Case Study

‘As a separate legal person, a corporation has two basic objectives: To survive and to thrive. Shareholder value is not the objective of the corporation; it is an outcome of the corporation’s activities. While shareholders entrust their stakes in a corporation to the board of directors, shareholders are just one audience among others that the board mav consider when making decisions on behalf of the corporation.

These audiences, typically called stakeholders, may also include other financial stakeholders, such as bondholders, and nonfinancial stakeholders, such as employees, customers, suppliers, and NGOs representing various concerns of civil society. In the face Of limited resources, no matter how large the corporation, directors must make choices regarding the significance Of the corporation’s many audiences.’ 

Assessment Criteria:

• Demonstration Of knowledge Of the ßsues and evidence Of Wide reading to support your analysis
• Demonstration Of Vour ability to apply the knowledge to identify keys issues leading to your recommendations
• Evidence of sound reasoning and the exercise of professional judgement to support your recommendations
• Development and statement Of concise recommendations for presentation to the AICD
• Overall structure and professional presentation of the report to the AICD
• High quality written communication of concepts and terms in ordinary English as not all readers Of the report can be assumed to be specialists competent in corporate governance

Executive Summary

According to Adam Smith, self-interest leads individuals to seek the most advantageous employment in exchange for their human capital. The most advantageous employment is aligned with the greater good and provides the most benefits for society. Self-interest, as discussed by Adam Smith, is accompanied by positive externalities and benefits not only the self-interested actors but also the larger group in which the actor is embedded. In today’s business world, the larger group to which the positive externality would extend could be shareholders, and the measurable benefit would be an increase in shareholder wealth. This report discusses whether the main responsibility of directors is to maintain shareholder interests through pieces of evidence determined by academicians and industry experts.

Introduction

The key purpose of the Board of directors is to handle organizational affairs and meet the appropriate interests of its shareholders. The directors act on behalf of shareholders to carry out business functions, and they are directly accountable for the company’s performance. With the application of the contract theory, the role of directors is to act as a monitor to protect equity and manage the cost of capital(Switzer & Cao 2011). Directors have a statutory duty to act responsibly and make decisions for a proper purpose. They are also obliged to resolve any conflict of interest arising from external influences in favour of the best interests of the corporation. Incorporate law, shareholder primacy is given prominence as shareholders interests in a company are assigned the highest priority when compared to other stakeholders. This report assesses whether company directors have to prioritize shareholders over other stakeholders based on pieces of evidence and give recommendations for their responsiveness to address different audiences during decision-making.

Roles and Responsibilities of Company Directors

The Board of Directors forms the governing bodies of most of the organizations (Hermalin & Weisbach. 2001). It is considered one of the legal requirements for the functioning of an incorporated organization. The Board forms an economic entity that helps in solving the agency problems that are inherent nature of an organization. Their economic function is determined by the Board’s ability to address the organizational problems.  It is considered as a market solution to an organizational design problem and an endogenous setup that helps to alleviate the agency problems impacting an organization.

As per Section 181(1) of the Corporations Act 2001, directors are to exercise their powers and discharge their duties 'in good faith in the best interests of the corporation'. Apart from this, they have to advance the interests of their owners, especially their wealth. Directors have to function as agents of the owners and to devotedly enhance the financial interests of the company because it is the property of its shareholders(Jones et al. 2007).

(Some parts of the solution has been blurred due to privacy protection policy)