A corporation’s predominant aim is often to generate the largest possible return for its shareholders within the confines of the law, commonly referred to as ‘shareholder primacy’. However, as the focus of corporations has shifted, now considering external factors such as social impact, environmental footprint and stakeholder engagement, how do Directors manage balancing director duties between the corporation and to its shareholders?
From a legal perspective, Directors must first and foremost act in the best interests of the company, and not the potentially shorter-term interests of its shareholders. In doing so, conflicts can arise between what actions Directors actually take to benefit the corporation in the long-term (which may negatively impact a shareholder) and what actions a shareholder wishes for Directors to take.
Due to the limited powers shareholder have to directly influence the decisions of Directors, relationships between Directors and shareholder can become tense, and whilst Directors firstly serve the company, if the shareholders are not pleased with the decisions made by the corporations board, shareholders generally hold power to vote to remove or replace the corporations Directors. For this reason, Directors are accountable to shareholders indirectly.
With this noted, there is no parallel duty for a Director to act in the best interests of a corporations shareholders. Decisions surrounding a corporation’s income and capital, including how money should be spent or disbursed to its shareholders, are therefore solely decisions for company management and ultimately, the board of directors. This principle is not limited to individual shareholders. Even where the shareholder of a corporation may be a single entity who has appointed the entire board – such as the government – the board of directors still holds legal standing to refuse requests from the shareholder so long as it remains acting in the best interests of the company.
An interesting event concerning the balance of the interests of the company and its shareholders is the 2022 Australia Post scandal surrounding former CEO Christine Holgate, who was allegedly ‘unlawfully’ stood down due to her actions in awarding company bonuses in the form of watches. Despite generating a wealth of revenue and profits for the company and its shareholders from her management decisions within Australia Post, the decision to issue yearly bonuses via watches to employees who had brought hundreds of millions of dollars’ worth of company contracts was deemed ‘unreasonable’ and ‘disgraceful’ conduct by the corporations sole shareholder worthy of her removal as the board’s chief executive. When questioned on her conduct, Ms Holgate believed the conduct was in line with the company’s policy of rewarding employees. Despite this, Australia Post’s sole shareholder – the Australian Government led by former Prime Minister Scott Morrison, made a complaint that the decision was not in line with the interests of the company which ultimately led to Ms Holgate’s removal as chief executive, showing the considerable influence shareholders hold over company directors.
Ultimately, conflicts such as the one stated above are due to lack of clear corporate governance. To ensure Director’s decisions are in line with a company’s best interests, companies and shareholders should have clear rules and policies within their corporate governance documents such as company constitutions and shareholders agreements.
Do you have questions about Director Duties? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business Lawyers on (02) 4929 7002 or fill out an enquiry form on our website.