UNIVERSITY OF BALLARAT

Master of Business Administration

ISSUES IN CORPORATE
GOVERNANCE

Company Directors
Their Duties According to the
Company Law & Corporate
Governance
 Company Directors
Their Duties According to the Company Law &
Corporate Governance

prepared by:
Ismail Ahmed
Managing Director
Language Explore
April 2007
 Directors:
Persons constituting the board of directors who
supervise the policy and management of the company.
Agents for the company - have the powers and duties of
carrying on the whole of its business, subject to the
restrictions imposed by the memorandum or articles and
any statutory provisions contained in the Corporations Law.
Are under a fiduciary duty towards the company and
improper actions may entail liability either through a breach
of
- Corporations Law
- the company's memorandum (charter)
- the general law.
 Responsibilities. . .

Must act bona fide in the interests of the

company; exercise their powers for the
purposes for which they have been conferred;
not place themselves in a position in which
there is a conflict between their duties to the
company and their personal interests; and
must not make a secret profit.
 Responsibilities. . .

Must at all times act honestly in the exercise

of powers and the discharge of the duties of her
or his office
In the exercise powers and the discharge of
duties, must exercise the degree of care and
diligence that a reasonable person in a like
position in a corporation would exercise in the
corporation's circumstances.
 Legally.

The rules are largely common law and equitable

rather than statutory
Articles/Charter fully state the powers and duties
of the director
In law directors are neither agents nor trustees
for the individual shareholders but - are their
appointees - it is the individual members who will
benefit or suffer from the fortunes or misfortunes
of the company
Overall Legal Obligations of Directors:

Legally, in Conclusion:
The fiduciary duty
The duty of loyalty and the duty of fair
dealing
The duty of care
The duty not to entrench
The duty of supervision
 Percival v Wright (1902)
Directors owe their duties to the company - interpreted as
meaning the providers of capital, i.e., the company's
shareholders. This means the shareholders as a body rather
than individual shareholders.
Thus, in Percival v Wright (1902), certain shareholders
approached directors and asked if the directors would
purchase their shares. Negotiations took place but the
directors failed to mention that a takeover bid had been
made for the company. This materially affected the value of
the shares. Held - there had been no breach of duty by the
directors.
The directors owed their duties to the body of shareholders
rather than individual shareholders and premature disclosure
of the takeover negotiations could well have amounted to a
breach of duty.
 Accountability
Directors act on behalf of the company's owners:
- first level of accountability for the company's
performance and results is to the shareholders
- second and third level accountabilities - the
wider stakeholder community & to the
environment at large.
Prime responsibility - maximising returns - but -
in doing so, must ensure that all kinds of other
interests have to be taken into account
 Corporate Governance Principles
1. Lay solid foundations for management and oversight this
requires companies to recognise and publish the respective roles
and responsibilities of the board and management.
2. Structure the board to add value - to ensure the board has an
effective composition, size and commitment to adequately
discharge its responsibilities and duties. Eg: that the chairperson
should be an independent director, the role of the chairperson and
CEO should be performed by separate individuals, a majority of
the board should be independent and the board should establish a
nominations committee.
3. Promote ethical and responsible decision-making through
formal and transparent codes of conduct
 Corporate Governance Principles
4. Safeguard integrity in financial reporting - this requires
the company to have a structure to independently verify and
safeguard the integrity of the companys financial reporting.
5. Make timely and balanced disclosure - this requires the
company to make timely and balanced disclosure of all
material matters regarding the company.
6. Respect the rights of shareholders - this seeks to
ensure that the company respects the rights of shareholders
and facilitates the effective exercise of those rights. The
recommendations outline requirements for the companys
communication strategy.
 Corporate Governance Principles
7. Recognise and manage risk - this requires the company to
establish a sound system of risk oversight and management of
internal control.
8. Encourage enhanced performance - this requires the
company to fairly review and actively encourage enhanced
board and management effectiveness, the recommendations
outline requirements for directors induction, education and
performance evaluation.
9. Remunerate fairly and responsibly
10. Recognise the legitimate interests of stakeholders - this
requires the company to recognise legal and other obligations
to all legitimate stakeholders.
 Governance & Management Distinguished

responsibility of the board is to govern the company,

while the managers' task is to run its business.
managers operate within the hierarchy of delegated
responsibility and authority.
all board members are jointly and individually
responsible. all members have equal rights and duties.
decisions must be reached by consensus
in practice some members may have charismatic power
to influence their fellow directors
others may be allowed to dominate, but there is no
official hierarchy.
 the board and management
differentiated
Figure 1: The Board and Management Differentiated (Adapted
from Tricker, Robert. I. International Corporate Governance: Text,
Readings and Cases, Singapore: Prentice Hall, 1994. pg. 44)

BOARD
GOVERNANCE

MANAGEMENT
MANAGEMENT
ORGANISATION
 CGP 2: Director Independence

2. Structure the board to add value

Eg: that the chairperson should be an
independent director, the role of the
chairperson and CEO should be performed by
separate individuals, a majority of the board
should be independent and the board should
establish a nominations committee.
 Examples
Singapore Code, in calling for a strong and
independent element of the Board, defines
an independent director as "... one who has
no relationship with the company, its
related companies or its officers that
could interfere, or be reasonably
perceived to interfere, with the exercise
of the directors independent business
judgement with a view to the best
interests of the company".
 Examples

The Malaysian Code clarifies independence

as meaning: "...independence from any
controlling shareholders and
independence from management... ".
 (Brountas, 2004)
Directors must be aware of the CEO's need for attentive
and committed directors who are willing to devote the time
necessary to acquire and maintain solid knowledge about the
company's business, finances, competitors, and risks.
Directors need to concentrate during board meetings and
remember what the CEO and management tells them about
achievements, problems, plans, and future strategies.
There is nothing more frustrating to a CEO than a director who
asks for a discussion or explanation of a matter, a future
strategy, or a compensation program that was exhaustively
presented and discussed at a recent prior meeting.
 (Brountas, 2004)
Directors need to assist the CEO in planning the
agendas for the board meetings, thereby allowing the
CEO to conduct meetings that are relevant,
informative, productive, and beneficial to both
management and the directors.
The CEO wants and needs honest feedback from the
directors, including advice designed to improve
board meetings and enhance director knowledge,
as well as frank and helpful criticism when required and
encouragement and praise when earned.
 Values & Qualities Directors
Should Possess
Integrity
Independence
Informed
Involved
Initiative
 CONCLUSION
Directors are fiduciaries, i.e. empowered to
oversee the management - to ensure that it is
effective, honest, and dedicated to managing the
company for the benefit of its shareholders and
to enhance shareholder value.
Rules are largely common law and equitable
rather than statutory
As overseers, directors should serve as
advisers, monitors, counselors, protagonists,
and critics but not as bulldogs.
 Acknowledgement of Sources:
Brountas P.P. Boardroom Excellence: A Commonsense Perspective
on Corporate Governanace. San Fransisco: Jossey Bass, 2004.
Colley J.L.Jr, Doyle J.L, Logan G.L, Stettinius W. What Is Corporate
Governanace?. New York: McGraw Hill, 2005.
Cowan, Neil. Corporate Governance that Works. Singapore: Pearson
Prentice Hall, 2004.
Garrat B. Thin on Top: Why Corporate Governance Matters and How
to Measure and Improve Board Performance. London: Nicholas Brealey
Publishing, 2003.
Routledge-Cavendish Lawcards. Company Law, 5th Edition, 2006.
Tricker, Robert. I. International Corporate Governance: Text, Readings
and Cases, Singapore: Prentice Hall, 1994.
Yorston, Fortescue and Turner. Australian Commercial Law. The Law
Book Company Limited, 1994.