QUESTION
Assessment details
Assessment item 1— Written Assignment
Due date: 4pm AEST, Saturday of Week 6 ASSESSMENT
Weighting: 40%
Length: Part A: Short Answer (not longer than 1500 words)
Part B: Corporations Act 2001 provisions (no word limit)
Part C: Essay (Not longer than 2000 words, including substantive material in footnotes) 1
Objectives
This assessment item relates to all course learning outcomes as stated in the Course Profile.
Part C: 15 Marks
Please prepare a short research essay on the following issue.
“Directors must unequivocally act in the best interests of the company.” Critically discuss with reference to relevant case law and statute.
In answering Part C you are expected to consult both the prescribed materials and wider primary and secondary sources. Internet sites consulted must be relevant to the topic and should be from academic and Australian legal websites. Your essay must conform to normal academic essay requirements and include a clear introduction and overall argument.
- Need a bibliography at the end of the essay.
Reference books.
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SOLUTION
Corporate Governance
The over writing object of governance regime can be described as the creation and maintenance of an orderly commercial environment which works in public interests by controlling and monitoring performance of the board of the directors. The idea that running a company ethically would create profits for the corporation and in this process by default economic benefit for the society would also be generated. The role of the Directors of a company has been clearly defined by Hinchy and McDermott (2006) as the management role acquired by the directors of a company requires that in exercise of their powers the director should act honestly and also in the best interests of the shareholders of a company. While in the past directors were elected to the board of the directors due to their acquaintance with other members of the boards, these days directors are elected on the basis of their ability and skills to make valuable contributions to the board of a company and by default to the business of the company (Berle and Means, 1932). The board of directors for the companies is required to show the efficient discharge of their fiduciary duties imposed by the Corporation Law (2001). The global corporate governance principle mentions that corporate boards are required to be independent. Independence of the director has been defined by joint code of professional conduct as being free of any interest, in fact and appearance which might be considered as incompatible with the integrity and objectivity of the company (Leung and Van Homrigh, 2005). Similarly Goodman and Schwartz (2004) state that corporate governance is appealed which is concerned with the principles and rules regulating the relationship between owners or shareholders, directors and managers of a company.
Duties of Directors
The miscalculation of risk and the use of irresponsible lending practices have been pointed out as the underlying cause of the financial crisis witnessed by the corporations between 2007 and 2009. While some authors focused on the failure in managing risk as one of the causes behind the crisis, some others feel that a broader reason was behind the crisis. It has been identified as the pressure placed on the directors of companies due to the demands of the shareholders of the companies’ for ever increasing unsustainable growth in earnings of the companies and the dangerous route of taking excessive risk adopted to meet these demands of the shareholders. These authors emphasize that stability and financial strength that is required to endure economic cycles was sacrificed in favour of immediate satisfaction.
On the other hand some authors believe that the crisis was caused by failure in corporate governance among the companies. It is important to note that a Swiss financial services company UBS has linked the failures in risk management with the failures in corporate governance. This emphasizes the need to bring the issue of corporate governance near the center stage as well the need for better governance in companies by the directors.
The company law in Australia comes from three sources which are the common law, statute law and Constitution of the company itself. The duties of directors of companies in Australia are designed in such a way that they promote good governance and also ensure that the directors of the company’s work for the benefit of the company (Hinchy and McDermott, 2006). This responsibility of the directors requires them to put the interests of the company before their own interests. In case of the duties of the directors in relation with common law as well as the Corporations Act, some of the main responsibilities duties and obligations of the directors include the duty to act for the welfare of the company, the duty to not to work for any improper purpose, the responsibility to exercise due care and diligence while working for the company, the duty to avoid any kind of conflict in the interest of the company and its directors, the duty to not to use improperly the position of the director and the duty to not to use improperly any information obtained by them in their capacity as the director of the company.
The number of obligations that the directors of companies are being expected to meet is increasing gradually therefore the responsibilities of directors extend much beyond the legal duties imposed on them (Bryer, 1993).
The directors are required to act in good faith for the welfare of the company. To test if a director has been acting bona fide for the welfare of the company is to apply the subjective test of diligence or honesty1. A director is considered to have failed this test when they fail to give proper consideration to the interests of the company2. An example could be given of a case where the director assumes that the interests of the company match up with the interests of the director and does not consider the interests of the company as a distinct entity. There are, however certain conditions for applying this subjective test. This test requires the application of an objective standard if an honest and diligent person in place of the director would have believed in the given circumstances that transactions made by him were for the welfare of the company or in the best interest of it3.
While considering the interests or welfare of a company and what is for the benefit of a company, the director should keep in mind the shareholders of the company as a collective group. However it should be kept in mind that when a company is facing the risk of insolvency, the interests of creditors have to prevail over the interests of shareholders4. It is the responsibility of the directors to not to act for any purpose that is improper for the company. This includes taking an advantage or curtailing the voting control of the present shareholders by generating majority afresh. It means that authority to issue shares of the company should be exercised in the best interests of the company5. An example could be given of the issuing of new shares for raising capital for the company or what taking advantage of the commercially favorable opportunity. Here it should be noted that while upholding the interest of a company, its director can also indirectly advance his own interest provided such interest is not contrary to the interest of his company. The test for determining if a director has used his powers for any proper or improper purpose is a subjective test. For example while borrowing money we can see how substantial the need was for borrowing for the company to see if he borrowing was made for proper purpose (Goodman and Schwartz, 2004).
(1) Whitehouse v Carlton Hotel Pvt. Ltd (1987) 162 CLR 285.
(2) Whitehouse v Carlton Hotel Pvt. Ltd (1987) 162 CLR 285.
(3) Walker v Wimborne (1976) 137 CLR 1
(4) Farrow Finance Company Ltd (in liq) v Farrow Properties Pty Ltd (in liq) (1997) 26 ACSR 544.
(5) Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722
It is the duty of the directors to remain informed about the real financial issues faced by their company. This duty cannot be waved off by delegating this responsibility to somebody else. Therefore directors of a company cannot take refuge on the pretext of ignorance about the financial affairs of the company when such ignorance is caused by their own neglect6. This duty entails that the directors should require that the information placed before them to make sure that it represents the position of their company and the directors should also not accept whatever is put before them by the employees of the company. An example could be given of the situation where a balance sheet given to a director did not match. In such a case it would be a breach of duty are part of the director if it he failed to get the balance sheet corrected. The directors have to make independent and informed decisions by placing them in such a situation where they can direct their company and also keep an eye on the performance of the management of the company (Dellaportas, et al, 2005)
It is the duty of the directors to be in a situation where they can implement decisions which according to them are in the best interest of their company. Therefore the directors should avoid entering into financial transactions that could put them in a situation where they are not able to take part in the process of decision-making on the company. For example directors can avoid entering into dealings which may place them in a situation where they may be required to place the interest of the others ahead of the interest of their own company7.
Similarly it is also the duty of the directors of the company to keep away from any conflict of interest between their own interests and that of their company. These are called the fiduciary duties of the directors. It is a key legal relationship which involves the responsibility of trust requiring extreme good faith. In this context can be easily said that in such cases the directors are required to put the interests of the company before their own interest (Drutman, and Cray, 2004). This duty of the directors refrain them from putting themselves in situations where they might have a personal interest which is
6. Statewide Tobacco Services Ltd v Morley, 1990.
7. Comptroller of Stamps v Howard-Smith (1936) 54 CLR 614
in conflict with that of the company as the directors have been found protecting the interests of their company. The conflict to interest could be either direct or indirect but it is the duty of a director to not to have any personal interest in the transactions of the company. The duty would be breached if any director enters into a contractor agreement with the company which had entered into contract with the company of which he is the director of8. The directors of companies are generally expected to provide appropriate returns to the shareholders of their company. This involves efficient accomplishment of the business of the company, setting strategy towards which the management of the company can work, safeguarding the assets of their company and creating and environment where cases of material fraud and error can not be present. It is also the responsibility of the directors to not to disclose any confidential information. Any information is consider confidential when the owner of the information believes that in case it is disclosed, the results could be disadvantageous for him or could be beneficial to some others. Information is also considered confidential when due to the practices of usage prevalent in a particular trade or industry; the information is regarded as of such a nature which requires protection. For example if a director discloses the details of the clients or the suppliers of his company in such a situation where this information can be considered to have been delivered in confidence or either as engaging in side trading9. It is the duty of the directors to promote the financial interest of the company therefore they should avoid situations where there personal interests could be in conflict with the interests of the company. Under the Corporations Act such a situation might arise when the director of the company may be so involved with the affairs of the company that the act is done during the process of management and while using the special knowledge and opportunities provided to him as the director. Therefore it is indispensable to see into the circumstances under which such an opportunity occurred as there should be a casual link among the opportunity and the fiduciary obligations of its director. If there is any connection between the opportunity and the obligation of the director it is highly probable that the opportunity may have been misused by the director.
8. Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405.
9. ANZ Executors & Trustee Co Ltd v Qintex Australia Ltd (recs and mgrs apptd) [1991] 2 Qd R 360.
In this case it is not relevant if the company was not capable of exploiting the opportunity itself and the only exception is provided in case where the perusal of such an opportunity is in reality is advantageous for the company. Section 180 of the Corporation Act requires an obligation of diligence and care on the directors of a company. This duty has featured prominently under the common law also but was reinforced by its incorporation in the Corporation Act. The constitution of a company and its internal management rules also provide guidance regarding the duties of the directors of the company as they specifically state the obligations of the directors of the company. Section 134 of the Corporation Act allows the management to be governed by the provisions of Corporation Law, by the constitution of the company or by a combination of both. The constitution of a company and the replaceable rules have been provided the consequences of a contract by the Corporation Act between the company and its directors under which they agree to adhere to the rules and constitution of the company.
References:.
Berle, A., and Means, G., 1932 The modern corporation and private property Chicago, Commerce Clearing House
Bryer,R.A., 1993 “The late nineteenth-century revolution in financial reporting: Accounting for the rise of investor or managerial capitalism?” Accounting, Organisations and Society Oxford, Vol.18 Iss.7,8 p.649.
Dellaportas,S., Gibson,K.,Alagiah,R.,Hutchinson,M., Leung,P., and Van Homrigh,D., 2005 Ethics, governance and accountability, a professional perspective, john Wiley and Sons, Qld, Australia.
Drutman, L., and C. Cray., 2004 The Peoples Business: Controlling Corpoartionsand restoring Democracy, Berrett-Koehler Publishers Inc, US German Corporate Governance Code 2002.
Goodman,A., Schwartz,B., 2004 Corporate Governance: Law and Practice. Matthew Bender and Co., Albany, New York.
Hinchy,R., and McDermott,P., 2006 Company Law Pearson Prentice Hall, Frenchs Forest, Australia.
JG44
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