Marshall, S; Ramsay, I --- "Stakeholders and Directors' Duties: Law, Theory and Evidence" [2009] UMelbLRS 2

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An important debate concerns the meaning of the duty imposed on company
directors to act in the best interests of the company. Are shareholders’
interests paramount when directors act in accordance with this duty? To what
extent can the interests of stakeholders other than shareholders be considered
by directors? Does this duty need to be changed to facilitate socially
responsible behaviour by directors? There have been significant international
developments addressing these questions. For example, in the United
Kingdom the duty to act in the interests of the company was reformulated in
2006. In Australia, two recent government inquiries have investigated these
questions. However, the two government inquiries lacked empirical evidence
regarding how directors understand their legal duties. This paper assesses the
findings of the two government inquiries against the results of a survey of
directors which inquired into how company directors balance the competing
and sometimes conflicting interests of stakeholder groups, including
employees, creditors and shareholders. The paper also investigates the extent
to which the current law of directors’ duties permits directors to consider the
interests of stakeholders other than shareholders.

Policy prescriptions in Australia regarding in whose interests company directors
should act have largely been based on views about whose interests directors ought
to take into account. This paper contrasts the results of a recent survey of
Australian directors concerning the way they perceive their obligations to various
stakeholders with current Australian corporate law1 and two recent Federal
government inquiries. These two inquiries were conducted by the Corporations and
Markets Advisory Committee and the Parliamentary Joint Committee on
Corporations and Financial Services. Both reported in 2006. The aim of this paper
is first, to assess whether case law and the outcomes of the two inquiries reflect
directors’ views. The second aim is to explore alternative proposals to the
conclusions of the inquiries based on this assessment.

∗ Lecturer, Department of Business Law and Taxation, Monash University.
∗∗ Harold Ford Professor of Commercial Law and Director of the Centre for Corporate Law and Securities Regulation, Melbourne Law School, the University of Melbourne. Both authors are members of the Corporate Governance and Workplace Partnership Project. The project is now being conducted by the Centre for Corporate Law and Securities Regulation and the Centre for Employment and Labour Relations Law at Melbourne Law School, the University of Melbourne and the Departments of Business Law and Taxation and Management at Monash University. The project was funded by an Australian Research Council Discovery Grant. The authors thank Nicole Yazbec for her research assistance in the preparation of this paper and Meredith Jones for research in relation to the survey data reported in this paper. 1 We use the terms ‘company law’ and ‘corporations law’ interchangeably to refer to the body of statutory and common law which regulates the operation of companies.

The push to reconsider the question in whose interests companies ought to be
managed and directed has attracted strong interest due to the growing impact of the
corporate social responsibility (CSR) movement. The board of directors is the
highest decision making body in the company. As a result, it receives a great deal
of attention within the CSR policy and academic literature and, in particular, in the
sub-strand of stakeholding discourse.2 Whilst debates concerning the stakeholder
theory of the corporation have been exchanged since the 1930s, it was not until the
late 1990s that the idea that stakeholders who contribute to, benefit from, and bear
risk in, companies should have their interests taken into account in corporate
decision-making gained real influence in Australian public policy debates.
Stakeholder models were seen as a means to moderate the shareholder primacy
model of corporate governance by which shareholder interests are privileged,
sometimes at the expense of other stakeholders in the company, such as employees.

In Australia, this aspect of the CSR movement has, for some companies, been
driven by at least three related factors. The first of these is corporate misbehaviour
which has resulted in harm to stakeholders and the reputation of these companies.
Many businesses wish to present the image of good citizens both to distinguish
themselves from companies which have fallen into disrepute and also to enhance
their social licence to operate.3 A second driver has been the growth of civil society
movements which have brought into question the dichotomy between ‘public’ and
‘private’, claiming that private actors such as corporations ought to act in the public
interest.4 The third of these is a shift away from the provision of strong legislative
protections for some stakeholders, such as employees, through conventional ‘hard’
law mechanisms.5 For example, whilst statutory protection of employee
entitlements upon insolvency within company law has increased, conventional
protections provided by bargaining rights and the right to strike have been eroded
in labour laws since 1993. As a result, stakeholder or other organisations such as
unions, human rights bodies and environmental groups have looked for alternative
mechanisms to make companies more accountable to stakeholders.6 Whilst

2 L. Mitchell, ‘The Board as a Path Toward Corporate Social Responsibility’ in D.
McBarnet, A. Voiculescu and T. Campbell (eds.), The New Corporate Accountability:
Corporate Social Responsibility and the Law, Cambridge University Press, 2007, at 279.
3 C. Tilt and C. Symes, ‘Environmental Disclosure by Australian Mining Companies:
Environmental Conscience or Commercial Reality?’ (1999) 23 Accounting Forum 137.
4 S. Wheeler, ‘An Alternative Voice in and Around Corporate Governance’ (2002) 25
University of New South Wales Law Journal 556 at 559 and J Farrar, ‘Frankenstein
Incorporated or Fool’s Parliament? Revisiting the Concept of Corporation in Corporate Governance’ (1998) 10 Bond Law Review 142.
5 P. Utting, ‘Regulating Business via Multistakeholder Initiatives: A Preliminary
Assessment’ in Voluntary Approaches to Corporate Responsibility: Readings and a
Resource Guide, UN Non-Governmental Liaison Service Development Dossier, New
York, 2002, 96-97.
6 Contrary to this position, however, the 1989 report of the Senate Standing Committee on Legal and Constitutional Affairs, Company Directors’ Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors (Australian Government Publishing Service, November 1989, available at:
http://www.takeovers.gov.au/display.asp?ContentID=542) at 18, found that the proper
place for the protection of stakeholders was in the range of Federal, State and Territory Laws that are designed to protect various stakeholder groups or public values, and not
companies have mainly voiced a preference for ‘soft law’ or voluntary mechanisms, there have been occasions, such as following the James Hardie incident, when companies have called for stakeholder legislation to permit them to more carefully balance the interests of shareholders and other stakeholders.7

The development of corporate stakeholder-based policies in Australia has lagged
behind some other liberal democratic OECD countries. Throughout the 1990s, for
instance, the term ‘stakeholder’ gained increasing currency in the UK and the US.
In Britain, Tony Blair invoked the term during and after his successful 1997
election campaign as a riposte to the ‘enterprise economy’ of the Conservative
Party.8 He referred to the stakeholder economy as being a unifying theme under
which opportunity was available to all and from which no-one should be excluded.9
Whilst Blair may not have acted upon the full range of stakeholder-related policies
espoused early in his period in office, the UK Labor government enacted a number
of policies and regulations which took steps towards fostering a stakeholder model
of the corporation. As is discussed in greater detail in Part 3 of this paper, these
include the Companies Act 2006 which made reporting on environmental and social
activities mandatory for companies listed on the London Stock Exchange, and
created new obligations for company directors to consider the interests of workers,
local communities, and the environment alongside the interests of shareholders
when making decisions. In the US, also throughout the 1990s, many states were
adopting stakeholder or ‘constituency’ statutes.10

It was some time after these developments in the UK and the US that serious policy
consideration was given to these issues in Australia at the Federal level.11
Significant policy consideration occurred after the events concerning James
Hardie.12 On 23 March 2005 the Parliamentary Secretary to the Treasurer sent a
company law.

7 B. Pheasant, ‘Directors Need a Safe Harbour’ Australian Financial Review, 17 March
2005, 3. The outcry from this event led to the government asking the Corporations and
Markets Advisory Committee to consider, inter alia, directors’ duties regarding corporate
social responsibility. The Committee’s report, The Social Responsibility of Corporations,
was published in June 2006 and is available on the Committee’s website:
http://www.camac.gov.au.
8 P. Ireland, ‘Corporate Governance, Stakeholding, and the Company: Towards a Less
Degenerate Capitalism?’ (1996) 23 Journal of Law and Society 287 at 287. Ireland goes on
to explain that, “by the time of Blair’s grand pronouncements, ‘stakeholding’ in this
narrower corporate sense, had already been widely embraced in Britain, with both the
Trade Union Congress and the Labor Party enthusiastically backing the ‘modernizing
theory’ of the stakeholding company. Considerable support had also already been
expressed by some in industry, with the final report of the Tomorrow’s Company inquiry,
organized by the Royal Society of Arts and supported by companys such as Cadbury
Schweppes, Guinness, Thorn EMI, and Whitbread, wholeheartedly endorsing the merits of
an ‘inclusive’ conception of the company” (at 288).
9 He stated in an early speech delivered in Singapore that the stakeholder principle should
also apply to companies which should operate as a community or partnership in which
employees have a stake, and not as a mere vehicle for the capital market. Blair’s speech is
referred to in A. Hicks, Palmer’s In Company (1996) No 4, 17 April, at 41.
10 See the text associated with nn 73-78.
11 Previous consideration of the issue was given by the Senate Standing Committee on Legal
and Constitutional Affairs, Company Directors’ Duties: Report on the Social and
Fiduciary Duties and Obligations of Company Directors, November 1989.
12 See DF Jackson QC, Report of the Special Commission of Inquiry into the Medical
letter to the Corporations and Markets Advisory Committee (CAMAC) asking
CAMAC to inquire into whether the Corporations Act 2001 should include
corporate social responsibilities or explicit obligations to take account of the
interests of certain classes of stakeholders other than shareholders.13 CAMAC’s
report, ‘The Social Responsibility of Corporations’, was released in December
2006.

On 25 June 2005 the Parliamentary Joint Committee on Corporations and Financial
Services (PJC) resolved to inquire into corporate responsibility and triple-bottomline
reporting for incorporated entities in Australia. The PJC’s report, ‘Corporate
Responsibility: Managing Risk and Creating Value’, was released in June 2006.
Neither of these reports recommended changes to directors’ duties to reflect a
stakeholder model of the company.

As we shall see in the account of the policy debate that occurred in relation to the
two inquiries,14 it is generally assumed that a legal requirement that directors take
into account the interests of stakeholders is unnecessary. Within the debates and
policy literature two reasons gain most attention. First, it is often said that
Australian companies largely follow a ‘shareholder primacy’ model, in which the
interests of shareholders are pursued either over a short or long-term time frame.
For some, this is seen to have wider economic benefits which would be diluted if
companies were expected to pursue stakeholder interests as well. For others, it
would be too complex and onerous to expect company directors and managers to
change the way in which they operate so as to take into account interests other than
those of shareholders.15 The second, more widely held view, is that current
Australian company law permits directors sufficient freedom to pursue stakeholder
interests without requiring that they do so. Rather than legislating, policy makers
have shown a preference for allowing a more temperate adaptation to current
practices and views through case law developments.

Against this, advocates of the stakeholder model of the corporation argue that the
law should be changed so as to more clearly permit directors to take into account
the interests of stakeholders. There has been concern that under the laws as they are
currently constituted directors may be breaching their duties to the company if they
privilege the interests of non-shareholder stakeholders. Stronger advocates wish to
require directors to take into account non-shareholder interests. These advocates
hark to the lengthy development of the concept of ‘stakeholding’ in the sphere of
company law and corporate management theory, where it has surfaced regularly in
academic debates about corporate governance since the famous debate between
Berle, Means and Dodd in the 1930s.16 Stakeholding conceptions of the company
Research and Compensation Foundation, 21 September 2004.

13 CAMAC Homepage ‘Reference in relation to directors’ duties and corporate social
responsibility' (March 2005) available at:
http://www.camac.gov.au/CAMAC/camac.nsf/byHeadline/Whats+Newdirectors%27+dutie
s+and+corporate+social+responsibility?openDocument.
14 See the text associated with nn 118ff.
15 A mixture of these two reasons informed the view of the Senate Standing Committee on
Legal and Constitutional Affairs, Company Directors’ Duties: Report on the Social and
Fiduciary Duties and Obligations of Company Directors, November 1989.
16 A.A. Berle, ‘Corporate Powers as Powers in Trust’ (1931) 44 Harvard Law Review 1049;
are supported by the idea that companies need not and should not be operated
solely in the interests of their shareholders. According to its 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.17

Whether imposing a legal requirement that companies take into account the
interests of stakeholders or taking the lesser step of permitting them to do so
through amendments to corporate law would entail a re-conceptualisation of ‘in
whose interests the company operates’ is a matter which lacks empirical evidence.
This is because, until now, very little has been known about in whose interests
Australian company directors seek to act.18 In this paper, new empirical evidence
collected through a major survey of Australian company directors is examined
concerning in whose interests directors consider themselves to be acting. This study
is the most comprehensive of its type thus far conducted in Australia.

The remainder of this paper is structured as follows: Part 2 provides a brief
description of the stakeholder theory of the company. Part 3 considers the extent to
which current Australian corporate law encapsulates a broader sense of directors’
duties. In Part 4, examples of stakeholder or constituency laws implemented outside
Australia are considered. In Part 5, the findings and recommendations of the reports
of the two inquiries are outlined, along with the main arguments of significant
submissions to the inquiries. In Part 6 of the paper, empirical evidence regarding
the way in which Australian directors perceive their obligations to various
stakeholders is presented. In the concluding part of the paper, the findings of the
two inquiries are critically assessed against this empirical evidence.

Whilst the stakeholder model of the company is concerned with the interests of all
who contribute to, or benefit from, or bear risk in, the company’s actions, this paper
uses, particularly in Part 6, employees as the primary example of a stakeholder
group. This allows us to exemplify and contrast the rights of shareholders with a
group who make a significant contribution, with associated risks, in the company
with which they are productively engaged.

The classical exposition of the stakeholder model of the company was developed
by R Edward Freeman.19 Since the publication of Freeman’s landmark book,

E.M. Dodd, ‘For Whom are Corporate Managers Trustees?’ (1932) 45 Harvard Law
Review 1145; A.A. Berle, ‘For Whom Corporate Managers are Trustees: A Note’ (1932)
45 Harvard Law Review 1365 and the text associated with nn 19-26. In the 1990s there
were a number of symposia on stakeholding which brought the idea back into academic
purview: see for example (1993) 43 Toronto Law Review and (1991) 21 Stetson Law
Review.
17 Ireland, above n 8.
18 Previous empirical studies include I. Francis, Future Direction: The Power of the
Competitive Board, FT Pitman Publishing, Melbourne 1997.
19 Freeman supplies a history of the term and the concept in R. E. Freeman, Strategic
literature about the concept has expanded rapidly. Within this still emerging
literature the concepts stakeholder, stakeholder model, stakeholder management,
and stakeholder theory are explained and used by different authors in very different
ways. The defining feature of the normative aspect of the theory is the acceptance
of the following ideas:

The managerial aspect of the theory, as defined by Donaldson and Preston, is as
follows:

problem of identifying stakeholders and evaluating their legitimate ‘stakes’

So who, or what, is a stakeholder within the corporation? In the broadest
interpretation, stakeholders are persons or groups that have, or claim, ownership,
rights, or interests in a corporation and its activities, past, present, or future. Such
claimed rights or interests are the result of transactions with, or actions taken by,
the corporation, and may be legal or moral, individual or collective. Stakeholders
with similar interests, claims, or rights can be classified as belonging to the same
group.22 These can be divided into primary and secondary stakeholders.
A primary stakeholder group is one without whose continuing participation the
corporation cannot survive as a going concern. Primary stakeholder groups
typically are comprised of shareholders and investors, employees, customers, and
Management: A Stakeholder Approach, 1984, at 31-42. He claims an intellectual heritage
for the concept derived from Adam Smith and A. Berle and G. Means.

20 T. Donaldson and L. Preston, ‘The Stakeholder Theory of the Corporation: Concepts,
Evidence, and Implications’ (1995) 20 Academy of Management Review 65 at 67.
21 Ibid.
22 Freeman specifically includes within such groups suppliers, customers, employees,
shareholders, and the local community.
suppliers, together with what is defined as the public stakeholder group: the
governments and communities that provide infrastructures and markets, whose laws
and regulations must be obeyed, and to whom taxes and other obligations may be
due.23 There is a high level of interdependence between the corporation and its
primary stakeholder groups. Failure to retain the participation of a primary
stakeholder group will result in failure for that corporation.24

Secondary stakeholder groups are defined as those who influence or affect, or are
influenced or affected by, the corporation, but they are not engaged in transactions
with the corporation and are not essential for its survival. The media and a wide
range of special interest groups are considered secondary stakeholders under this
definition. Competitors may also fall into this category.

The types of rights endowed upon constituencies by the stakeholder model vary
depending upon the model of corporate governance that is proposed. In theory,
according to Freeman, each one of these stakeholders has a right to be treated as an
end in itself, not to be treated as a means to some other end.

Evans and Freeman suggest that if the modern corporation or its management and
directors insist on expanding their power by disrespecting the rights of others, and
treating others as a means to an end, then at a minimum the others must agree to
and hence participate or choose not to participate in the decisions. It follows,
according to this thinking, that each stakeholder group must participate in
determining the future direction of the company in which it has a stake.25
What are the employees’ stakes within the corporation?
Employees have at stake their jobs and sources of livelihood, among other things.
As a result, they are concerned with what happens to them (a) in the process of
employment, such as recruitment and selection, (b) during job incumbency, and (c)
as they seek continuance of their jobs.26

23 Public stakeholders are sometimes considered to be secondary stakeholders.
24 The corporation’s survival and continuing success depend upon the ability of its directors
and managers to create sufficient wealth, value, or satisfaction for those who belong to
each stakeholder group, so that each group continues as a part of the corporation’s
stakeholder system: M. Clarkson, ‘A Stakeholder Framework for Analyzing and
Evaluating Corporate Social Performance’ (1995) 20 Academy of Management Review 92
at 106-7.
25 According to the theory, managerial rights must have implicit and explicit limits.
Implicitly, if they are exerted for any other aim, or disproportionately to their legitimate
aims, they are unfounded and can be ignored. Explicitly, the interests of a given category
of stakeholders limit the interests of the other ones: E. Freeman and W. Evans ‘Corporate
Governance: A Stakeholder Interpretation’ (1990) 19 Journal of Behavioural Economics 337.
26 C. Summers, ‘Codetermination in the United States: A Projection of Problems and
Potentials’ (1982) 4 Journal of Comparative Corporate Law and Securities Regulation
155 at 170, cited by K. Van Wezel Stone, ‘Employees as Stakeholders under State Nonshareholder Constituency Statutes’ (1991) 21 Stetson Law Review 45 at 49.
For some advocates of the stakeholder model of the company, employees have a
particularly strong stake in the company by virtue of both their high level
contribution and risk. Employees make a financial contribution to the corporation
in the form of human capital. Summers represents this view as follows:

Accordingly, employees as stakeholders have their own rights whose fulfilment is
required by the corporate organisation. Therefore, it is argued, the corporation,
working through its officers, must have a corresponding responsibility to respect
each of those rights with the result that companies need to be managed for the
benefit of their stakeholders, including employees.

In this section we have sought to provide a sketch of the features of what is an
amorphous construct. Within the jurisprudential setting, discussion has centred on
the responsibilities and duties of directors, with the proponents of the stakeholder
model making a variety of different proposals for legal reform, most notably an
extension of directors’ duties, representation of stakeholders on the board of
directors, voting rights for stakeholder groups, and greater disclosure of corporate
information. Our main focus in this paper is on directors’ duties.

A major argument used by those who are opposed to including stakeholder
provisions in corporate law is that the law is already permissive enough to allow
directors wide discretion to take into account the interests of stakeholders.27 This
interpretation of corporate law is also held by some proponents of the stakeholder
model. For instance, Blair and Stout, who constructed the team production model of
corporate governance,28 argue that ‘many features of corporate law in the United
States are more consistent with our team production model than they are with
shareholder primacy, at least if shareholder primacy is interpreted to mean
maximization of shareholder value in the short term’.29 For Blair, in the United
States context, this is because the ‘prescriptions for directors’ duties under the team
production model turn out to be very similar, and perhaps even “observationally
equivalent” in practice to the prescriptions that advocates of long-term share value

27 This was the conclusion of both the CAMAC and PJC Reports. See also R.P. Austin,
H.A.J. Ford and I.M. Ramsay, Company Directors: Principles of Law and Corporate
Governance, LexisNexis Butterworths, 2005, at 7.13, for elaboration of this interpretation
of the law.
28 M. Blair and L. Stout, ‘A Team Production Theory of Corporate Law’ (1999) 85 Virginia
Law Review 247. This is one of the more thoroughly developed, stakeholder-type,
alternative models of corporate governance.
29 M. Blair, ‘Directors’ Duties in a Post-Enron World: Why Language Matters’ (2003) 38
Wake Forest Law Review 886 at 890.
mazimization would make’.30 For others, such as Sheldon Leader, the formulation
of the company as an autonomous legal entity - separate from its members as well
as other stakeholders - creates the possibility that the legal conception of the
company may already be largely consistent with the stakeholder conception.31 The
company has interests which are independent of any single set of people affected by
it, including shareholders. Thus, the role of managers and directors is to mediate a
constantly shifting set of interests.

There is another view. The purpose of the company, according to a narrow
conception, is to advance the interests of its owners (predominantly to increase
their wealth), and the function of directors, as agents of the owners, is to faithfully
advance the financial interests of the cormpany, because the company is the
property of its shareholders.32 The purpose of this part of the paper is to assess the
extent to which any of these contentions is accurate with regards to Australian
corporate law.

Although it has not been discussed previously in the judgments of courts or the
literature on Australian directors’ duties, it can be argued that there has been a shift
in the extent to which the interests of stakeholders other than shareholders can be
considered by directors. Writing in 1967, Professor Parsons commented on what is
meant by the interests of the company in the following terms:

Writing 20 years later, in 1987, Professor Sealy had a different interpretation of
Australian corporate law – one that would allow the interests of non-shareholder
stakeholders to be considered by directors, but only where shareholders benefited
from such consideration:

30 Ibid at 890-891.
31 S. Leader, ‘Private Property and Corporate Governance Part 1: Defining Interests’ in F. Patfield (ed.), Perspectives on Company Law: 1, Kluwer Law International, 1995, 85 at 86.
32 A more radical view is the contract conception of the company espoused by R. Coase, ‘The Nature of the Firm’ (1937) 4 Economica 386. In adaptations of this model, the corporation tends to disappear, transformed from a substantial institution into part of the market in which autonomous property owners freely contract. K. Van Wezel Stone and others suggest that this model does not rule out a role for labour in corporate governance, because no group has an a priori privileged relationship to the entity as a whole. For a development of the Coasian view see also: O. Hart, ‘An Economist’s View of Fiduciary Duty’ (1993) 43 University of Toronto Law Journal 299; R. Daniels, ‘Stakeholders and Takeovers: Can Contractarianism Be Compassionate?’ (1993) 43 University of Toronto Law Journal 315.
33 R.W. Parsons, ‘The Director’s Duty of Good Faith’ [1967] MelbULawRw 1; (1967) 5 Melbourne University Law Review 395 at 418, n 99.

Three important questions can be asked. First, are there any circumstances when
the interests of non-shareholder stakeholders can be considered by directors without
there being any derivative benefit for shareholders? Second, are there any
circumstances when the interests of non-shareholder stakeholders must be
considered by directors? Third, are there any circumstances when the interests of
non-shareholder stakeholders can be given higher priority by directors than the
interests of shareholders? The questions relate only to the duty of directors to act in
the best interests of the company. There may be other statutory obligations that
require directors to consider the interests of particular stakeholders.

Writing 21 years after Professor Sealy, Justice Owen provides insight into these
questions.35 In brief, there can be limited circumstances when the answer to all
three questions is yes. Justice Owen observes the ‘a reflection of the interests of the
company may be seen in the interest of shareholders’.36 This is the established
position. However, Justice Owen further observes that this:

It is, in my view, incorrect to read the phrase ‘acting in the best interests of

the company’ and ‘acting in the best interests of the shareholders’ as if they

meant exactly the same thing...it is almost axiomatic to say that the content of

Because of the nature of the case before him, Justice Owen gave particular attention
to the interests of creditors. He stated that in an insolvency context, the duty to act
in the best interests of the company includes an obligation on directors to take into

34 L.S Sealy, ‘Directors’ “Wider” Responsibilities – Problems Conceptual, Practical and
Procedural’ [1987] MonashULawRw 7; (1987) 13 Monash University Law Review 164 at 187.
35 The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239.
36 Ibid at [4392].
37 Ibid at [4393] and [4395].
account the interests of creditors.38 His Honour stated the obligation can arise in
situations outside of actual insolvency, noting that:

Moreover, according to his Honour, although the interests of creditors must be
considered in an insolvency context, there is no rule that in this situation the
interests of creditors are paramount.40 They may be paramount in a particular
situation but there is no rule that requires this conclusion.

Therefore, returning to our three questions, we can answer them as follows. First,
as a general proposition, acting in the best interests of the company generally
means acting in the interests of shareholders as a general body. The directors are
able, but not required, to consider the interests of non-shareholder stakeholders, and
where they do, such consideration needs to be done with a view to the benefit of the
shareholders. However, in some circumstances, directors can consider the interests
of non-shareholder stakeholders without there being any derivative benefit for
shareholders. The only such situation that courts have clearly identified is where
the company is insolvent or is close to insolvency or some contemplated transaction
threatens the solvency of the company.

Second, in an insolvency context, there is an obligation on directors to take into
account the interests of creditors. Finally, the only situation where the courts have
clearly identified that the interests of non-shareholder stakeholders can be given
higher priority by directors than the interests of shareholders is where the company
is insolvent or is close to insolvency or some contemplated transaction threatens the
solvency of the company. We now consider these principles in greater detail.

Directors are subject to a range of duties in conducting the affairs of the company.
These are, most relevantly, ss 180 and 181 of the Corporations Act. Section 180
requires that directors and other officers of the corporation exercise their powers
with the degree of care and diligence that a reasonable person would exercise in a
similar situation. This duty is tempered by the ‘business judgment’ rule (s 180(2)).
The purpose of this rule is to make it clear that it is not the intention of the law to
second guess the decisions of officers. The effect of the business judgment rule is
that the officer is assumed to have acted with appropriate care and diligence if all
the factors contained in s 180(2) are satisfied.

Section 181 obliges directors and other corporate officers to exercise their powers
and discharge their duties ‘in good faith and in the best interests of the corporation’
and also ‘for a proper purpose’. As well as acting in good faith, directors must
satisfy the test of acting ‘in the best interests of the corporation’. In applying that
test, the courts consider that it is the role of the directors to determine what is in the

38 Ibid at [4418].
39 Ibid at [4445].
40 Ibid at [4436] – [4440].
best interests of the company, unless no reasonable director could have reached the
decision.41

An important question is what, if any, limits the requirements to exercise powers
‘in the best interests of the corporation’ and ‘for a proper purpose’ might impose on
directors in taking into account the broader environmental and social context in
their decision-making. According to one commentary on corporate law, although
there may be no direct legal obligation for officers to take the interests of
stakeholders other than shareholders into account, this does not preclude directors
from choosing to do so:

Mitchell, O’Donnell and Ramsay have argued that even if we accept that the
interests of the company are largely co-extensive with the interests of shareholders,
the formulation of directors’ duties is still imprecise enough to allow considerable
discretion to directors to take into account the interests of employees and other
stakeholders.43 These authors offer the following view of directors’ duties:

It can be in the interests of existing shareholders for directors to take a longterm

41 See, for example, Darvall v North Sydney Brick & Tile Co Ltd (1987) 16 NSWLR 212; 12
ACLR 537; 6 ACLC 154.
42 R.P. Austin, H.A.J. Ford and I.M. Ramsay, Company Directors: Principles of Law and
Corporate Governance, LexisNexis Butterworths, 2005 at 7.13.
43 R. Mitchell, A. O’Donnell and I. Ramsay, ‘Shareholder Value and Employee Interests:
Intersections of Corporate Governance, Corporate Law and Labor Law’ (2005) 23
Wisconsin International Law Journal 417.

Even where the fate of the company and the short-term welfare of
shareholders diverge, the law does not compel the pursuit of shareholder
wealth maximisation but often continues to grant considerable latitude to
directors to make discretionary judgments as to the best interests of the
company.44

The Corporations Act makes it clear that the statutory duties in the Act do not
exclude the operation of other laws, including the general law.45 Under the general
law, directors are obliged to act in the interests of ‘the company as a whole’. As we
shall see, this phrase has been interpreted to mean the financial well-being of the
shareholders as a general body.46 Some commentators have argued that the current
formulation of this directors’ duty embodies a time-factor which arguably protects
employees (albeit not in express terms), in the sense that the directors may, and
indeed must, direct their efforts towards securing the continued prosperity of the
company’s enterprise (i.e. of the company as an ongoing concern). Peter Xuereb
posits that it is arguable that in doing this the law requires, at the least, that the
directors ensure that there is an entity in existence on a continuing basis, thus
offering employment and also furthering or protecting the interests of the general
body of the company’s employees.47 At the broadest level of principle then, it may
be said that as most stakeholders have an interest in the commercial well-being of
the company in the long run, the formulation of directors’ duties is consistent with
a minimal stakeholder approach. Joseph Fuller and Michael Jensen, for instance,
argue that ‘enlightened value maximisation uses much of the structure of
stakeholder theory but accepts maximisation for the long-run value of the firm as
the criterion for making the requisite tradeoffs among its stakeholders’.48

We now examine the case law to assess whether this view is supported by the
courts’ interpretation of directors’ duties. The courts have held as a general rule

44 Ibid at 436-438.
45 Section 185. Section 9 of the Corporations Act defines the general law to mean the
principles and rules of the common law and equity.
46 See Greenhalgh v Arderne Cinemas [1950] 2 All ER 1120. See also Gaiman v National
Association for Mental Health [1971] Ch 317.
47 P. Xuereb, ‘Juridification of Industrial Relations through Company Law Reform’ (1988)
51 Modern Law Review 157 at 165.
48 J. Fuller and M. Jensen, ‘Just Say No to Wall Street: Putting a Stop to the Earnings Game’
(2002) 14 Journal of Applied Corporate Finance 41.
that the powers of directors are entrusted to them for the benefit of the company,
namely, for the benefit of the shareholders as a whole, and not for the benefit of the
directors themselves, or of a group of shareholders of the company, or of outsiders:
Parke v Daily News Ltd.49 The interests of the company as a whole have been said
to require the directors to have regard to ‘the interests of the members of the
company, as well as having regard to the interests of the company as a commercial
entity’: Darvall v North Sydney Brick & Tile Co Ltd.50 This idea of the company as
a commercial entity may thus support claims that an ‘enlightened value
maximisation’ approach is possible under Australian case law.

When we further consider the case law we see that the interests of the company as a
whole may vary according to the stage in a company’s life.51 Whilst the duty to
consider the interests of the company as a whole may be considered co-terminus
with the interests of shareholders when the company’s financial health is buoyant,
it may not be true when the company is in financial difficulty. Sheldon Leader, for
instance, points to the fact that at the point of insolvency directors are sometimes
said to owe a duty to the company’s creditors. It is possible for a creditor to have a
derivative interest in seeing the company remain healthy and capable of paying its
debt fully.52 It was on this basis, for example, that the court acted in favour of
creditors in Standard Chartered Bank v Walker.53 In this case the interests of the
creditors and those of the company coincided. In the Australian context, Mason J in
Walker v Wimborne,54 held that ‘directors of a company in discharging their duty to
the company must take account of the interests of its shareholders and its creditors’
because failure to do so ‘will have adverse consequences for the company as well
as for them.’ Subsequent cases demonstrate that when a company is approaching
insolvency a director is not only obliged to consider the interests of creditors as part
of the discharge of his or her duty to the company itself but that the interests of
creditors may become more important than the interests of shareholders. In Chew v
R,55 Malcolm CJ cited Kinsela v Russell Kinsela Pty Ltd (in liq),56 as standing for
the principle that, if a company's financial position is precarious, the interests of
creditors may become the dominant factor in what constitutes the ‘benefit of the
company as a whole’.57 In Nicholson v Permakraft (NZ) Ltd (in liq),58 it was
suggested that creditors might have an action against directors of a company for

49 [1962] 1 Ch 927. See also Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] 1 Ch
62; Levin v Clark [1962] NSWR 686.
50 (1987) 16 NSWLR 212; 12 ACLR 537; 6 ACLC 154.
51 Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 ACLC 215 at 221.
52 Under Australian law, directors do not have any direct duty to creditors and no such duty
is enforceable by the creditors other than in cases where a special responsibility has arisen
or under statutory provisions dealing with liquidation: Sycotex Pty Ltd v Baseler (1994)
122 ALR 531; 13 ACSR 766; 12 ACLC 494. This interpretation was subsequently
endorsed by the High Court in Spies v R [1999] HCA 68; (2000) 201 CLR 603; 173 ALR 529; 35 ACSR
500; [2000] HCA 43. See also Geneva Finance Ltd v Resource and Industry Ltd (2002)
169 FLR 152; 20 ACLC 1427; [2002] WASC 121 at 6.
53 [1992] BCLC 602.
54 [1976] HCA 7; (1976) 50 ALJR 446 at 446.
55 (1991) 5 ACSR 473.
56 (1986) 4 NSWLR 722.
57 See also the discussion of The Bell Group Ltd (in liq) v Westpac Banking Corporation [No
9] WASC 239 at nn 35-40 and accompanying text.
58 [1985] 1 NZLR 242 at 249; (1985) 3 ACLC 453 at 459.
breach of duty based on a duty owed by directors to creditors. However this
approach was rejected in Sycotex Pty Ltd v Baseler,59 and by the High Court in
Spies v R.60

These cases clash with the idea that the interests of a company for the purpose of
directors’ duties can only be the interests of shareholders. It is on this basis that
Leader argues that there is a constantly shifting set of interests of stakeholders to be
satisfied by the company if it is to function successfully, and the notion of its
independent interests serves to define the fixing of the priorities within that shifting
field at any particular point of time. 61 As such, it is not possible to say that a
company’s interest is reducible to the ‘sum’ of the interests of different
constituencies, since the notion of a sum fails to convey the fact that there is no
stable, single way of aggregating these interests over time. The company therefore
remains independent of any single set of stakeholders affected by it.

Extending this general principle, Robert Sadler argues that to fail to take account of
employees’ interests, also, can have adverse consequences for corporations, as a
result of, for example, prolonged industrial unrest.62 Therefore, the principle
articulated in Walker v Wimborne 63 could logically be extended to employees.
Australian case law shows there are limits to the application of this argument.
Directors have scope to take into account employee and other stakeholder interests
unless they clash with the interests of shareholders.

It is generally accepted that employees’ interests cannot be placed ahead of those of
shareholders, unless this is necessary to ensure that the company meets its
obligations to employees under employment, industrial or occupational health and
safety laws.64 Where the interests of employees are given priority over shareholders
by directors, the courts have indicated that directors are in contravention of their
duties. In Parke v Daily News Ltd, counsel for Daily News Ltd submitted that
although the directors’ principal duty must be to the shareholders, boards of
directors must also consider their duties to employees. 65 Plowman J quashed any
hope for the privileging of employees’ interests by stating that:

. . . no authority to support that proposition as a proposition of law was cited

59 (1994) 122 ALR 531; 13 ACSR 766; 12 ACLC 494.
60 (2000) 201 CLR 603; 173 ALR 529; 35 ACSR 500; [2000] HCA 43.
61 Leader, above n 31 at 86.
62 R. Sadler, ‘Employee Representatives on Boards of Directors: Limiting Directors’
Fiduciary Duties’ (1982) Journal of Industrial Relations 282 at 283.
63 Above n 54.
64 Ensuring compliance with such laws forms part of directors’ common law and statutory
duties to act with due care and diligence; see, e.g., Justice S. Whelan and L. Zwier,
Employee Entitlements and Corporate Insolvency and Reconstruction, Research Paper,
Centre for Corporate Law and Securities Regulation, University of Melbourne, 2005, at 10.
65 The issue of the stage in the company’s life may have been important in Parke v Daily
News Ltd [1962] Ch 927, in which the court held invalid a board of directors’ decision to
set aside the entire net proceeds of 1,572,500 pounds from the sale of the London News
Chronicle as a fund for severance pay to employees.
66 Ibid at 963.
In another rejection of the proposition that employees’ interests may be privileged,
in Re William Brooks & Co Ltd,67 the court ordered the company to be wound up
because the directors had acted improperly by giving priority to employee interests
over those of shareholders.68

In any case, the extension of duties of directors has not been attended by the
extension of rights for stakeholders. For instance, the courts have stopped short of
perfecting a duty to consider the interests of creditors at the point of insolvency
with an accompanying right of enforcement even though their interests may be
important for the company’s ongoing commercial survival. Their interests are
derivative. Employees are said to be ‘outsiders’ for the purposes of directors’
duties.69 The discussion in this part of the paper has shown that employees’ interests
may only be taken into account for the purposes of directors’ duties where it is in
the interests of the shareholders, unless otherwise dictated by law. For some
commentators, the problem of enforcement is one which diminishes claims that
directors’ duties have been meaningfully broadened. Although fiduciary discourse
is celebrated for its significant socialising and educational role in corporate
governance,70 without an element of enforceability, fiduciary law does not increase
the ‘stake’ of the employee in the company in the manner envisaged by stakeholder
theorists as expounded in Part 2 of this paper. Katherine Stone remarks that:

This examination of Australian corporate law has shown that directors are able to
exercise significant discretion in executing their duties. This may be consistent
with an ‘enlightened shareholder value’ approach 72 and thus a limited stakeholder
approach to corporate governance. However, it falls short of a fuller stakeholder
approach which would allow directors to treat the discharge of employee and other
stakeholder rights and interests as an end in itself, not as a means to some other
ends, namely long term shareholder wealth creation.

67 [1962] NSWR 142.
68 See also Lyford v Commonwealth Bank of Australia [1995] FCA 1261; (1995) 130 ALR 267; 17 ACSR 211;
[1995] FCA 1261; 13 ACLC 900.
69 Bercusson uses the ‘insider/outsider’ terminology in B. Bercusson, ‘Workers, Corporate
Enterprise and the Law’ in R. Lewis (ed.), Labour Law in Britain, Oxford, Blackwell,
1986, at 139.
70 M. O’Connor, ‘How Should We Talk About Fiduciary Duty? Directors’ Conflict-Of-
Interest Transactions and the ALI’s Principles of Corporate Governance’ (1993) George
Washington Law Review 954 at 968.
71 K. Stone, ‘Labor and the Corporate Structure: Changing Conceptions and Emerging
Possibilities’ (1988) University of Chicago Law Review 73 at 151.
72 See discussion of this phrase in the context of s 172 of the UK Companies Act 2006: nn
79-90 and accompanying text.
4. International Developments

The idea that directors owe special responsibilities to employees and other
stakeholders has been explicitly recognised in corporate statutes in some
jurisdictions. In this part of the paper we examine some examples of these statutes
in the US, the UK and other jurisdictions. We also discuss the recent decision of the
Supreme Court of Canada in BCE Inc and contrast this with US case law.
Stakeholder statutes and related initiatives

Starting with Pennsylvania in 1986, more than half of the state governments of the
United States of America have passed stakeholder statutes, which propose a
corporate governance model different from the classic or conventional corporate
law paradigm of the director-manager acting for the shareholder-owner. These
statutes, called non-shareholder constituency statutes, can be divided into two main
categories: permissive statutes and mandatory statutes. Permissive statutes allow,
but do not require, directors to take the interests of employees and other
stakeholders into account when making strategic-level decisions.73 An example of
the former is Pennsylvania, where the board may consider ‘the effects of any action
upon...employees’ An example of the latter is Connecticut, where directors are
required to consider (inter alia) ‘the interests of the corporation’s employees’.74

The following states have permissive statutes: Florida, Georgia, Hawaii, Idaho,
Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Minnesota,
Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York, North
Dakota, Ohio, Oregon, Rhode Island, South Dakota, Tennessee, Vermont,
Wisconsin, and Wyoming.75 Most of the statutes allow directors to consider
stakeholder interests in any circumstances however 19 states only allow stakeholder
consideration during takeover or change of control situations.76 There is also a
difference amongst the statutes as to what the directors are permitted to take into
account. Some statutes permit directors to consider the ‘effects’ of their decisions
on stakeholders whilst others only permit directors to take into account the
‘interests’ of stakeholders. Most statutes allow for the consideration of both long
and short-term interests.77 Indiana and Pennsylvania have statutes that explicitly
provide that the claims of shareholders need not be held above those of other
stakeholders. These statutes presume the validity of a directors’ determination to

73 J. Hanks, Jr, ‘Playing with Fire: Nonshareholder Constituency Statutes in the 1990s’
(1991) 21 Stetson Law Review 97 at 103.
74 A. Reynolds ‘Do ESOPS Strengthen Employee Stakeholder Interest?’ (2001) 13 Bond Law
Review 95.
75 J. Hanks, Jr, ‘Non-Stockholder Constituency Statutes: An Idea Whose Time Should Never
Have Come’ Insights, December 1989, 20- 26.
76 K. Hale, ‘Corporate Law and Stakeholders: Moving Beyond Stakeholder Statutes' (2003)
45 Arizona Law Review 823 at 836.
77 Ibid.
consider non-shareholder interests if approved by a majority of disinterested
directors unless it is proven after reasonable investigation that the disinterested
directors did not act in good faith.

Two states, Connecticut and Arizona, have enacted mandatory statutes that require
directors to consider the interests of other constituencies. Connecticut requires
directors to consider the interests of the corporation’s employees, customers,
creditors, suppliers, ‘community and societal considerations’, as well as long-term
and short-term interests of the corporation and of the shareholders, ‘including the
possibility that those interests may be best served by the continued independence of
the corporation’.78

Until 2006, s 309 of the Companies Act 1985 provided that ‘the matters to which
the directors are to have regard in the performance of their functions shall include
the interests of the company’s employees in general as well as the interests of its
members.’79 This was limited by s 309(2) which expressly stated that the duty was
to be owed to the company and enforceable as such. In 2006 the UK enacted its
much debated Companies Act 2006. Section 172(1) imposes a duty upon a director
to act in the way he or she considers, in good faith, would be most likely to promote
the success of the company for the benefit of its members as a whole, and in doing
so have regard (amongst other matters) to (a) the likely consequences of any
decision in the long term, (b) the interests of the company’s employees, (c) the need
to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of
business conduct, and (f) the need to act fairly as between members of the
company. Section 172(1) is limited by
s172(2) which specifies that this list of purposes ‘has effect as if the reference to
promoting the success of the company for the benefit of its members were to
achieving those purposes’.

It can be seen that among other effects, this duty aims to introduce wider corporate
social responsibility into a director’s decision making process. Whilst the section
makes it clear that the directors owe a duty to promote the success of the company
for the benefit of its members, it seeks to provide a broader context for fulfilling
that duty.80 According to a member of the UK Company Law Review Steering
Group which drafted the changes, the laws reflect an ‘enlightened shareholder
value’ approach. Section 172(1) is intended to articulate the common law view that
‘the company’ means its shareholders as a whole. The phrase ‘in the interests of the
company’ was intentionally omitted as being meaningless.81 Section 172(1)(b)-(e)

78 Hanks, above n 73.
79 This is known as the ‘regard clause’: A. Conard, ‘Corporate Constituencies in Western
Europe’ (1991) 21 Stetson Law Review 71; Xuereb, above n 47. The provision may be
traced to the 1970s industrial democracy movement: P. Redmond (ed.), Companies and
Securities Law: Commentary and Materials, 2nd edition, The Law Book Company, 1992, at
412.
80 CAMAC Report, above n 7 at 103.
81 P. Davies, ‘Enlightened Shareholder Value and the New Responsibilities of Directors’,
seek to make clear that although shareholder interests are predominant, the
promotion of these interests does not require ‘riding roughshod’ over the interests
of other groups on whose activities the business of the company depends for
success.82

There are further key provisions that place new responsibilities on companies in
relation to their social and environmental impact. The Companies Act 2006 brings
together elements of the previous operating and financial review and the
requirements of the EU Accounts Modernization Directive. Under the Act, all
companies other than small companies must produce a business review as part of
the directors’ report which contains a fair review of the company’s business and
principal risks and uncertainties. This must include information about the
environment, employees and social and community issues to the extent necessary
for an understanding of the business.83 The business review must be audited. The
Companies Act 2006 also includes a reserve power to allow the government to
require institutional investors to disclose how they have voted at annual meetings.
This was included for the purpose of fostering voluntary disclosure. The resort to
law will take place only if investors ‘fail to come clean on their voting records
voluntarily’.84 McBarnet observes that: ‘In effect, while supporting a voluntary
approach to CSR, UK government strategy . . . has been to legislatively support and
strengthen the market pressures on companies to pay attention to CSR issues’.85

The changes to directors’ duties under the UK Companies Act 2006 came into force
in October 2007. Recent commentaries on the Act continue to speculate about its
possible effects on company directors’ decision-making, and question whether this
form of regulation is best placed to foster the enlightened shareholder value
approach in UK companies.86 An immediate result of the changes agreed upon by
most commentators is that directors will take greater precaution to evidence their
consideration of s 172(1) stakeholders in decision-making because of perceived
risks of being censured by a regulatory body, or of facing a derivative action
brought by a shareholder. Legal commentary on the changes contemplates much
use of the derivative action provisions by activist shareholders.87 However, since
the Act has come into force, little evidence of such a trend has arisen. Loughrey,
Keay and Cerioni have considered the legal profession's reaction to the Act and
suggest that the lack of shareholder derivative actions may stem from lawyers who
W.E. Hearn Lecture at the University of Melbourne Law School, 2 October 2005.

82 Ibid.
83 CAMAC Report, above n 7 at 130-131.
84 Financial Times, 6 June 2006, quoting Alastair Darling, Trade and Industry Secretary,
cited in D. McBarnet, ‘Corporate Social Responsibility Beyond Law, Through Law, for
Law: The New Corporate Accountability’ in D. McBarnet, A. Voiculescu and T. Campbell
(eds.), The New Corporate Accountability: Corporate Social Responsibility and the Law,
Cambridge University Press, 2007, at 35.
85 McBarnet, ibid, at 35.
86 See A. Keay, ‘Tackling the Issue of the Corporate Objective: An Analysis of the United
Kingdom’s ‘Enlightened Shareholder Value Approach’ [2007] SydLawRw 23; (2007) 29 Sydney Law Review 577
who argues that the enlightened shareholder value approach in s 172 is a little different
from the shareholder value approach.
87 N. Mirchandani, and R.Huntsman, ‘Directors Cut’ (2008) 21 (45) Lawyer 31; ‘New
derivative action may lead to increased claims against directors’ (2007) 28 Credit Control
92.
have stated that they would advise shareholder clients of the difficulties at
succeeding with a derivative action, and discourage them from proceeding.88 Most
supporters of CSR expect that the changes will have little impact initially. Charles
Wynn-Evans posits that as a stakeholder group, employees may be worse off under
the changes as they have no enforceable rights, and their concerns may be
deemphasised if considered equally with the other s 172(1) stakeholders.89
However he agrees with the views of other commentators that anything that will
assist directors to internalise CSR considerations may have real benefits for
stakeholders in the future.90

Several African countries have in their corporate law statutes provisions that
mention employees in the context of directors’ duties. The Zimbabwe Companies
Amendment Act 1993, which was the first major amendment of the principal Act
for many years, enables directors to take account of the interests of their employees
as well as those of their shareholders.91 The Ghanian Companies Code s 203(3)
states that:

Due to fundamental differences between Member States’ traditions in the company
law field, it appears unlikely that any similar development will occur in the EU in
the near future.93 The EU Draft Fifth Directive on Company Law, which provided
that each member of the supervisory board, management board or administrative
organ, as the case may be, has the same duty at law and shall exercise his or her
functions ‘in the interests of the company, having regard to the interests of the

88 J. Loughrey, A. Keay, and L. Cerioni, ‘Legal Practitioners, Enlightened Shareholder Value
and the Shaping of Corporate Governance’ (2008) 8 Journal of Corporate Law Studies 79
at 111.
89 C. Wynn-Evans, ‘The Companies Act 2006 and the Interests of Employees’ (2007) 36
Industrial Law Journal 188 at 192.
90 Wynn-Evans, ibid at 192; P. Yeoh, ‘The Direction and Control of Corporations: Law or
Strategy?’ (2007) 49 Managerial Law 37; L. Cerioni, ‘The Success of the Company in s.
172(1) of the U.K. Companies Act 2006: Towards an 'Enlightened Directors Primacy'?’
(2008) 4 Original Law Review 1 at 31.
91 (1994) 20 (1) Commonwealth Law Bulletin 5-6. In South Africa, cl 76 (3)(b) of the
Companies Bill 2008 provides that a director must act ‘in the best interests of the
company’. For discussion of the South African position, see I. Esser and J. du Plessis, ‘The
Stakeholder Debate and Directors’ Fiduciary Duties’ (2007) 19 South African Mercantile
Law Journal 346. The authors observe that courts in South Africa have interpreted the
company to mean the shareholders collectively: ibid at 357.
92 The Code has been criticised for failing to give greater direction as to what degree of
consideration is ‘special but not exclusive’ (Sadler, above n 62 at 285.)
93 Activities of the European Union, Summaries of Legislation,
http://europa.eu/scadplus/leg/en/lvb/l26002.htm,
shareholders and of the employees’,94 was withdrawn by the Commission in
December 2001 because of political deadlock.

Over the 20 or so years since stakeholder statutes have been enacted, their effect
would seem to be relatively insignificant. It is suggested that although these statutes
lay a good foundation for stakeholder interests they cannot achieve very much on
their own. Commentators disagree about whether stakeholder statutes represent
radical changes in the law of ownership rights in corporations or whether they
merely codify pre-existing corporate law doctrine. Some commentators have
interpreted the US stakeholder statutes as demonstrating that directors do not owe
duties exclusively to shareholders; rather, they play the role of mediators between
different corporate constituencies.95 Others believe the statutes are so limited as to
the rights they create as to make very little concrete difference.96

There appear to be three main conflicting views of the stakeholder statutes in the
US: (a) they create no enforceable rights of action on the part of stakeholders but
do authorise directors to make trade-offs between shareholder and stakeholder
interests, including the right to reduce shareholder gains for enhanced stakeholder
welfare; (b) they create an implied right of action; and (c) they probably do not
create an implied right of action, but even if they do create an implied right of
action, in practice they will only have the effect of entrenching managerial power.

The first view is held by Stephen Bainbridge.97 Alternatively, some commentators,
such as Lawrence Mitchell, argue that stakeholder statutes should be interpreted to
create enforceable obligations for non-shareholder constituency groups. Although
none of these laws provide for an explicit right of action, Mitchell argues that there
are implied rights. He argues that the legislative intent was to grant a right of
action, because the legislature would not have believed that it is likely that directors
are generally motivated by a sincere interest in protecting employee and community
interests. Instead, he argues that stakeholder statutes would have no significance in
the absence of enforceable private rights of action, other than granting uncontrolled
discretion to directors - a goal that cannot plausibly be accepted as a legitimate
legislative purpose that legislators would willingly use to justify publicly their
support for the statute. He concludes that courts should interpret stakeholder laws
to contain private rights of action on the part of their intended beneficiaries.

Others, such as Katherine Stone, reject the implied right of action argument. With
the exception of the Connecticut and Arizona statutes, all the statutes speak in
permissive tones. They say directors may consider the interests of other
constituencies, making the likelihood of enforceability even less. Given the

94 Articles 10(e) and 21(q). O.J. No. C240/2, 9.9.83.
95 R. Karmel, ‘Implications of the Stakeholder Model’ (1993) 61 George Washington Law
Review 1156 at 1157.
96 M. Polonksy and P. Ryan, ‘The Implications of Stakeholder Statutes for Socially
Responsible Managers’ (1996) 15 Business & Professional Ethics Journal 3 at 16, cited in
CAMAC Report, above n 7 at 102.
97 S. Bainbridge, ‘Interpreting Nonshareholder Constituency Statutes’ (1992) 19 Pepperdine
Law Review 971.
business judgment rule, the range of stakeholder interests, and the conflict between
them, the statutes would merely amplify managerial discretion.98 No stakeholder
statute has yet been interpreted to contain implied rights of action.99
In addition, there are practical considerations that may inhibit application of the
law, as employees have, in the past, been less likely to access court based remedies
to the same extent as management or shareholders. The expense for individual
employees to bring the legal actions necessary to vindicate statutory rights is often
prohibitive, and thus, even if there was a right of action, most breaches would go
unremedied.100 There are some signs that unions are becoming more willing to
found actions of this nature on behalf of employees, which may assist in
overcoming individual problems of access to courts. Union assistance will not
overcome the barriers created by ambiguity as to the existence of an implied right
of action.

This seems to be the general conclusion reached by other commentators. Jonathan
Macey and Geoffrey Miller believe that:

[I]t seems patently clear that the true purpose of these statutes is to benefit a

held corporations who want still another weapon in their arsenal of antitakeover

Evidence suggests that directors sometimes invoke the interests of employees when
it serves their interests in answering claims by shareholders that they have failed
adequately to serve the interests of the corporation. However, during instances of
conflict between the interests of employees and either shareholders or managers,
the interests of employees are difficult to enforce using stakeholder statutes.102

98 K. Stone, ‘Policing Employment Contracts within the Nexus-of-Contracts Firm’ (1993) 43
University of Toronto Law Journal 353 at 375.
99 J. Singer, ‘Jobs and Justice: Rethinking the Stakeholder Debate’ (1993) 43 University of
Toronto Law Journal 475 at 503.
100 A study by the Rand Institute for Civil Justice of 120 wrongful discharge cases brought in
California between 1980 and 1986 found that over 53 per cent were brought by executives
or middle management: J. Dertouzoso, E. Holland and P. Ebener, ‘The Legal and
Economic Consequences of Wrongful Termination’, Rand Corp, 1988, 19-21, cited by K.
Stone, above n 98, at 375.
101 J. Macey and G. Miller, ‘Corporate Stakeholders: A Contractual Perspective’ (1993) 43
University of Toronto Law Journal 401 at 405.
102 Singer, above n 99 at 503. Some commentators have pointed out that the US statutes were,
in fact, not intended to increase the power of the constituencies directly, but were passed as
a result of pressure from managers, employees, and municipalities to counter hostile takeovers,
which these groups perceived to be inimical to the public welfare. The purpose was
to protect managerial power, in order to increase stability. A few of the statutes therefore
are limited to decision making regarding takeovers. These include the statutes of
Connecticut, Iowa, Kentucky, Louisiana, Missouri, Oregon, Rhode Island, and Tennessee:
L. Johnson and D. Millon, ‘Missing the Point About State Takeover Statutes’ (1989) 87
ased on empirical research on the operation of stakeholder statutes, Springer
concludes that ‘Directors appear to invoke constituency statutes more as a
rationalization for deferring to their discretion than as a principled justification for
consideration of constituent interests’.103 In any case, it may be that in some
instances the gap between the stakeholders and the corporate decision makers is too
broad to allow the corporate officers to really understand and take into account the
interests of the various stakeholders.104 More conservative critics of the laws have
also argued that the statutes convert directors into ‘unelected civil servants’ with a
responsibility for determining the public interest.105

A further reason stakeholder statutes, even in their broad and mandatory form, fail
to give rise to enforceable rights, as Joseph Singer observes, is that courts are likely
to be reluctant to ‘second-guess’ managerial decisions.106 Because judges are likely
to see managers as ‘experts’ in business matters they are usually reluctant to
substitute their judgments for those of management.107 Further, despite recent
descriptions of corporations as a ‘nexus of contracts’ or as ‘social entities’,
traditional views of shareholders as the ‘owners’ of the corporation are likely to
exert a powerful influence on judges’ perceptions of managerial activity. Studies
have concluded that the statutes did little to alter the centrality of shareholder
primacy in US corporate law.108

In practice, the permissive provisions appear to have been utilised primarily in the
context of takeover defences. According to Polonsky and Ryan, in the small
number of US cases that referred to stakeholder statutes in the early years of their
operation, none insisted that directors demonstrate that they in fact deliberated
about or balanced stakeholder interests to gain the protection of the statute.109 As a
result, the American Bar Association Committee on Corporate Laws may be correct
in stating that the stakeholder statutes mainly confirm the common law position:
[D]irectors may take into account the interests of other constituencies but
only as and to the extent that the directors are acting in the best interests,
long as well as short term, of the shareholders of the corporation.110

Michigan Law Review 846.
103 J.D. Springer, ‘Corporate Law and Constituency Statutes: Hollow Hopes and False Fears’
(1999) New York University Annual Survey of American Law 85.
104 Hale above n 76 at 842.
105 J. Macey, ‘An Economic Analysis of the Various Rationales for Making Shareholders the
Exclusive Beneficiaries of Corporate Fiduciary Duties’ (1991) 21 Stetson Law Review 23,
cited in CAMAC Report, above n 7 at 102.
106 Singer, above n 99.
107 Further, most of the statutes use the words ‘may consider’. It is not clear what ‘may
consider’ means. Does it mean that directors should consider the interests of employees,
but then decide they should act in the shareholders’ interest anyway, even though the two
sets of interests conflict? For this type of criticism of stakeholder statutes from the
perspective of shareholders see Hanks, above n 73 at 116.
108 Springer, above n 103 at 122.
109 M. Polonksy and P. Ryan, ‘The Implications of Stakeholder Statutes for Socially
Responsible Managers’, above, n.96.
110 American Bar Association Committee on Corporate Laws, ‘Other Constituencies Statutes:
Potential for Confusion’ (1990) 45 Business Law 2253 at 2269, cited in CAMAC Report,
above n 7 at 101.
Similar problems existed in relation to s 309 of the UK Companies Act prior to the
enactment of the Companies Act 2006. Section 309 gave the employee no remedy.
We can conclude, from this discussion of the evidence at hand, that US stakeholder
laws do not generally strengthen the stakeholder rights of employees in an
enforceable manner. This is partly due to the fact that the stakeholder laws modify
only a small aspect of corporate law. Shareholders alone continue to have the
power to vote for the board of directors. Indeed, one American critic has argued
that, if anything, the stakeholder laws have detracted from the need for real changes
in corporate law that address stakeholder needs.111

Recent UK reform has avoided using the words ‘in the interests of the company as
a whole’ and has instead used the words ‘be most likely to promote the success of
the company for the benefit of its members as a whole’. Regardless of this
difference, the reform was nevertheless conceived of as encoding the existing
‘enlightened shareholder’ common law interpretation of directors’ duties, rather
than mandating a ‘pluralist’ conception of the company which gives stakeholders
similar rights to those of shareholders.

Courts in both Canada and the US have grappled with the question of the interests
that may be considered by directors in compliance with their duties. The most
recent judgment is that of the Supreme Court of Canada in BCE Inc v 1976
Debentureholders.112 The court made the following observations:

• the fiduciary duty of directors is a duty to act in the best interests of the
corporation;
• often the interests of shareholders and stakeholders are co-extensive with the
interests of the corporation but if they conflict, the directors’ duty is to the
corporation; and
• the duty is not confined to short-term profit or share value. Where the
corporation is an ongoing concern, the duty looks to the long-term interests of
the corporation.113

fairly. There are no absolute rules. In each case, the question is whether, in all

111 Springer, above n 103 at 122.
112 [2008] SCC 69, date of judgment: 20 June 2008; reasons delivered: 19 December 2008.
113 Ibid at [37] and [38].
114 Ibid at [4].
the circumstances, the directors acted in the best interests of the corporation,
having regard to all relevant considerations, including, but not confined to,
the need to treat affected stakeholders in a fair manner, commensurate with
the corporation’s duties as a responsible corporate citizen.115
In relation to what, if any, interests of stakeholders are to be preferred, the court
stated:

all stakeholders...There is no principle that one set of interests – for example

The court referred to the ‘Revlon line’ of takeover cases from Delaware and noted
that it had been argued that these cases support the principle that where the interests
of shareholders conflict with the interests of creditors, the interests of shareholders
should prevail.117 The Canadian Court summarised these cases in the following
way:

It may be possible to reconcile the Canadian and Delaware decisions. According to
the Supreme Court of Canada, there is no rule that the interests of one group of
stakeholders is to prevail over another. What set of interests will be paramount will
depend on the particular circumstances. In the context of the decision in Unocal
where the company was being sold to the highest bidder, then the interests of
shareholders are paramount according to the Delaware court. Perhaps the Canadian
court would have reached the same decision as the Delaware court if faced with the
same set of facts. However, it is notable that the Delaware court states that
consideration of non-shareholder interests is inappropriate in the particular situation
of the company being sold to the highest bidder. In other words, it is not a situation
of the board balancing the interests of different groups of stakeholders and
determining that the interests of shareholders are paramount. It may be that the
Canadian court would allow a wider range of interests to be considered in this
situation than the Delaware court. After all, in the situation of the company being

115 Ibid at [82].
116 Ibid at [83] and [84].
117 Revlon Inc v MacAndrews & Forbes Holdings Inc, 506 A.2d 173 (Del 1985) and Unocal
Corp v Mesa Petroleum Co, 493 A.2d 946 (Del 1985).
sold to the highest bidder, the directors may want to consider the interests of
stakeholders other than shareholders, such as employees. However, the decision of
the Supreme Court of Canada, while allowing the interests of a range of
stakeholders to be considered, does not provide guidance on the weight to be given
to these interests by the directors.

In this part of the paper we review two recent Australian inquiries into corporate
governance which had overlapping purposes. The first of these is the Corporations
and Markets Advisory Committee (CAMAC) inquiry; the second is the
Parliamentary Joint Committee on Corporations and Financial Services (PJC)
inquiry. We document and then analyse the different interpretations of the duty to
act in the best interests of the company adopted by the two inquires.

On 23 March 2005 the Parliamentary Secretary to the Treasurer requested CAMAC
to provide him with advice concerning to what extent the Corporations Act 2001
should include corporate social responsibilities or explicit obligations to take
account of the interest of certain classes of stakeholders other than shareholders.118
The relevant questions CAMAC was requested to report on for our purposes are as
follows:

• Should the Corporations Act be revised to clarify the extent to which directors
may take into account the interests of specific classes of stakeholders or the
broader community when making corporate decisions?
• Should the Corporations Act be revised to require directors to take into account the interests of specific classes of stakeholders or the broader community whenmaking corporate decisions?

CAMAC’s report, ‘The Social Responsibility of Corporations’ (CAMAC Report)
was released in December 2006. Here, we focus on CAMAC’s recommendations
regarding whether the duties of directors under the Corporations Act should be
amended to require directors to take into account the interests of employees and
other stakeholders.

Ultimately, CAMAC decided no reform was required. However, in the course of its
deliberations CAMAC identified its preferred interpretation of the scope of
directors’ duties based on the existing case law. CAMAC stated that:119

• the phrase ‘the interests of the company as a whole’ under the common law of
directors’ duties means the financial well-being of the shareholders as a general

118 CAMAC Report, above n 7.
119 The following list is extracted from the CAMAC Report, above n 7 at 84-85, 86, 91-92, and
106-107.
body. The overriding test is the well-being of the company and therefore the
shareholders generally;

• the phrase ‘the best interests of the corporation’ in s 181 of the Corporations
Act obliges directors to act in the best interests of the shareholders generally.
However, directors may take into account a range of factors external to
shareholders if this benefits the shareholders as a whole;
• directors are also obliged to consider the financial interests of creditors when
the company is insolvent or near-insolvent, though they have no direct fiduciary
duty to creditors;
• directors are not confined in law to short-term considerations in their decisionmaking,
such as maximising profit or share price returns. The interests of a
company can include its continued long-term well-being; and
• directors have considerable discretion over the factors they may choose to take
into account in determining what will benefit the company. Although there may
be no direct legal obligation in company law to take the interests of
stakeholders other than shareholders into account (compared to statutes dealing
with other areas of the law), this does not preclude directors from choosing to
do so.

CAMAC also considered a number of possible approaches to the reform of
directors’ duties to take into account stakeholder interests. It grouped the possible
approaches proposed in submissions and other jurisdictions under three categories:
a ‘pluralist approach’, an ‘elaborated shareholder benefit approach’ and a ‘business
approach’.120 The various views grouped under the ‘pluralist approach’ shared the
opinion that the Corporations Act should be amended so as to permit or require
directors to serve a wider range of interests in their decision-making, not
subordinate to, or merely as a means of achieving, shareholder well-being.121 The
‘pluralist’ approach is thus closest to a stakeholder model of corporate governance
amongst the options considered by CAMAC. The ‘elaborated shareholder benefit’
approach considers that current laws be extended so as to expressly refer to various
considerations that directors should take into account in determining what is for the
benefit of shareholder generally (as has been done in the UK Companies Act 2006,
s 172).122

Submissions to CAMAC for legislative change under the auspices of the pluralist
and elaborated shareholder benefit approach which would alter directors’ duties
included:123

• a provision (possibly an amendment to s 181 of the Corporations Act) that
would expressly permit or mandate directors to take into account the interests of
specific classes of stakeholders, extending beyond shareholders, or the broader
community;124

120 Ibid at 108-109; see also 109-110 for a complete list of all the approaches considered by the Committee.
121 Ibid at 96-102.
122 Ibid at 102-108.
123 These proposals are noted in CAMAC Report, ibid at 109–110.
124 Support for this proposal was expressed by the NSW Lawyers Association (submission 44) and the Public Interest Law Clearing House (Submission 22): CAMAC Summary of Submissions at 32-33.
an amended business judgment defence, either to liberalise the defence to give
greater protection to directors and officers who choose to take various
stakeholder interests into account or, alternatively, to impose additional
requirements on directors and officers to take stakeholder interests into account
before they can avail themselves of the defence;

• a replaceable rule permitting directors to take account of the interests of
stakeholders other than shareholders;
• an ethical judgment rule designed to afford directors some protection from
liability in the event that their ethical decision causes a detrimental impact on the
financial interests of the company as a whole.

The main concerns voiced regarding these approaches was how to identify relevant
classes of stakeholders; which stakeholders would have standing to enforce duties;
whether courts might become involved in making commercial decisions if called
upon to balance or weigh up competing stakeholder interests; and whether criminal
or civil enforcement of directors’ duties would be compromised if directors could
refer to a range of competing or conflicting stakeholder interests in defending
claims of breach of duty. For instance, the Law Council of Australia argued that
amendments to the Corporations Act of the type noted above would reduce
flexibility, potentially increase the range of persons who can sue directors, reduce
directors’ accountability, likely increase red tape, be of uncertain scope and have a
disincentive effect.125 Others were of the view that environmental and social
concerns should be addressed through specific legislation on those matters rather
than by amending directors’ duties contained in the Corporations Act.

The majority of submissions could be grouped under the ‘business approach’ as
they shared the view that the existing law of directors’ duties provides sufficient
scope for directors to choose to take into account a range of factors external to
shareholders if this benefits the shareholders collectively.126 There was particular
concern for the maintenance of directors’ accountability as was highlighted in the
submissions of H Bosch (Submission 51) and ASIC (Submission 55). In particular,
there was a shared view that companies are already subject to a range of Federal,
State and Territory laws that are designed to protect various stakeholder groups,
and directors cannot lawfully ignore or subordinate these corporate obligations
because of a notion of shareholder interests. In any case, it is likely to be in a
company’s own interests, at least over the long term, to take into account the
environmental and social context in which it operates due to concerns regarding
value enhancement, risk management, including reputational risk and regulatory
risk.

Doubts were expressed about the effectiveness of the business approach in some
submissions. One respondent (Rupu Tex, Submission 47), for instance, argued that

125 CAMAC, Summary of Submissions at 29-30.
126 Support for this view is found in the submissions of the Business Council of Australia
(Submission 57), Australian Institute of Company Directors (AICD) (Submission 43),
National Australia Bank (Submission 45), the Australian Shareholders Association
(Submission 3) and the Australian Bankers Association (Submission 49) to name a few. All
these submissions supported the view that legislative change to the Corporations Act was
not desirable.
currently not all companies recognise CSR issues as a potential material risk to
shareholders or the company as a whole and there remains a focus on short-term
indicators at the expense of the long-term sustainability of the company. The NSW
Attorney General put forward the strongest critique of the business approach in
relation to the James Hardie experience.127 The submission stated:
I believe prudent directors already consider broader interests in performing
their duties. I do not suggest that we need legislative reforms to change the
behaviour of prudent directors. However, reform is necessary to compel
directors who may not always follow prudent practices, to adhere to
appropriate standards of corporate social responsibility. Voluntary reforms
or directors’ education initiatives may be effective in enhancing the
behaviour of prudent directors, but they will not be effective in regulating
all directors. Legislative reform is required.

CAMAC rejected proposals for changes to the Corporations Act. The Committee
took the view that:

to hold itself to a particular approach to the conduct of its business by adopting

some form of ‘social responsibility’ charter in its constitution. CAMAC concluded

that a ‘non-exhaustive catalogue’ of interests to be taken into account would serve

little useful purpose for directors and as such rejected the pluralist and elaborated

Parliamentary Joint Committee on Corporations and Financial Services
Corporate Responsibility Report

In June 2005, the Parliamentary Joint Committee on Corporations and Financial
Services (PJC) resolved to inquire into corporate responsibility. Its inquiry had
particular reference to a number of questions which are relevant to this paper.

• The extent to which organisational decision-makers have an existing regard for
the interests of stakeholders other than shareholders, and the broader
community.
• The extent to which organisational decision-makers should have regard for the
interests of stakeholders other than shareholders, and the broader community.

127 Submission 53.
128 CAMAC Report, above n 7 at 111.
The extent to which the current legal framework governing directors' duties
encourages or discourages directors from having regard for the interests of
stakeholders other than shareholders, and the broader community.

• Whether revisions to the legal framework, particularly to the Corporations Act,
are required to enable or encourage incorporated entities or directors to have
regard for the interests of stakeholders other than shareholders, and the broader
community. In considering this matter, the Committee will also have regard to
obligations that exist in laws other than the Corporations Act.
• Any alternative mechanisms, including voluntary measures that may enhance
consideration of stakeholder interests by incorporated entities and/or their
directors.
• The appropriateness of reporting requirements associated with these issues.
• Whether regulatory, legislative or other policy approaches in other countries
could be adopted or adapted for Australia.

The PJC’s report, ‘Corporate Responsibility: Managing Risk and Creating Value’129
was published in June 2006. The PJC concluded that no compelling case for change
to directors’ duties was presented during the inquiry. Further, the PJC considered
that the existing network of social and environmental legislation provided sufficient
regulation of the social and environmental performance of companies.
The PJC identified its preferred interpretation of the scope of directors’ duties,
although it is arguable that the PJC interpretation is different to that provided by
CAMAC. The PJC stated:

This resembles, to some extent, the interpretation of CAMAC – that the interests of
the company are generally those of its shareholders. However, the PJC explicitly
rejected what it termed the ‘shareholders first’ interpretation of directors’ duties.
The PJC defined this interpretation as follows: ‘there is no particular objection to
directors considering the interests of stakeholders other than shareholders, but the
interests of shareholders must be the clear priority’.131 The PJC stated that this
interpretation of directors’ duties is too constrained and stated that, in the view of
the Committee, acting in the best interests of the corporation and acting in the best
interests of the shareholders does not inevitably amount to the same thing.132

129 Corporate Responsibility: Managing Risk and Creating Value, June 2006, can be accessed
at http://www.aph.gov.au/Senate/committee/corporations_ctte/corporate_responsibility/tor.htm .
130 Ibid at 59.
131 Ibid at 51.
132 Ibid at 52.
Here we detect a difference with the interpretation of directors’ duties adopted by
CAMAC because CAMAC defined the best interests of the company as the best
interests of the shareholders – while acknowledging that directors could take into
account the interest of other stakeholders if this benefits the shareholders.133
The PJC preferred what it termed the ‘enlightened self-interest’ interpretation of
directors’ duties. The PJC defined this as follows:

The enlightened self-interest interpretation of directors’ duties acknowledges

An important observation to be made about the interpretation of directors’ duties
adopted by the PJC is that the Committee does not define what it means by the
company. According to the PJC, the enlightened self-interest interpretation of
directors’ duties focuses on ‘the long term viability’ of the company and the ‘best
interests of the company from a commercial perspective’. CAMAC defined the best
interests of the company as those of its shareholders, basing this interpretation on
existing case law. The PJC does not define what it means by the best interests of
the company and therefore the Committee does not engage with the important
question that arises concerning what stakeholders’ interests receive priority if there
are conflicting interests among stakeholders. The CAMAC definition does provide
an answer to this question if (a) the conflict is between the interests of shareholders
and some other stakeholder group, (b) the company is solvent, and (c) the conflict
is to be resolved under the law of directors’ duties and there are no relevant statutes
other than the Corporations Act that impact upon the decision of directors.

133 See the text accompanying n 119 above. The statement by the PJC that acting in the best
interests of the corporation and acting in the best interests of the shareholders is not the
same thing could be reconciled with the view of CAMAC if the PJC was commenting on a
company that is insolvent or nearly insolvent. In this situation, as we have seen, directors
must consider the interests of creditors and the interests of creditors may receive a higher
priority than the interests of shareholders. However, the PJC does not limit its statement to
this situation.
134 Ibid at 52 and 53.
It may be that one way to understand the interpretation of directors’ duties adopted
by the PJC is that it presents the company as an independent entity with its own
interests that are separate to those of its stakeholders. Whether this has a sound
basis in law is subject to some doubt. In Greenhalgh v Arderne Cinemas Ltd,135
Evershed MR stated that the benefit of the company as a whole ‘does not (at any
rate in such a case at the present) mean the company as a commercial entity,
distinct from the corporators: it means the corporators as a general body’. This
statement was quoted with approval by the High Court of Australia in Ngurli Ltd v
McCann.136 The reference by Evershed MR to the case before him leaves open the
possibility of the interests of the company as a commercial entity being a relevant
consideration for directors. This was acknowledged by Hodgson J in Darvall v
North Sydney Brick & Tile Co Ltd,137 where he stated:

the creditors of the company. I think it is proper to have regard to the interests

Hodgson J here indicates that the interests of the company as a commercial entity
are one of a set of interests that directors may consider, depending on the
circumstances, although he does not indicate what priority each of these interests
should receive.

On appeal, the decision of Hodgson J was affirmed. Only one judge, Kirby P,
commented on the meaning of the interests of the company, and he stated that ‘the
court is not obliged to look at the company as in some way disembodied from its
members’138 which perhaps may be viewed as casting doubt on the view that the
interests of the company can be viewed as a commercial entity separate to the
shareholders of the company.

In Kirwan v Cresvale Far East Ltd (in liq),139 Giles JJA also expressed reservations
about the interests of the company being the company as a separate enitity:
The description of the power as a fiduciary power is because it
must be exercised in the interests of another or others. Who or
what is or are the other or others? To refer to the company as a
whole leaves much unanswered. In law the company has an
existence separate from its shareholders. But, as the passage from
Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286 at 291; [1950]
2 All ER 1120 at 1123 approved in Ngurli Ltd v McCann shows
... the directors do not exercise their power according to the

If it is correct that the PJC interpretation is one that views the company as an
independent entity with its own interests, this would mean that in some
circumstances the directors would be able to make a decision that is in the interests
of the company, as a separate entity, even where this decision went against the
interests of one or more groups of stakeholders, including shareholders, creditors
and employees. However, the PJC does not elaborate on the definition of directors’
duties it prefers, so it is only possible to speculate concerning the content and
meaning of this interpretation of directors’ duties.

While providing its own interpretation of the scope of directors’ duties, the PJC
noted there is a wide variety of interpretations of the scope for directors to take into
account stakeholder interests under the current law which leads to uncertainty for
directors about the appropriate behaviour with regard to CSR strategies. The PJC
described these different interpretations as follows (in addition to the ‘shareholders
first’ interpretation discussed above): the directors’ restrictive interpretation, under
which directors claim that they are unable to undertake activities based on
corporate social responsibility because such activities may not be directly ‘in the
best interests of the corporation’; the shareholders’ restrictive interpretation, which
objects to corporations providing philanthropic funds or acting with deliberate
corporate responsibility because those funds could be invested in wealth generation
(and thus returns to the shareholders); the short term interests interpretation, which
allows that investment in corporate responsibility may be appropriate, but only if it
can be justified on the basis of annual return on investment (competing with other
possible investments); and the enlightened self-interest interpretation, which holds
that careful and appropriate corporate responsibility is almost always in the
interests of the corporation, and thus falls well within the behaviours permitted to
directors under current legal duties.140

The PJC considered that directors who adopt a ‘restrictive interpretation’ approach
to the current law are misinterpreting the law:

The PJC also noted that where directors are uncertain about the proper course with
regard to the adoption of a CSR strategy which would entail taking into account the
interests of stakeholders’ interests or corporate philanthropy, the directors could put
the board policy to a shareholder vote. The PJC thus considered that those directors
who adopt the ‘directors’ restrictive interpretation’, the ‘shareholders’ restrictive

140 Above n 129 at 46.
141 Ibid at 49-50.
interpretation’ or the ‘short term interests interpretation’ are adopting an
interpretation of the scope of directors’ duties that is too constrained. The PJC did
not agree that ‘acting in the best interests of the corporation and acting in the best
interests of the shareholders inevitably amounts to the same thing’.142 Instead, the
PJC preferred the ‘enlightened self-interest interpretation’ of directors’ duties under
the current law which acknowledges that investments in corporate social
responsibility can contribute to the long term viability of the company even where
they do not generate immediate profit. Under this interpretation directors may
consider and act upon the legitimate interests of stakeholders to the extent that
these interests are relevant to the corporation.143 As a consequence of seeing this as
the preferred interpretation of the current law, the PJC saw no reason to recommend
reform of directors’ duties.

As we have seen, both recent inquiries into whether reforms to directors’ duties are
required decided in the negative. Both did so on the basis that current corporate law
is sufficiently permissive for directors to take into account non-shareholder
interests. However, we also saw that the two inquiries adopted different
interpretations of the scope of the duty to act in the best interests of the company.

Other than the submissions of various companies and interest groups, the two
Australian inquiries considered in the previous part of this paper lacked empirical
evidence regarding how directors understand their obligations. Their
determinations were based on whether the law reflected what directors ought to be
doing, or the scope of the discretion that directors ought to have to make business
decisions. They had no sense of whether the law was out of step with wider practice
or consistent with it. A survey of Australian directors conducted by the Corporate
Governance and Workplace Partnerships project144 sheds light on these questions.

The survey was undertaken using a self-completion, mail out survey form which
was sent to 4000 company directors. Our sample was drawn from the Dun and
Bradstreet ‘Business Who’s Who’.145 Company directors were selected based on the
following criteria:
• a roughly equal distribution of directors from companies in three sizes (by
employee numbers): 50-100 employees; 101-250 employees and 250+
employees;

142 Ibid at 52.
143 Ibid at 52.
144 The website of the project is: http://cclsr.law.unimelb.edu.au/go/centreactivities/
research/corporate-governance-and-workplace-partnerships-project/index.cfm.
145 This database can be accessed in book form as a yearly volume: The Business Who's Who
of Australia, Sydney : R.G. Riddell, or as a website
http://bww.dnb.com.au/advancedsearch.asp
• a random mix from all states; and
• a random mix of all industries.

We achieved a final sample of 375 usable completed surveys. This is a low
response rate but not uncharacteristically low for surveys of this kind, i.e. of ‘elite
personnel’.146 Around 200 surveys were returned due to incomplete or incorrect
mailing details. A further 50 responded with apologies based on lack of availability
of the directors or stated that company policy precluded the completion of surveys.
The responses were from a cross section of small and large companies based on
employee numbers and income, and a mix of listed and unlisted public companies
and proprietary limited companies: 75.5 per cent of respondents were from
proprietary limited companies rather than public companies, and only 16.5 per cent
of respondents were from listed companies. Twenty-eight per cent had earnings of
less than $20 million in the last financial year, 28.1 per cent had between $20 and
$50 million, 12.7 per cent earned between $50 and $100 million, and 30.8 per cent
had more than $100 million in earnings. Thirty two per cent of companies surveyed
had less than 100 employees, 40 per cent had between 101 and 1000, and 30 per
cent had more than 1000. Eighty three per cent of companies had no foreign
ownership and 95.3 per cent had their company headquarters in Australia.147

One of the central aims of the survey was to explore directors’ understandings of
their legal obligations and the way this might affect their approach to stakeholders.
We were particularly interested in the extent to which shareholders were perceived
to be the most important among several stakeholders. Do directors perceive that
their primary obligation is to shareholders, either in the short term or long term,
and, if so, is this partly a result of their understanding of the legal duties?

We asked directors to indicate which of four statements best represented their
understanding of their obligation to act in the best interests of the company. We
also asked them to indicate whether they believed the law required them to act only
in the interests of shareholders or whether it allowed them to consider a broader
range of stakeholders. Table 1 sets out the responses for these questions. A majority
of directors understood that their primary obligation to act in the best interests of
the company meant that they should balance the interests of all stakeholders (55 per
cent). A further 38.2 per cent believed that they must, by means of acting in the
interests of all stakeholders, ensure the long-term interests of shareholders. No
directors believed that they were required to act in the short term interests of
shareholders only and only a very small proportion (6.6 per cent) believed that they
were required to act in the long term interests of shareholders only.

146 See S. Jacoby, E. M. Nason and K. Saguchi, ‘The Role of the Senior HR Executive in
Japan and the United States: Employment Relations, Corporate Governance and Value’
(2005) 44 Industrial Relations 207 at 216, and B. Agle, R. K. Mitchell and J. Sonnenfeld,
‘Who Matters to CEOs? An Investigation of Stakeholder Attributes and Salience,
Corporate Performance and CEO Values’ (1999) 42 Academy of Management Journal 507
at 513.
147 All of the survey findings are available as a research report at:
http://cclsr.law.unimelb.edu.au/index.cfm?objectid=E3D38F25-B0D0-AB80-
E2F1BF648C87997F.
On directors’ understanding of the parameters of their obligation, it is very clear (as
shown in the bottom of Table 1) that most directors take a broad view. Nearly all
directors (94.3 per cent) believed that the law is broad enough to allow them to take
the interests of stakeholders other than shareholders into account.

Primary Obligation: I must act in the best interests of the company and this means acting in the....	Per cent Yes
Short term interests of shareholders only	0.0
Long term interests of shareholders only	6.6
Interests of all stakeholders to achieve short term interests of shareholders	0.3
Interests of all stakeholders to achieve long term interests of shareholders	38.2
Balancing the interests of all stakeholders	55
Parameters of Law on Directors’ Duties	Per cent Yes
I must only be concerned with shareholders’ interests	5.7
Allows me to take account of interests other than shareholders	94.3

These findings are in certain respects both consistent with and inconsistent with the
PJC and CAMAC determinations. On the one hand, they indicate that both
Committees were correct in stating that the current law is not inhibiting the pursuit
of stakeholder interests by directors. Almost all respondents thought the law
allowed them to take account of interests other than shareholders. Based on our
assessment (in Part 3 of this paper) and also in the view of both inquiries, the
respondents were justified in holding this opinion. On the other hand, it is the
second most popularly held conception of directors’ obligations that appears most
consistent with the ‘elaborated shareholder benefit’ approach or the ‘business’
approach preferred by CAMAC. The understanding of obligations held by the
majority of respondents to the survey (55 per cent) would seem to go beyond the
preferred approach of CAMAC and possibly align more with the ‘enlightened self
interest’ interpretation of directors’ duties preferred by the PJC.
The survey instrument did not allow for an ‘open ended’ inquiry into what exactly
respondents had in mind by identifying ‘balancing the interests of all stakeholders’
in relation to a concrete business practice. The results reported in the following
sections provide some insights, however.

An important question is whether directors acknowledge a primary obligation to the
interests of shareholders. We tested this assumption in a number of ways. First,
using a ranking exercise adapted from the Francis study148 we asked directors to
rank stakeholders in the order in which those stakeholders’ interests were
prioritised. Second, we utilised a scale to assess the relative influence of key
stakeholders over the decision making of directors. Third, we asked directors about
the priority they assigned to certain specific shareholder-oriented matters such as
dividend policy, share price and special dividends. These three tests enabled us to
form an assessment of the shareholder orientation of the surveyed group.
Table 2 sets out the average ranking given to each stakeholder group, the
percentage of directors who ranked that stakeholder group as their number one
priority and the percentage of directors who included that stakeholder group as one
of their top three priorities. It indicates that shareholders were most commonly
ranked number one, followed closely by ‘the company’ according to both the
average ranking and the percentage who ranked that group as their number one
priority. These results differ from earlier research conducted, from which this
ranking exercise was drawn. In 1997, Francis surveyed Australian and international
company directors and found that a large majority of Australian directors ranked
shareholders number one (74 per cent), regardless of the fact that their actual legal
obligation was to the company.149 We found that employees were highly ranked
based on the average ranking given (2.87).150 However, very few directors (6.7 per
cent) ranked employees as their number one priority.

Stakeholder	Average Ranking	Percentage Ranked 1	Percentage included in Top 3
1. Shareholders	2.23	44.0	78.2
2. The Company	2.25	40.4	71.1
3. Employees	2.87	6.7	72.8
4. Customers	3.53	8.2	44.8
5. Suppliers	5.99	1.2	3.9
6. Lenders/Creditors	5.83	0.6	10.6
7. The Community	6.43	0.3	3.4
8. The Environment	7.07	0.6	2.0
9. The Country	8.41	0.3	1.1

148 I. Francis, Future Direction: The Power of the Competitive Board, FT Pitman Publishing,
Melbourne 1997.
149 Ibid at 354.
150 Francis (ibid) also conducted the ranking exercise in the US and Japan. The rankings made
by respondents to our Australian survey sit somewhere between US and Japanese rankings.
According to Francis, eight out of ten US directors gave shareholders a number on ranking compared with one out of nine Japanese directors.
# Directors were asked to rank the list of stakeholders in order of priority between 1 and 9

with 1 being highest priority. The smaller the average rank, the higher the priority.
These findings indicate that although directors believe their obligation is to balance
the interests of all stakeholders, they nonetheless rank shareholders first amongst
those stakeholders.

In order to obtain further information about what it means that shareholders are the
highest ranking stakeholders we measured the influence of shareholders, employees
and creditors using a scale devised in research conducted in the US by Agle,
Mitchell and Sonnenfeld into which stakeholders matter most to CEOs.151 Agle et
al sought to move beyond the assumption that stakeholders have a fixed position of
influence in relation to the company and devised a model of salience (as they call
it) or influence which is based on the assumption that salience depends upon
managers’ perceptions of the power, urgency and legitimacy of stakeholders.
Modifying Agle et al’s test somewhat, a series of propositions was presented to the
surveyed group concerning the relative influence of shareholders, employees and
creditors. The scale was comprised of seven items: directors were asked to rate the
extent to which they agreed or disagreed with certain statements on a scale of 1
(strongly agree) to 5 (strongly disagree). Table 3 sets out both the proportion of
directors who agreed with each proposition (in relation to shareholders) and the
mean score for that proposition for shareholders, employees and creditors.

151 B. R. Agle, R.K. Mitchell and J.A. Sonnenfeld, ‘Who Matters to CEOs? An Investigation
of Stakeholder Attributes and Salience, Corporate Performance and CEO Values’ (1999)
42 Academy of Management Journal 507-525, Special Research Forum on Stakeholders,
Social Responsibility and Performance, Appendix, Table A (with minor modification –
some of the items were removed because of duplication).
Table 3: Comparison of Shareholders, Employees and Creditors Salience

Statement	S/H per cent of Directors Agree*	S/H Mean score#	Emp’ees per cent of Directors Agree*	Emp’ees Mean score#	Cred’s per cent of Directors Agree*	Cred’s Mean Score#
Had the power to influence management	81.2	4.03	78.0	3.74	23.6	2.44
Were active in pursuing demands or wishes which they felt were important	66.5	3.61	65.4	3.48	20.3	2.37
Actively sought the attention of our management team	64.6	3.54	70.5	3.60	21.6	2.39
Urgently communicated their demands or wishes to our company	48.8	3.20	47.0	3.14	19.6	2.35
Demands or wishes were viewed by our management team as legitimate	78.7	3.88	76.7	3.83	47.3	3.17
Received a high degree of time and attention from our management team	65.0	3.61	85.9	4.03	30.4	2.63
Satisfying the demands or wishes of this stakeholder group was important to our management team	83.3	4.02	87.9	4.04	54.7	3.22

* Includes responses ‘strongly agree’ and ‘agree’
# In this scale 5 is strongly agree and 1 is strongly disagree
The table demonstrates that both the power of shareholders and the legitimacy of
their interests remain a high priority in the perception of directors’ interests. The
items ‘shareholders had the power to influence management’ and ‘satisfying the
demands or wishes of shareholders was important to our management team’
achieved the highest scores and had the largest proportion of directors who agreed.

The item ‘shareholders demands or wishes were viewed by our management team
as legitimate’ also scored highly. On the other hand these high levels of legitimacy
and power do not seem to be associated with similarly high levels of activity on
behalf of shareholders as measured by the items ‘shareholders were active in
pursuing demands or wishes’, ‘shareholders actively sought the attention of our
management team’ and ‘shareholders urgently communicated their demands or
wishes to our company’. This suggests that shareholder power and the legitimacy of
shareholder interests for directors arise, at least in part, independently of any direct
pressure exercised by shareholders over directors in terms of governance strategy.
In other words, shareholders have a level of power that is partly independent of
their specific demand activity. Taken as a whole, though, these outcomes establish
that ‘shareholder primacy’ is prominent in the attitudes of our respondent company
directors.

When we further examine the break-downs for the items in the salience scale we
see that with the exception of one item, the proportions and the scores are similar
for both shareholders and employees. The exception to this is the item ‘received a
high degree of time and attention from our management team’ with which 65 per
cent of directors agreed in relation to shareholders compared with 85.9 per cent in
relation to employees. Creditors are the least influential of the three stakeholders
groups. Significantly smaller proportions of directors agreed with all of the items
that comprise the scale in relation to creditors. The items ‘creditors' demands or
wishes were viewed as legitimate’ and ‘satisfying the demands of creditors was
important to our management team’ had the largest proportion of directors agreeing
with them and yet this was only around half of the directors (47.3 per cent and 54.7
per cent respectively). These findings suggest that creditors have some degree of
legitimacy (although lower levels of legitimacy than shareholders and employees)
but low levels of power and urgency.

A key issue regarding the debate about the preferred formulation of directors’
duties is to what extent a particular formulation affects corporate behaviour. There
is very little detailed discussion on this point in policy debates and the literature
does not provide much insight into whether reforms to corporate law along the lines
of the US constituency statutes have resulted in changes in corporate practice.
Looking behind the assertions made in the submissions to the inquiries examined in
this paper, it might be said that advocates for a stakeholder conception of directors’
duties believe such reforms will impact positively on corporate behaviour. This is
particularly the case where directors are required to take account of nonshareholder
stakeholder interests. Some of those who prefer the status quo with
respect to directors’ duties argue that reforms to directors’ duties will not produce
the desired results and in fact will have negative consequences.
Data from our project provide further insights which may better inform this debate.
First, the data discussed thus far shows there is a certain amount of decoupling of
corporate practice and formal obligations. Second, it shows that, even within the
scope of formal directors’ duties, directors are always juggling and balancing
interests. This is at the heart of their job as the chief strategists or stewards
(depending on the conception of their role in the company) of the business. Third,
there is no reason to assume coherence within companies in relation to ranking
stakeholders. In the course of case studies associated with the research we repeated
the stakeholder ranking exercise with a range of management personnel.152 We
found no coherent approach to ranking stakeholders within any given company. For
instance, the person responsible for human resource management and for ensuring
that employment laws are complied with generally had a different view of
obligations than the company secretary.

The results reported in this section provide further understanding of the extent to
which shareholder salience (or influence) was consistent with particular business
practices or priorities on behalf of directors. This is important from a public policy
perspective because it is generally assumed that having a ‘shareholder primacy’
corporate governance strategy will result in the privileging of shareholder interests
to the detriment of other stakeholders. In particular, it is assumed that those
directors who prioritise shareholder interests will be less responsive to employees’
needs and implement policies which are detrimental to employee consultation, as
well as pay and conditions. This is one of the bases for arguing for a stakeholder
approach.

We asked directors to rate a series of items on a scale indicating the importance of
the items to the director.153 Table 4 shows the items that were important to
directors overall and the comparison between directors in the high range of the
shareholder salience scale and those in the low range. As can be seen, there are
very few differences across the groups. Ensuring that customers and clients were
satisfied was the most important item to directors (97.4 percent of whole sample).
Growing the business was also very important (95.4 percent of sample) as was
ensuring employees are fairly treated (94.2 percent of sample), with improving
productivity highly important as well (92.8 percent). Interestingly, and contrary to
the assumption that the shareholder primacy model of governance would lead to the
prioritisation of shareholders’ interests by directors, the results show that generally
the items that relate to employees’ interests (morale, fair treatment, safeguarding
jobs and creating more job opportunities) were rated as more important by more
directors than those relating to shareholders’ interests (dividend policy, share price
and special dividends).

It is also noteworthy that the only statistically significant difference between the

152 See Corporate Governance and Workplace Partnerships Case Studies which is available
at: http://cclsr.law.unimelb.edu.au/go/centre-activities/research/corporate-governance-andworkplace-
partnerships-project/index.cfm
153 This question was adapted from S. Jacoby, E. Nason and K. Saguchi, ‘The Role of the
Senior HR Executive in Japan and the United States: Employment Relations, Corporate
Governance and Values” (2005) 44 Industrial Relations 207. They present results for their
key executive values for Japanese directors and for Japanese human resource executives,
US human resource executives, and US chief financial officers.
responses of directors was that directors in the high range of the shareholder
salience scale rated ‘ensuring employees are fairly treated’ as significantly more
important than did directors who were in the low range of the scale. Directors who
rated shareholder salience highly were not, however, more likely to view the items
relating to shareholders as more important than directors who gave it a lower rating.

Item	percent of whole sample important#	percent of high shareholder salience important# (n=264)	percent of low shareholder salience important# (n=63)
Dividend Policy	41	43.7	33.3
Growing the Business	95.4	95.4	96.7
Improving Employee Morale	87.3	87.5	86.9
Creating Job Opportunities within the Company	46.3	46.7	43.3
Improving Productivity	92.8	93.8	91.8
Ensuring Customers/Clients are Satisfied	97.4	97.3	96.7
Making a Contribution to Society	32.1	31.6	26.7
Increasing Share Price	45.0	48.1	37.5
Diversifying and Expanding into New Markets	48.8	49.8	37.5
Safeguarding Existing Employee Jobs	66.2	63.8	70.0
Reducing Costs	80.1	81.1	76.7
Ensuring Employees are Fairly Treated	94.2	95.7	86.7**
Ensuring Other Stakeholders are Satisfied	67.2	68.5	60.0
Special Dividends	6.6	6.9	5.0

# Where rated either most or very important
** Significant at 1 percent level, significant difference is between high and low shareholder groups

We tested the extent to which the company’s relationship with shareholders may be
affected by the degree of salience and found some statistically significant
differences between the responses of directors in the high range and those in the
low range of the shareholder salience scale. As would be expected, in companies
where directors rated shareholder salience as high, the person who deals with
shareholders does so more frequently than those in the low range of the scale.
Additionally, shareholders raised particular issues more frequently in companies
where shareholder salience was in the high end of the scale. Table 5 sets out the
responses to this question.

Dealings with Shareholders	High shareholder salience per cent (n=264)	Low shareholder salience per cent (n=63)
Frequency of Dealing with Shareholders (per cent indicating daily or weekly contact)#	49.2	34.9*
How often issues discussed	Per cent sometimes or often	Per cent sometimes or often
Dividend Policy	51.4	47.5
Financial Performance of Company	96.2	88.3*
Social / Environmental Performance of Company	43.7	28.1*
Expenses	81.3	53.3**
Share Price	40.5	38.9
Expenditure/Investment	85.5	70.0**
New Business Strategy	83.7	78.3
Corporate Governance Concerns	52.3	42.1
Executive Remuneration	48.9	32.2*
Capital Management Strategy	68.1	50.0**
Human Resource Management Strategy	68.4	55.2

* significant at 5 per cent level, ** significant at 1 per cent level
# Frequency with which person who deals with shareholders does so (not necessarily
respondent director)

It can be seen that there were highly significant differences between the responses
of directors in the high range of the shareholder salience scale and those in the low
range regarding the frequency with which matters to do with expenses, expenditure
or investment, and capital management strategy were raised. There were significant
differences in the frequency with which financial performance of the company,
social or environmental concerns, and executive remuneration were raised – again,
being more frequently raised in companies where directors were in the high range
of the scale than in the low range.

It is interesting to note the relatively high proportion of each group that reported
that shareholders had discussed matters to do with the company’s human resources
strategy with management. For directors in the high range of the shareholder
salience scale, the percentage was 68.4 compared with 55.2 per cent of directors in
the low range.

Another highly significant difference (which is not shown in the tables) emerges in
response to the question about whether there had been areas of tension between
company direction and shareholder expectations in the past twelve months. In
companies where shareholder salience was rated as high, 30 per cent of directors
indicated that there had been areas of tension compared with only 12.7 per cent of
companies where directors were in the low range – a difference significant at the
one per cent level. This probably reflects higher levels of engagement between the
company and shareholders in these companies. However, there was only one
significant difference in the responses indicating what the area(s) of tension were
and this was that directors in the low range of the shareholder salience scale were
more likely to report tension over the dividend policy or payout ratio (62.5 per cent
of ‘low shareholder’ salience compared with 19.8 per cent of ‘high shareholder’
salience, significant at the one per cent level).

The three most common areas of tension indicated by directors in the high range of
the shareholder salience scale were financial performance of the company (64.2 per
cent of these directors indicated there had been areas of tension), new business
strategy (38.3 per cent) and expenditure / investment (32.1 per cent). For directors
in the low range of the shareholder salience scale, the three most common areas of
tension were dividend policy (62.5 per cent of these directors indicated there had
been tension), financial performance of the company (62.5 per cent) and
expenditure or investment policy (25 per cent). Only a small proportion of either
group reported tension over the human resources strategy, with 13.6 per cent of
‘high shareholder’ salience directors and 12.5 per cent of ‘low shareholder’ salience
directors.

Having examined the relationship between directors and shareholders to assess the
extent to which the respondent directors’ sense of shareholder salience appears to
make a difference to this relationship, we move to examine the situation in relation
to employees. Just as we asked directors about the company’s relationship with its
shareholders, we asked about the relationship with employees. If shareholders were
seen to be important and influential, then employees’ interests and demands might
receive a lower priority from directors. The results are presented now along with
comparisons of the responses of directors in the high range of the shareholder
salience scale and those in the low range.

We asked directors to indicate the issues concerning employees below executive
level which had been raised at board level over the past twelve months. Table 6
shows those results.
Table 6: Human Resources Issues Raised at the Board

HR issues raised at board	Per cent of whole sample raised 3 or more times	Per cent of high shareholder salience raised 3 or more times (n=264)	Per cent of low shareholder salience raised 3 or more times (n=63)
Remuneration	37.1	37.9	35.5
Productivity	66.3	65.4	68.3
Performance Management	64.2	63.0	71.4
Industrial Disputes	10	10.2	6.5
Enterprise Bargaining	15.4	15.9	14.5
Restructuring or Retrenchments	16.1	18.9	4.8**
Employee Share Schemes	15.8	17.2	14.5
Work Organisation	56.9	57.6	61.3
Training	65.0	65.0	63.9
Occupational Health and Safety	73.3	71.6	74.2

** significant at 1 per cent level, significant difference is between high and low shareholder
Groups

As can be seen, the most striking finding is that directors in the high range of the
shareholder salience scale were significantly more likely to report that restructuring
or retrenchments concerning employees below executive level had been considered
by the board during the previous twelve months (18.9 per cent) than directors in the
low range (4.8 per cent). A similarly significant and related finding (not shown in
the above table) is that directors in the high range of the shareholder salience scale
were more likely to report that staff numbers had decreased in the past year (20.4
per cent) than those in the low range (7.9 per cent). This finding seems to provide
some support for the view that a strong shareholder orientation in companies may
lead to an emphasis on costs and job reduction.
We also examined differences between stakeholder and shareholder oriented
directors in relation to their beliefs about the source of their obligation to
employees and the role that the law plays in relation to the human resources
strategy of the company.154 We asked directors to identify which of four possible
sources was the dominant source of their obligation to employees. Most directors
reported that they derive their sense of obligation toward employees from sources

154 For this analysis we created two groups of directors. The ‘stakeholder oriented directors’ are
those who responded that they are required to ‘balance the interests of all stakeholders’. The
‘shareholder oriented directors’ are those who equated the best interests of the company with
the long or short term interests of shareholders.
other than law. Forty-two per cent reported that it was business imperatives that
underpinned their obligation to employees. A further 24.8 per cent believed that
they had ethical or social responsibilities to ensure the well being of employees and
this was the dominant source of obligation. A slightly higher proportion of directors
(16.9 per cent) believed that their obligations stemmed primarily from corporate
law, than did so in relation to labour law (15.8 per cent). We cross-tabulated these
findings with data regarding directors’ understanding of their obligations. Table 7
shows the responses for both stakeholder and shareholder oriented directors.

Table 7: Dominant Source of Obligation to Employees by Director’s
Orientation

Dominant Source of Obligation to Employees	Stakeholder Oriented Group (n=195)	Shareholder Oriented Group (n=155)
Labour Laws	14.3	17.3
Corporate Law and Directors’ Duties	16.3	17.9
Business Imperatives	39.9	47.5
Ethical or Social Values	29.6	17.3**

As can be seen, the stakeholder oriented group was statistically more likely to
indicate that the dominant source of obligation to employees was ethical or social
values (29.6 per cent) than were shareholder oriented directors (17.3 per cent). The
dominant source of obligation for both groups was business imperatives (39.9 per
cent of stakeholder oriented directors and 47.5 per cent of shareholder oriented
directors).

Finally, regarding the relationship with employees we asked directors whether they
viewed this relationship as a partnership. Many authors suggest that groups with a
stake in the company should have some ability to influence decision making in the
company, not merely to have their interests taken into account by directors. Deakin
et al, for instance describe the importance of partnership for stakeholders as
follows:

. . . [T]o qualify as an ‘influential stakeholder group’ within an enterprise,

incurring costs if the enterprise fails or their relationship with it terminates;

In light of the importance of partnership to the concept of stakeholding, we asked
our survey respondents to indicate whether they conceived of the relationship
between their company and its employees as being one of partnership. We also
asked them to indicate whether, if they did conceive of a partnership, it was
founded on the alignment of interests between employees and the company or
whether it allowed for difference of interests. If they did not think that a partnership
style relationship was operating, we asked them to identify the reason for this. The
responses are shown in the following tables (Table 8 contains the ‘yes’ responses
and Table 9 contains the ‘no’ responses) cross-tabulated with shareholder salience
findings.

Partnership with Employees?	Per cent of Whole Sample - No	Per cent of High Shareholder Salience – No (n=264)	Per cent of Low Shareholder Salience – No (n=63)
Is the relationship between the company and its employees best described as one of partnership?	76.9	75.8	76.2
If yes, which of the following best describes your understanding of that partnership?
Company and employees are parties with separate interests working toward common goals	29.2	30.2	25.5
Company and employees are parties with same interests working toward common goals	70.8	69.8	74.5

155 S. Deakin, R. Hobbs, S. Konzelmann and F. Wilkinson, Partnership, Ownership and
Control: The Impact of Corporate Governance on Employment Relations, ESRC Centre

for Business Research, University of Cambridge, 2001.
Table 9: No Partnership between Company and Employees

Partnership with Employees?	Per cent of Whole Sample - No	Per cent of High Shareholder Salience – No (n=264)	Per cent of Low Shareholder Salience – No (n=63)
Is the relationship between the company and its employees best described as one of partnership?	23.1	24.2	23.8
If no, which of the following best describes your understanding of the relationship between the company and its employees?
Company and employees are parties with same interests, with employees working under direction to further company goals	38.3	41.3	26.7
Company and employees are parties with separate and sometimes conflicting interests	18.5	17.5	26.7
Company and employees cannot be conceived of separately – employees are part of the company	43.2	41.3	46.7

We can see that a large majority of directors conceived of the relationship between
the company and its employees as being one of partnership. This did not vary
between directors in the high range and those in the low range of the shareholder
salience scale. In terms of the type of partnership, a large majority of directors,
around 70 per cent, saw the company and its employees as parties with the same
interests working toward common goals. Again, the importance of shareholders
within the company did not have a significant effect on this response.
In the smaller proportion of directors who did not describe the relationship between
employees and the company as being one of partnership, the most common reason
identified was that employees are part of the company and so cannot be conceived
of separately. There were no significant differences in this respect between
directors in the high range and those in the low range of the shareholder salience
scale.

To summarise, then, one of the major purposes of the survey was to determine
whether directors adhere to a ‘shareholder primacy’ understanding of their
responsibilities, as is often believed to be the case with Australian directors. We

expected that this understanding would derive from a number of sources, including
understandings of legal obligations, institutional frameworks and business
imperatives. Our findings in this regard were mixed, and it cannot be said that the
data confirmed the ‘shareholder primacy’ view, regardless of how broadly
‘shareholder primacy’ is defined (ie, whether shareholder primacy is regarded as
involving the prioritisation of shareholder interests in the short term or the long
term, to the exclusion or detriment of other stakeholders’ interests). The first of our
findings in this regard was that the majority of directors surveyed had what might
be termed a ‘stakeholder’ understanding of their obligations. Just over half of the
respondents believed that acting in the best interests of the company meant they are
required to balance the interests of all stakeholders. Furthermore, whilst 44 per cent
of directors perceived shareholders as their number one priority, almost as many
(40 per cent) regarded the company as their number one priority. However,
questions which sought to test the shareholder primacy thesis in a more complex
way did provide support for the argument that shareholder interests are prioritised
over those of other stakeholders in relation to business practices. When shareholder
‘salience’ (influence and ability to make demands) was measured relative to the
salience of other stakeholders, shareholders had a higher level of salience than
employees and creditors.

One of the main concerns of advocates of a stakeholder approach to directors’
duties is that where directors perceive that their primary responsibility is to
shareholders, the interests of employees and other stakeholders receive a lower
priority. The evidence on this matter from our survey data was mixed. Questions
regarding directors’ understandings of their obligations under the law did not
suggest that prioritising shareholders’ interests resulted in a diminution or deprioritising of employees’ interests. However, when we tested this issue using the
‘salience’ scale as a measure of the orientation towards shareholders and crosstabulated it with other measures, we found some evidence that employees’ interests may receive a lower priority. For instance, those directors in the high range of the shareholder salience scale were more likely to indicate that matters relating to
restructuring and retrenchment had been discussed at the board level over the past
year than those directors in the low range of the scale. On the other hand, dividend
policy and increased share price ranked relatively poorly as against job security and
employee morale in the list of specific corporate agenda items put to directors.

The question in whose interests directors of Australian companies should act is one
which has not been settled satisfactorily in Australia. The CAMAC and PJC
inquiries decided that maintaining the status quo was appropriate as the current law
of directors’ duties provides sufficient flexibility for directors to determine what
they think is in the best commercial interests of the company. However, we also
saw that while the two inquiries reached the same conclusion regarding whether
any reform of directors’ duties is needed, the two inquiries adopted different
interpretations of the scope of the existing law of directors’ duties. We have also
seen that differences exist in the scope of directors’ duties in the corporate law
statutes of some other countries.
When we compare the findings of the two recent inquiries with the results of the
survey data reported in this paper, a number of observations can be made:
1. The survey data indicates that 94.3 per cent of directors believe that the existing
law of directors’ duties allows them to take account of the interests of
stakeholders other than shareholders. This is consistent with the interpretation of
directors’ duties adopted by both CAMAC and the PJC.
2. In relation to directors’ understanding of the scope of their duties, the survey data
indicated that 55 per cent believe that acting in the best interests of the company
means balancing the interests of all stakeholders and 38.2 per cent believe that it
means acting in the interests of all stakeholders to achieve the long terms
interests of shareholders. The larger group of the directors (the 55 per cent
group) adopts the interpretation of directors’ duties preferred by the PJC – what
the Committee referred to as the ‘enlightened self-interest interpretation’
whereby the interests of the company, arguably as an entity separate to the
company’s stakeholders, are paramount. The smaller group of directors (the 38.2
per cent group) adopts the interpretation of directors’ duties preferred by
CAMAC.
3. These different interpretations also appear in other data from the survey. We saw
that in terms of priority ranking of interests, shareholders and ‘the company’
were ranked almost equally by directors as the most important priority.
4. Other data from the survey indicated that shareholders and employees have
approximately equal influence with company management (and much more
influence than creditors) although a notable difference was that employees
receive significantly more time and attention from management than
shareholders.
5. There is also evidence that some matters relating to the interests of employees
(such as improving employee morale, ensuring employees are treated fairly, and
safeguarding existing employee jobs) are rated by directors as more important
than some matters relating to the interests of shareholders (such as dividend
policy and increasing the company’s share price).

Do these results indicate any need for reform of directors’ duties? As we have seen,
proposals for reform of directors’ duties have been widely debated. One possible
approach, considered by CAMAC, is an amendment to s 181 of the Corporations
Act that would expressly permit directors to take into account the interests of
specific classes of stakeholders, extending beyond shareholders. This approach is
reflected in s 172 of the UK Companies Act. Critics of this approach who prefer the
status quo argue such reform will only confuse directors as they try to work out
how to balance various interests. Our survey results demonstrate, however, that
directors are already doing exactly this and they are not looking to formal rules to
guide them in this process. They are guided by business imperatives and other
considerations. On the other hand, reform of this minimal variety will not ‘compel
directors who may not always follow prudent practices, to adhere to appropriate
standards of corporate social responsibility’, as is the wish of advocates of change
such as the NSW Attorney General.156 This type of reform only permits directors to
take into account the interests of non-shareholder stakeholders – something they
can already do under the existing law.

156 See n 127 above and the accompanying text.
An extended approach which compels directors to take into account the interests of
non-shareholder stakeholders would require much more. Our study of the law and
international developments suggest that this legal guidance would need to address a
number of issues. The first amongst these is whether the statute is to create
enforceable rights for certain stakeholders, and if so, which ones and how they are
to be enforced (ie, as derivative rights on behalf of the company or personal rights).
The literature indicates that without enforceable rights constituency statutes
elsewhere in the common law world are making very little difference to
stakeholders. Further, there is a risk that they simply entrench managerial power. A
further challenge therefore is how to ensure that shareholder rights are not rendered
less enforceable by directors being able to argue that, in making a certain decision,
they were exercising their option to prefer other interests.
The main problems with expanding directors’ duties were succinctly identified in
1989 by the Senate Standing Committee on Legal and Constitutional Affairs:157

The fact that similar arguments were made almost 20 years later in submissions to
the CAMAC and the PJC inquiries demonstrates the persistence and force of this
debate.

The results of the survey indicate that directors do not typically look to the law of
directors’ duties for specific guidance concerning the interests they should pursue

157 Senate Standing Committee on Legal and Constitutional Affairs, Company Directors’
Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors
(Australian Government Publishing Service, November 1989, see
http://www.takeovers.gov.au/display.asp?ContentID=542), at 12.
as directors. Rather, that specific guidance is found in a raft of statutes other than
the Corporations Act if they look to the law at all. In any case, they are more likely
to be guided by business imperatives and ethics.

In their interpretations of directors’ duties, the courts have offered flexibility to
directors to consider a wide range of interests provided that the interests of
shareholders are thereby served. The courts have also indicated how the interests of
the company shift so that the interests of creditors can assume greater importance
than the interests of shareholders when a company is insolvent or nearly insolvent.
An important finding of the study is that ambiguity exists among the directors
surveyed concerning the permissible scope of their duties. We have also seen that
the CAMAC and PJC inquiries adopted different interpretations of the scope of
directors’ duties. This may be an argument for some clarification of the law - not
necessarily to have a non exhaustive list of the interests directors may consider
such as the list in s 172 of the UK Companies Act but at least to clarify for directors
which of the interpretations is to be preferred.

At the same time, we should be cognisant of what appear to be significant
limitations on the influence of the duty to act in the best interests of the company
on the actual decision making of directors. The fact that large proportions of
directors surveyed can adopt different interpretations regarding the scope of the
duty to act in the best interests of the company and yet this has not apparently lead
to significant litigation or other challenges to the decisions of these directors may
tell us something about the limited role of this duty compared to other obligations
and duties that influence decision making by directors. The function of this duty
may be to set very broad parameters within which directors operate and it will
usually only be egregious cases where directors’ decisions are successfully
challenged under this duty. The duty therefore permits extensive balancing of
stakeholders’ interests by directors within the broad parameters set by the duty.

This does not mean the duty is unimportant. There are of course some notable cases
concerning the duty to act in the best interests of the company. The often cited
Kinsela v Russell Kinsela Pty Ltd (in liq)158 is important for the significance it
places on the interests of creditors when a company is insolvent or nearing
insolvency.159 There is also an important series of cases on the meaning of the
interests of the company when the company in question forms part of a corporate
group.160 A notable feature of recent Australian cases in which the actions of
directors have been held to breach the duty to act in the best interests of the
company is that they often involve the director pursuing a personal interest at the
expense of the interests of the company.161 However, where such a personal interest

158 (1986) 4 NSWLR 722; 10 ACLR 395; 4 ACLC 215.
159 See A. Keay, ‘The Director’s Duty to Take Into Account the Interests of Company
Creditors: When is it Triggered?’ [2001] MelbULawRw 11; (2001) 25 Melbourne University Law Review 315.
160 See, for example, Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) BSWLR
50; 11 ACSR 642; 11 ACLC 952; Maronis Holdings Ltd v Nippon Credit Australia Pty Ltd
[2001] NSWSC 448; (2001) 38 ACSR 404 and Lewis (as liq of Doran Constructions Pty Ltd (in liq) v Melwren
Pty Ltd (in liq) [2005] NSWCA 243; (2005) 54 ACSR 410.
161 Cases in this category include Lawfund Australia Pty Ltd v Lawfund Leasing Pty Ltd (2008)
66 ACSR 1; [2008] NSWSC 144; Australian Securities and Investments Commission v
is not present, courts will typically not interfere with a good faith decision of
directors that balances stakeholders’ interests provided the decision is within the
broad parameters established by the courts. When directors privilege investor
interests at critical times in the life of the company, to the detriment of other
stakeholder interests, this is likely to have more to do with competitive business
pressures than corporate law.

University of Melbourne Law School Research Series

Marshall, S; Ramsay, I --- "Stakeholders and Directors' Duties: Law, Theory and Evidence" [2009] UMelbLRS 2