Directors and Shareholders

There is a general duty imposed on Directors to put the interests of their shareholders above all others. This is commonly referred to as ‘shareholder primacy’. However, the focus of corporations has shifted, there is now a need to consider external factors such as social impact, environmental footprint, and stakeholder engagement. How do Directors manage balancing director duties between the corporation and its shareholders?

From a legal perspective, Directors must first and foremost act in the best interests of the company and not the shorter-term interests of its shareholders. In doing so, conflicts can arise between what actions Directors take to benefit the corporation in the long term and what actions shareholders wish the Directors to take.

Due to the limited powers shareholders possess to directly influence the decisions of Directors, relationships between Directors and shareholders can become tense. Whilst Directors primarily serve the company, if the shareholders are not pleased with the decisions made by the corporation’s board, they can exercise their power to vote to remove or replace one or more Directors. For this reason, Directors are indirectly accountable to shareholders.

There is no parallel duty for a director to act in the best interests of a corporation’s shareholders. Decisions regarding a corporation’s capital, including financial decisions including dividend policy are decisions for company management and ultimately, the board of directors. limited to individual shareholders. Even where the shareholder of a corporation may be a single entity that has appointed the entire board – such as the government – the board of directors still has the legal capacity to refuse requests from the shareholder so long as it acts in the best interests of the company.

An interesting event concerning the balance of the interests of the company and its shareholders is the 2022 Australia Post scandal surrounding former CEO Christine Holgate, who was allegedly ‘unlawfully’ stood down due to her actions in awarding company bonuses in the form of watches. Despite generating a wealth of revenue and profits for the company and its shareholders from her management decisions within Australia Post, the decision to issue yearly bonuses via watches to employees who had brought hundreds of millions of dollars worth of company contracts was deemed ‘unreasonable’ and ‘disgraceful’ conduct by the corporation’s sole shareholder worthy of her removal as the board’s chief executive. When questioned on her conduct, Ms Holgate believed the conduct was in line with the company’s policy of rewarding employees. Despite this, Australia Post’s sole shareholder – the Australian Government led by former Prime Minister Scott Morrison, made a complaint that the decision was not in line with the interests of the company which ultimately led to Ms Holgate’s removal as chief executive, showing the considerable influence shareholders hold over company directors.

Ultimately, conflicts such as the one stated above are due to a lack of clear corporate governance. To ensure Director’s decisions are in line with a company’s best interests, companies and shareholders should have clear rules and policies within their corporate governance documents such as company constitutions and shareholders agreements.