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The history of corporate governance over the last one hundred and fifty years suggests that its fundamental purpose has been to maximise corporate profit with a view to increasing shareholder wealth. However, stake-holding conceptions of the company are increasingly emerging and influential. Theories of corporate governance developed from the notion that companies need not and should not be operated solely in the interests of their shareholders are gaining traction. According to ‘stakeholder’ advocates, changes in corporate management and company law should be made to ensure that, in their decision-making and policy formulation, company directors take account of the interests of not only shareholders but all those with a ‘stake’ in the company, including employees, creditors, suppliers, consumers, the environment and the community at large.

Economic support for the theory arises from the view that long-term profitability of the company is dependent on more than just concentration on shareholder wealth. This is commonly known as the ‘stakeholder concept’ or the ‘stakeholder theory’.

To some extent ‘stakeholder’ theory is recognised in the legal principles pertaining to corporate governance in Australia. The primary responsibility for stakeholder protection normally falls on the board of directors, as the highest decision-making body in the company. As one example only, the statutory duty of good faith in section 181(1) of the Corporations Act 2001 (Cth) (‘Corporations Act’) requires directors and other corporate officers to exercise their powers and discharge their duties ‘in good faith in the best interests of the corporation’. In 2006 the Corporations and Markets Advisory Committee (CAMAC) found that the duty of directors to act in good faith in the interests of the company pursuant to s181 was broad enough to allow directors to consider the interests of stakeholders.

The extent of stakeholder protection is an evolving and controversial area of law, and was to some extent considered in the litigation involving the Bell Group of companies. One of the key issues in the Bell Group litigation was the extent to which directors of companies that are insolvent or approaching insolvency ought to consider the interests of creditors. In his judgment, Owen J held that there had been a breach of duties on the part of the directors. In taking into account the circumstances that befell the Bell Group, and the claim of the banks, his Honour found the directors had not paid sufficient heed to the interests of creditors generally.

Expansion of director’s duties – too much?

Some commentators argue that the majority’s view in Bell sends the wrong message to directors and executives, that is: if in doubt, close the business for fear of prejudicing creditors. Arguably, this could push more businesses into formal insolvency proceedings and impair strategies for business rescue, which would be an undesirable outcome.

At HHG Legal Group we regularly advise directors and officers, as well as stakeholders, as to their obligations and rights in insolvency or near insolvency situations. We have developed tools for analysing the risks and appropriate trigger points for taking action to minimise the risk of claims arising against directors and officers, whilst working together with other professionals such as accountants, CFO’s and reconstruction experts. The key message to all directors and officers in a distressed corporate environment is to take advice early and be pro-active and vigilant in laying out and executing a transparent and clear plan of action, with clear exit points.  The best kind of advice requires the co-operation and teamwork of accountants, lawyers and reconstruction consultants, as well as other professionals like a skilled business coach. No one profession or set of expertise is sufficient to truly deliver the best advice and outcome.

If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or via email.

*This information serves as a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable Legal Team for any specific inquiries or advice relevant to your circumstances, as the content may not have been updated subsequently.