the gap that needs to be filled in terms of corporate governance regulation. The briefing paper will specifically focus on director’s duties. It will highlight the current directors’ rules in both the general law and Corporations Act. The paper will then explain the impact of these regulations on corporate governance in the context of Australia. Lastly, the paper will provide recommendations for the current situation.

  1. Current Situation

Under the legislative and common law, directors have the central responsibility to manage the company conferred to them by the Corporation’s Act and the company’s constitution.[2] Under the Corporations Act (Section 181) 2001, company directors are also required to exercise their power in the best interest of their corporations, and with good faith.[3] This is the primary responsibility to a director in corporate governance. There also other duties of directors including duty not to act improperly, duties of caring and acting diligently, avoidance of conflict, duty not to use managerial power improperly, duty not to trade in an insolvent situation, and using information properly.[4]

According to Australia’s law on corporations, directors should act reasonably and dilligently.[5] In this case, the director is required to be diligent to the level that a reasonable person under normal circumstances exercises.[6] The duty to act in good faith allows directors to avoid conflicts of interests and resolve such conflicts as they arise. This duty also requires directors to act honestly, motivated by the company’s needs and interests. Company directors should also avoid acting in manner in which a normal person would regard as bad aims or actions of the company. Furthermore, Corporations Act sect 181 suggests that directors should not use their positions to obtain an advantage for their own interests.[7] The law also requires directors of Australian companies not to use information to gain advantage for themselves of cause problems for the company.

The general law also provides duties of directors for shareholders. For instance, it requires directors to act properly and discharge proper purposes for the corporation, and in a way that meets the company’s interests.[8] Directors should also act in compliance with Environmental Protection Act 1970; failure to comply will attract certain amount of penalty depending on each specific offence. This allows Australian companies to carry out sustainable activities.

Australian law also requires managing directors to conduct the company’s affairs in a manner that may not be contrary to shareholders’ interests. It is also the directors’ duty not to act in an oppressive, prejudicial or discriminative manner against one or more directors.[9] The director is also required to account for the profits of the company which may be realized as a result of circumstances in which the director’s duty conflicts with his own personal interests.[10] The director is also obligated to account for profits earned through activities that are directly associated with his office.

According to Corporations Act 2001, directors have additional duty to shareholders if a relationship of trust exists between company director and individual shareholders. The director’s duties to shareholders will depend on specific circumstances and the nature of relationship between a shareholder and the company’s director. For instance, directors may have a duty to shareholders if the shareholders depend on the director’s information, if there is a relationship of confidence between the shareholder and the director, and if the transaction is particularly important to the shareholder.

Company directors also have financial duties to their companies. These duties include driving and monitoring business performance.[11] The directors ensure that the company has kept accurate financial records and the requirements of ASIC are appropriately followed by the directors; including provision of details of the current directors and their individual personal address as required by the ASIC.

  1. Impact on Corporate governance

Business conduct of corporations has several impacts on stakeholders and the society at large. Corporations incur social costs and generate benefits for the society. The question of whether corporations continue benefiting the society is highly debatable nowadays.[12] There are various scandals and sagas that face corporations, some of which are related to the actions of managing directors. In every action taken by managing directors of companies, there are consequences. Clarke et al (2014) suggest that poor corporate governance practices lead to business failure, and may impact negatively on market integrity and confidence.

The Australian regulations indicate that the main duties of directors are targeted on the company’s own interests. If necessary, the directors may also have a duty for the shareholders. This occurs mainly in which the shareholder and the managing director are related in relationship of confidence and trust to each other. Specifically, Section 181 of Corporations Act 2001 provides the duties of directors that dwell mainly on companies’ interests. Under this law, the duties of directors are not concerned with the interests stakeholders other than shareholders.[13] The impact of Australian regulations on director’s duties is clear in various court cases which favour directors in various corporate governance activities that affect the interests of shareholders.

One of the common cases is Woolworths v Kelly. In this case, the court held that a company can decide to be generous to its stakeholders, but this applies only to the extent that it benefits the company or it is in the purpose of the company to do so. Furthermore, in Harlowe’s Nominees Pty Ltd v Woodside (Lakes Entrance) Oil Co NL, company directors allotted themselves new shares in order to enhance the stability of the company.[14] The court contended that the directors’ act was properly purposeful. This does not conform to the interests of stakeholders; hence the law focuses more on the needs of the corporation than those of shareholders.

In a second case Howard Smith Ltd v Ampol Petroleum Pty Ltd, the judge ruled that the decision of the company to allot shares to one of its directors in order to reduce the overall shareholding of the company was an improper purpose.[15] This inconsistency in court rules also shows how the law on directors’ duties leaves a great gap for corporate governance in Australian context. There is a need to address this issue in order for directors to not only act for the company’s interests, but also take care of the interests of stakeholders of the organisation including the overall community which allows the company to operate in the society.

In the current regulation, directors are conferred with a lot of powers over the decisions of corporations. The principles proposed by judges in various cases seem to be harsh, but they are correct according to the law. Directors have discretion in the usage of company’s assets and other resources.[16] Whatever they do, even if they may hurt other stakeholders different from shareholders, is correct if they can prove that the actions are in the organisation’s best interests.

It is clear that the Australian law on directors’ duties leads to controversies in court rulings on the actions of company directors. It has also given directors primary power to work in a manner that they meet the company’s interests.[17] This has caused many directors to neglect the interests of other stakeholders, especially other stakeholders different from shareholders. As a result of the Corporations Act 2001 Sect 181 which gives directors power to act in the best interest of the company, directors have acted in a way likely to yield benefits of the company and impact negatively on the interests of stakeholders and the society.

  1. Recommendation

Due to the increased power given by the law to company directors, the interests of shareholders may be neglected. To avoid this, the duties of company directors should be changed to include their duties towards the environment, community and shareholders. Although corporate social responsibility regulations guide the relationship between an organisation and its stakeholders, they are usually overridden by the duties of directors.[18]

In this case, the duties of directors should include corporate social responsibilities. The reason why corporate responsibility is required among company directors is to integrate their duties for the company with the duties of the corporation’s duties towards other stakeholders.[19] The current law asserts that directors have a primary responsibility towards the corporation. This assertion should be changed to make directors primarily responsible for the company, the community and the environment. This approach will change the courts’ focus on the company interests and consider the interests of stakeholders in their rulings.

Other stakeholders also play an important role in the sustainability and growth of a company. Customers contribute to the revenue and profits of the organisation while creditors boost the company’s capital. Furthermore, corporate responsibility theories argue that responsibility towards the community and the environment enables the organisation to be allowed to carry on with its activities legitimately in the market. A company also earns a good public image by being committed to the interests if the community. For these reasons, it is very necessary for companies, led by their directors, to show some sense of responsibility to various stakeholders. In this regard, Australian corporations’ law should be amended to include provisions or regulations on the dealings of companies with their external environment.

Corporate social responsibility for companies may not be pursued successfully if directors focus only on their duties for the company and not their duties for the community and the environment. This is because directors are the primary decision makers of companies in the current Australian corporate governance regulations.[20] By adding new duties for directors to take consider the interests of other stakeholders, communities and the environment; Australian regulations will be able to deal with conflicts between organisations and the general environment successfully.

This briefing paper recommends that Section 181 of Corporations Act should be amended to create room for directors to and act in good faith towards stakeholders, the community and the environment.[21] In this regard, Section 181 needs amendments to include directors’ duties that take into account the interests of stakeholders in addition to shareholders while at the same time taking into accounts the social interests of the environment and the wider community.

However, the challenge of this recommendation is that the government has reviewed the law on duties of directors to determine whether the benefits of other stakeholders may be considered but the results have always been to maintain the same law. This is because the government thinks that the existing regulations are adaptable to respond to the interests of other stakeholders except for the shareholders.[22]

  1. Conclusion

Indeed, the current Australian regulations on directors’ duties are not effective in enhancing appropriate corporate governance within companies. The current law focuses specifically on the duties of the company towards the company’s interests; leaving the interests of other stakeholders at the mercies of the courts. With the powers given by the law to protect the interests of their companies, company directors have the potential of contributing positively and significantly to the interests of the community, the environment and other stakeholders of the company than the shareholders.

However, directors may also use this power to the disadvantage of the environment and the community by focusing on the company’s interests and in the process neglecting those of the environment, the community and other stakeholders. Therefore, it is necessary to amend section 181 of Corporations Act to include directors’ duties which allow them to focus on the interests of other stakeholders, the community and the environment.

 

Endnotes

[1] W Therese, ‘The pursuit of profit at all costs: Corporate law as a barrier to corporate social responsibility’, 30(6) Alternative Law Journal, 278.

[2]P Dermansky, Should Australia Replace Section 181 of the Corporations Act 2001 (Cth) With Wording Similar to Section 172 of the Companies Act 2006 (UK)?

[3] AustLII, Commonwealth Consolidated Acts: Corporations Act 2001 – Sect 181. Accessed April 24, 2014 from http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html.

[4] Shweizer Kobras, Director’s Duties and Responsibilities. Sydney, Shweizer Kobras, 2000.

[5] J Lowry, “The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey”, The Modern Law Review,        75(2), 2012, 249-260.

[6] Shwezer Kobras, p. 1.

[7] M Wellard and P Walton, “A Comparative Analysis of Anglo-Australian Pre-packs: Can the Means Be Made to Justify the Ends?” International Insolvency Review, 21(3), 2012, pp.       143-181.

[8] Lowry, p. 253

[9] Shweizer Kobras, p. 2

[10] C Beckers, O Marz, and LM Kolbe, Investing in Sustainability: A Practice-Oriented Approach to Analyze IT-Investments in Sustainability Reporting Systems”, International Journal of Social Ecology and Sustainable Development (IJSESD), 4(2), 2013, 99-120

[11] Shweizer Kobras, p. 3

[12] S Zyngier, F Burstein, and J McKay. Governance of Strategies to Manage Organizational Knowledge, chapter: English, InfoSci-Books. 2014.

[13] RF Webber, “Structural Regulation as Antidote to Complexity Capture”, American Business Law Journal, 49(3), 2012, 643-738.

[14] Dermansky, p.10.

[15] A Durie, Legal Requirements for CSR Reporting in the United Kingdom, Denmark, and Australia, Journal of the Australian Law Teachers Association, 2010, 11-27.

[16] Dermansky, p. 11.

[17] J Coulton and S Taylor, “Directors’ Duties and Corporate Governance: Have We Gone Too Far?” Australian Accounting Review, 14(32), 2004, 17-24.

[18] J McConvill, “Directors’ duties to stakeholders: A reform proposal based on three false assumptions”, Australian Journal of Corporate Law, 18(1), 2005, 88-102.

[19] P Lynch, Human Rights and Corporate Social Responsibility, Melbourne, Human Rights Law Resource Centre Ltd, 2006.

[20] Durie, p. 19.

[21] Lynch, p. 23

[22] Dermansky, p. 12

You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *