Law Reform Policy Reports-Duties Of Directors

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Law Reform Policy Reports-Duties Of Directors

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Law Reform Policy Reports-Duties Of Directors

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You are expected to research a specified topic reading and interpreting cases, journal articles and law reform policy reports. You are also expected to analyse the effect and operations of these laws and policies on companies and their stakeholders and you are expected to report on corporate legal issues using a Report format.

Directors’ duties are guidelines which are imposed through law on the directors with respect to the way in which they carry out their operations. Where most of the directors’ duties have been derived through common law provisions they are now a part of most of the corporate legislations around the world. These duties have the primary purpose if ensuring that the directors do not misuse the powers provided to them and ensure honesty, integrity, diligence, care and bona fide intentions towards working for the company. According to Talbot (2015, P 21) section 172 of the Companies Act 2006 (CA 2006) belonging to the UK is significantly controversial provision which has been incorporated into the law for companies in the country. Through the adoption of this section the legislation is able to incorporate within it the concepts of shareholders value along with a number of non-exhaustive factors which have to be taken into consideration by the directors in order to promote the success of the company. The question which is at issue in relation to this paper is that whether Australia through its Corporation Act 2001 (Cth) (CA 2001) should also adopt the provisions of section 172 in the light of section 181 which imposes similar duties of the directors.
As stated by Gullifer and Payne (2015, p 394) s.172 of the CA 2006 is a compromise between pluralistic stakeholders’ approach which makes the directors take into consideration stakeholders through law while taking decisions and the shareholder primary approach which emphasizes on concerns of the market and subjects the shareholders to self regulation.  The section is simply in relation to the duty of the directors to ensure and pursue the success of the organization. The wording of the section provides that the actions of the directors of an organization have to be in good faith, which would probably promote companies success for the interest of all its members. In relation to doing so the directors are to take into consideration the probable effects of a decision in the long run, employee’s interest who are working for the company, fostering the relationship of the organization with the customers and suppliers, the impact which the operations of the company have on the environment, maintaining high reputation and dealing fairly between the members of the company. It has been argued by Du Plessis, Hargovan, and Harris (2018, p 113) that when the provisions of the section are examined closely they simply reflect modern business practices and existing legal provisions which are applied in general to corporations all over the world. Further the author goes on to state that that the mere purpose of implementing such duties on the directors of a company is only to reinstate the practical reality they are subjected to.
The examination of the wordings of the section depicts that it requires the directors to take into consideration the interest of the stakeholders when such interest is in compliance with the interest of the shareholders (Collison et al., 2014, p 423). It has been pointed out by Michael that the section represents a shift from “permission to obligation” with the demonstration of old common law provided by the case of Hutton v West Cork Railway in providing permission to the directors to consider interest of the stakeholders albeit when they actions are primarily for the company’s interest.   The clear overriding obligation provided under the provisions of s.172 is that of acting in the company interest and while complying with such obligations the directors must take into consideration the other non-exhaustive factors. It has been argued by Flower that the section does not provide any individual value to the interest of the stakeholders which is actually present under pluralist approach. The test under this section ensures that the primacies of the shareholders over the stakeholders strongly prevail and thus it depicts the presence of the narrow view of CSR proposed by Friedman. Most of the cases which have interpreted the section have a view that it is not a part of the CA 2006 which the parliament wants to address through litigation such as the case of R (on the application of People & Planet) v HM Treasury [2009] EWHC 3020.  In addition it has been argued by Guillifer that there is an inherent problem with the provisions of s.172 in relation to the weighting of the factors, the need for objectivity, a right which has no remedy and judicial reluctance in business decision making. The principles of the section are contrary to those which had been provided by Steinberg (2018, p 323) which states that “A business that is accountable to all is actually accountable to none”.
On the other hand Australia like that of the UK had taken the review in relation to corporate governance as in initiative to address the corporate governance crisis in the wake of the Enron case (Deegan and Shelly, 2014, p 11).  The country published two reports in 2006 in relation to Corporate Social Responsibility which signified that it has strongly rejected the ‘Enlightened Shareholder Value’ approach and argues based on an approach which laid emphasis on “soft law” (Ferran and Ho, 2014, p 78).  The primary section which has some resemblance to s.172 in Australia is s.181 of the CA 2001. The section provided that it is the duty of the directors to act in good faith and for a proper purpose.  As stated by Stephens (2017, p 121) in order to find out that whether the directors duties in Australia or more precisely the provisions of section 181 of the CA have to be amended it is primarily required to understand the contemporary directors duties which are present through general statute and law. In Australia the powers of the directors are very wide and not limited to a shareholder approach. The courts have widely interpreted the powers of the directors to manage a company. In the case of Howard Smith Ltd v Ampol Petroleum Ltd it had been confirmed by the court that that the law provides powers to the directors to make a decision which is not in compliance to the wish of the shareholders.  In the same way it has been stated by the court in the case of Imperial Hydropathic Hotel Company Blackpool v Hampson that a decision of the directors cannot be overridden by a resolution of the members where they have been granted the powers to manage the affairs of the company. However this does not signify that the decision of the directors cannot be challenged. This is done in Australia through the imposition of section 180- 184 of the CA 2001.  The duties which are provided in section 181 contemporarily focuses on company interest. There have been various calls in relation to amendment of the statutory duties in order to clarify the extent to which the directors can take into consideration stakeholders’ interest or activities under CSR.  In the case of Australian Securities & Investments Commission v Hellicar & Ors [2012] HCA17 it had been stated by the court that the director would be liable to have contravened the provisions of the duty off the have not taken into consideration profit maximization.
According to Stout and Blair (2017, p 312) there have been no appellate decisions in Australia in relation to the degree to which the directors can consider stakeholder interest. However in the case of Woolworths v Kelly it had been held by the court that a company may be generous with those who are related to it, however the company must only do so while ensuring that it is pursuing its own interest. It has been argued by Bottomley (2016, p 221) that section 181 of the CA 2001 does not  provide for the obligations of the directors to the other stakeholders. On the other hand Flower (2015, p 117) states that one of the biggest advantages of the section is the flexibility which is provided through it. Where the provisions of section 181 of the CA 2001 are replaced with the provisions of s.172 of the CA 2006 it is going to have negative impact on the Australian community. For instance companies may restrain from selecting Australia as a place of incorporation. In addition it has been argued by Segerlund (2016, p 98) that the provisions of taking into consideration the interest of the shareholders may negatively impact investor’s confidence. The Australian investors currently known that their money is directed towards pursuing their own benefit and if this is changed the confidence of the shareholders would be affected. In addition the provisions of s.172 also do not specifically operate to ensure stakeholder interest as discussed above thus its inclusion is not worth. It has been further argued by Ferran that the duties which have been imposed via s.172 may prevent talented people from acting as directors. In the same way the application of the section may lead to a perception that litigation can be easily initiated against the directors for every decision they make and subsequently make the  growth of business stagnant. The availability of insurance may also be reduced where the provisions of this section have been incorporated in the Australian system (Clarke, 2014, p 763).
From the above discussion it can be stated that the provisions of section 181 of the CA 2001 must not be changed in the light of the similar wording which have been provided through s.172 of the CA 2006. It is the duty of the directors to safeguard the money of the shareholders. Thus the duties of directors have evolved for the purpose of taking into consideration their interest. It is a requirement of the directors under section 181 of the CA 2001 to act in the company’s best interest.  Where there is not much mentioned in relation to other stakeholders of the company it cannot be stated that the directors cannot take into consideration their interest. The operations of the company are not in a vacuum. For the company to be successful in the long term the interest of the stakeholders have to be taken into account by the directors. Those directors who are not able to adequately manage the breach can be said to be in contravention of due diligence duty under section 180.   Even where there are several examples in Australia where the companies only indulged in profit maximizing overlooking the interest of the stakeholders when the negative repercussions in relation to such companies are analyzed it can be stated that the actions were not in the best interest of the company. Disregarding the relevant interest of the stakeholders would not only lead to an adverse reaction from the community but also regulatory interventions, litigations and government inquiries.  
Where there has been criticism for section 181 of the CA 2001 that it does not  provide for the obligations of the directors to the other stakeholders, one of the biggest advantages of the section is the flexibility which is provided through it. All decision which the directors make has to be in company’s best interest. How and what is to be done is upon the reasoning of the directors who posses expertise and knowledge to make decisions. It is important the flexibility us provided to directors duties so that they can adopt with value changes and community expectations.  On the other hand even where clear guideline is set out by the provisions of s.171 of the CA 2006 it is subjected to significant problems such as weighting of the factors, the need for objectivity, a right which has no remedy and judicial reluctance in business decision making. In addition the section has many phrases and concepts which have not been tested by the court and are unclear. In addition  bureaucracy to decision making with very little benefit is provided through the prescribed interest which the directors have to consider. To make it worst the accountability of the directors in relation to the company is clouded by the prescribed interest list which provides a threat to the enforceability of the duty.  The CA 2001 may be an easy target but it is not the correct place where the interest of other stakeholders should be taken into consideration by the businesses.  Thus the notion that the provisions of section 181 of the CA should not be altered is supported by strong reasons and should be rightly resisted.  
Australian Securities & Investments Commission v Hellicar & Ors [2012] HCA17
Bottomley, S., 2016. The constitutional corporation: Rethinking corporate governance. Routledge.
Clarke, T., 2014. The impact of financialisation on international corporate governance: the role of agency theory and maximising shareholder value. Law and Financial Markets Review, 8(1), pp.39-51.
Collison, D., Cross, S., Ferguson, J., Power, D. and Stevenson, L., 2014. Financialization and company law: A study of the UK Company Law Review. Critical Perspectives on Accounting, 25(1), pp.5-16.
Companies Act 2006
Deegan, C. and Shelly, M., 2014. Corporate social responsibilities: Alternative perspectives about the need to legislate. Journal of Business Ethics, 121(4), pp.499-526.
Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate governance. Cambridge University Press.
Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
Flower, J., 2015. The international integrated reporting council: a story of failure. Critical Perspectives on Accounting, 27, pp.1-17.
Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury Publishing.
Howard smith ltd v ampol petroleum ltd [1974] ac 821
Imperial Hydropathic Hotel Co, Blackpool v Hampson (1883) 23 Ch D 1
Langford, R. and Ramsay, I., 2015. Directors’ Duty to Act in the Interests of the Company: Subjective or Objective?.
Page, M., 2014. Business models as a basis for regulation of financial reporting. Journal of Management & Governance, 18(3), pp.683-695.
R (on the application of People & Planet) v HM Treasury [2009] EWHC 3020
Segerlund, L., 2016. Making corporate social responsibility a global concern: norm construction in a globalizing world. Routledge.
Steinberg, M.I., 2018. The Federalization of Corporate Governance. Oxford University Press.
Stephens, B., 2017. The amorality of profit: transnational corporations and human rights. In Human rights and corporations (pp. 21-66). Routledge.
Stout, L.A. and Blair, M.M., 2017. A team production theory of corporate law. In Corporate Governance (pp. 169-250). Gower.
Talbot, L., 2015. Critical company law. Routledge.

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