As the Australian economy moves away from the resources boom, it is important for directors of fuel industry corporations to have a full understanding of the scope and nature of their duties. This ensures that directors are both fully operating within Australian law, and do not expose themselves, and their corporation to unnecessary legal risks. One area of increasing confusion for Australian directors is finding the ‘balance’ between maximising long term profit for shareholders and creating benefits for stakeholders such as employees, customers and the wider community.
The conflict between maximising shareholder value verses stakeholder goals is one that goes to the very heart of the role of directors within the modern marketplace. On the one hand, since shareholders ‘own’ the corporation, it seems natural that their interests should be at the forefront of directors’ minds. Alternatively, since corporations have an impact on people other than shareholders (such as employees, customers, suppliers and the broader community), there is a view that directors should also consider these interests whenever deciding on a course of action. For instance, even though the Australian fuel industry has moved away from a vertically integrated model, it is arguable that the close relationship between fuel distribution and fuel retailing prompts directors of each sub-industry to consider the wider impacts of decisions. This is to ensure that the industry as a whole remains strong, even if long-term shareholder profits are reduced early on.
Unfortunately, Australian corporations law does not offer concrete guidance on the level of balance that directors should take. Broadly, section 181(1) of the Corporations Act requires directors to exercise their powers and discharge their duties ‘in good faith in the best interests of the corporation’. There is no express acknowledgement of the interests of non-shareholder stakeholders. Given this vagueness of ‘best interests of the corporation’ it has been argued by some that the law already contemplates directors considering stakeholders when making decisions. One area where this arises is in insolvency cases. Courts have recognised that where a corporation is insolvent or close to insolvency or where some contemplated transaction threatens the solvency of the corporation, directors can consider the interests of creditors. This is the only time where the interests of stakeholders can be given high priority than shareholders. While this example provides some sense of ‘balance’ between shareholder and stakeholder priorities, insolvency does not provide a useful guide for the ordinary exercise of directors’ duties.
The uncertainty in the law is matched by directors’ own perceptions of their role and duties. In 2012, academics from Monash University and the University of Melbourne conducted a broad survey of directors. The results demonstrated that directors themselves believe they must be concerned with the interests of all stakeholders, rather than just shareholders. In particular, 55% of those surveyed considered that acting in the best interests of the corporation meant ‘balancing the interests of all shareholders’ compared to 7% for ‘long-term interests of shareholders only’. Moreover, 95% considered that Australian corporations law allowed directors to take account of interests other than shareholders. This shows that Australian directors are focused on the interest of stakeholders, even when the law is unsettled as to whether they have to, or even have the right to.
An area where the balance between shareholders and stakeholders is currently impacting directors’ duties is corporate social responsibility (CSR). For the fuel industry, demands by stakeholders for appropriate CSR initiatives will rise in line with any push towards the reduction of fossil fuels. While oil currently has no effective replacement as a transport fuel, part of the CSR demanded by stakeholders may be to increase investment in researching oil alternatives. Clearly, this has the potential to cause conflict between shareholder and stakeholder goals.
Overall, Australia’s current system of directors duties is at a cross roads. While a strict reading of the law appears to focus directors’ minds on maximising shareholder profits, both societies’ and crucially, directors’ own beliefs are increasingly causing them to balance stakeholder benefits against pure profit. As these tensions rise, it is likely Australia’s directors duties will need to be reviewed to ensure that the law reflects commercial reality.
[This article was written by Michael Joyce, Partner at Norton Rose Fulbright. michael.joyce@nortonrosefulbright.com.]
