Directors Duty in a Company

Directors Duty in a Company Free Essay

 In the current business world, the culture of neoliberalism is controlling the actions and decision-making process where profit earning is the order of the day. People who are profoundly affected by this culture belong to the management team who now have to face the fact that every decision and action they take have to be critically scrutinized by the shareholders in the line of weighing whether they correspond with the intention to make a fortune out of their investment. Those involved in the management of an organization are the directors who are bestowed with the responsibility of safeguarding the interest of their corporation. Thus, these individuals are expected to understand the underlying demands of a company and introduce the appropriate measures (Keay, 2014). It is, therefore, of great significance to ensure that a chairperson is faithful to his or her establishment contrary to which the CEO might influence a firm to reach decisions or perform actions that meet the leader’s interest and not the corporate welfare (Keay, 2014). Another element of importance is the fact that chiefs are appointed by the shareholders (Cox & Hazen, 2012), a phenomenon that has left them vulnerable to the coercions regarding meeting their demands. Besides, the topic has slowly become remarkable with the discussion revolving around whether directors owe their duties only to shareholders or whether they also have to safeguard other interests within a company. However, under neoliberalism, when the shareholders demand exclusive loyalty from the CEOs and want them to be the appointing arm, the latter find themselves in a tricky situation (Schram, 2015). Similarly, the interest at hand is to analyze the requirements that managers have to meet according to the ideology of neoliberalism, a highly competitive market and the need to secure that corporate laws are followed to the letter in line with identifying whether directors own their duties to their establishment only (shareholders) or should also be sensitive to other interests.

Obligations of a Director under the Corporate Law

            The USA does not have an umbrella corporate law that is applied across the country. Companies are therefore incorporated under the Delaware law, Model Business Corporations Act or the federal securities laws that include ‘Securities Act of 1933’ and the ‘Securities Exchange Act of 1934’ where most of the States base their corporate laws on the Delaware law (Giove & Treuhold, 2013). However, under both the Federal Security Laws and the Delaware Law, directors have two primary duties.

Duty of Loyalty

            The demand for duty of loyalty expected the CEOs to ensure that they act in good faith in order to uphold the interest of the company. Moreover, directors are expected to avoid actions or decisions that lead to the corporation suffering injuries (Hodges, 2015). The first line of duty of loyalty demands that a leader secures that the establishment is run in agreement with its corporation law. According to Cox and Hazen (2012), this is the law that outlines the engagements that a firm can be involved in together with sustaining its interest. In other words, under the duty of loyalty, it is presumed that the chief should at no time advice, lure or mislead the organization to undertake unlawful actions as an excuse for making the profit (Giove & Treuhold, 2013). Hence, the demand here is for directors to be at the forefront of ensuring that a company has policies that help it to be in line with all regulations that are relevant to its different operations. The aim is to make certain that the institution works in the expected manner in the context of its obligations to the environment, employees and labor laws.

            Another expectation of the chairperson under the duty of loyalty is the need to guarantee they do not use their position to pursue their personal interests. The call is for the leaders to remain loyal to stakeholders and the corporation at large without any element of influence that is self-centered (Cox & Hazen, 2012). The aim of this requirement is to ascertain that at no point in time can the head subordinate the concern of the establishment or the shareholders as a way of protecting his position within the company or to make a fortune out of the misdoing of the corporation. For example, it prohibits a director to influence the organization to arrive at a decision such as giving out a contract to the third party where he or she expects a kickback even if the agreement is of importance to the company. The duty of loyalty thus demands separation of the personal interest by chiefs when they are involved in matters of their institutions. Consequently, this is a necessary requirement that safeguards corporate priorities.

Duty of Care

            It is expected of the directors under the duty of care to ensure that they appreciate the role of the team in decision-making process. The call is for the CEO to secure that they utilize the information availed by the juniors in reaching corporate decisions but at the same time familiarize themselves with the content. It is the claim to make certain that at no time will the leader receive any data from other chiefs, their subordinates and adopt it as the truth without preliminary digging in the content (Cox & Hazen, 2012). The demand is aimed at guaranteeing that directors safeguard the interest of a company through the informed decision-making process. Going through the data brought to the CEO’s attention is crucial as well as evaluating its relevance to the requirements at hand and at the same time ensuring that they are realigning it to fit best to the corporate interests. It is on this basis of this claim that chairpersons are said to have a fiduciary duty to the shareholders.

Do Directors Owe Their Duties only to the Company (the Shareholders) or Should They Take Into Account Other Interests?

            A big ‘no’ is the most appropriate answer to this question. It is true that directors owe duties to the firm and shareholders, but this is not the exclusive entity that leaders have the responsibility with regard to governing the organization. From two basic duties of chiefs, it is clear that chairpersons need to be loyal to the corporation/shareholders and show the element of care. Deeper understanding of these two basic commitments that evidently indicate that directors do not owe their obligations only to stakeholders. In the context of faithfulness, corporate law on the duty for loyalty demand that the CEO should act with due diligence in safeguarding the interest of the company (Ennals, 2014). Similarly, leaders need to undoubtedly provide the shareholders with the right information as well as empower them in order to reach the right decision. However, presiding over the company does not necessarily mean only upholding the capital gains of shareholders (Godfrey, 2016). For example, it is under the duty of loyalty that the director is demanded to ensure that his or her establishment does not engage in illegal practices as the means towards earning profit.

            Therefore, to make certain that the firm stays aligned to the regulations, the chairperson might have to abandon demands of shareholders to seek for revenues if the requirements may lead to the trouble within the law. Moreover, in regards of securing that actions of leaders do not result in the company suffering any injury, adherence to the governing laws in all its operation is non-negotiable. Besides, under the loyalty duty, directors are expected to ensure that their establishment upholds its responsibility to the employees. Even under the current norm of neoliberalism of profit making at all cost, the staff provide the necessary support system that helps the institution to raise any revenue (Schram, 2015). Therefore, in line with safeguarding the interest of shareholders, the CEOs must balance this intention with that of protecting the interest of the personnel. Sometimes satisfying the needs of the workers such as promotion might not correspond with the shareholders' concerns. However, it is an essential action for the directors to perform conscientiously according to the demands of a company.

            With regard to caring, the law on fiduciary’s demand presupposes the leaders to utilize all the information available from different avenues as a means of making an informed decision. In this context, for the other parties to avail the crucial data, the CEO needs to provide the favorable environment. Additionally, this demand requires ensuring that they have the necessary support from the corporation; some might make the company spend extra money on the relevant compensation system. However, whenever the expenditure rises, welfare of shareholders that is estimated by improved capital gains is undermined (Hodges, 2015). Hence, this is the eventuality that many shareholders would command to be evaded; however, it is an obligatory undertaking for the company in general.

            In any management engagement, safeguarding the corporate interest requires more than making decisions satisfying the shareholders. The rule of thumb of the latter is to make the profit whenever possible (Godfrey, 2016). Nevertheless, they fail to appreciate that getting revenue is a product of the cohesive establishment that is operated by efficient, team-based actions and centered upon the rule of law. Therefore, under the contest of two primary duties of directors, they owe commitments not only to shareholders, but also to different parties and regulations necessary for smooth running of the organization.

The Need to Strike a Balance

            It is clear that presiding over of a company demands that the CEO acts or makes a decision based on the approach of exclusive duties towards the shareholders. Directors need to introduce policies that help the corporation to accommodate all the relevant parties involved (Dhir, 2015). No establishment operates in the vacuum; there are always external and internal factors that affect performance of the company one way or another (Godfrey, 2016). Moreover, shareholders must appreciate and accept the fact that the balanced manner of managing the firm presents the best option of saving their investments. In respect of the aforementioned, shareholders should not expect that leaders would only be loyal to their concerns. Thus, there is always the need to strike a balance between the shareholders’ demands and other crucial requirements that ultimately lead to safeguarding of the corporate interest.

            Another determining element that demands the call to achieve balance is the matter that shareholders’ interests are best upheld if perpetuity of the organization is primarily secured. According to Dhir (2015), continuity of a firm does not exclusively depend on defending personal issues of shareholders. Therefore, this is one of the critical factors that clearly demonstrates that directors do not owe their duties only to shareholders. Furthermore, the CEOs cannot protect the interest of the establishment and its shareholders if they is jeopardize continuity of the corporation. Hence, even if the chairperson at hand avails the necessary information to shareholders for them to reach a decision that will yield good profits but at the same time affect other factors, he or she is failing in safeguarding the company (Ennals, 2014). Additionally, such an approach might ultimately lead to the closure of the organization making the chairperson not to fulfil the duties of care and loyalty.

            The best way that the directors can serve at that position is appreciating that their responsibility is not limited to shareholders. As a means of securing company’s existence interests of employees and those of external forces are to be protected. Moreover, by finding the right balance when it comes to serving all the relevant parties, it is possible for a leader to ensure that he or she will provide healthy environment. Hence, this phenomenon is of paramount importance to success of any establishment (Dhir, 2015). Furthermore, the value of shareholders is highly safeguarded when all parties within a company are working together in pursuit of the same goals. On the contrary, if the directors are to be concerned only about protecting the requirements of stakeholders and at the same time alienating those of other parts such as employees, then it will be impossible for the firm to make any gains that may add value to the capital of shareholders (Dhir, 2015). Therefore, CEOs are expected to create the proper balance between competing demands of a company since it is the best way to serve all parties including shareholders.

Conclusion

            It is evident that despite the continued requirement by the shareholders for directors to be driven exclusively by their demands, there is the need for the CEOs to appreciate that this is not the right approach to the corporate management. Leaders have to ensure that they uphold the claim of loyalty duty that demands that any decision and action is taken to for the best interest of the company even if sometimes this means going against the appointing arm namely the shareholders. Besides, it is the demand under the duty of care for the administration to use and appreciate the importance of incorporating more information from all relevant parties while familiarizing with it as a means of proving that the right decision is the only one that will guide corporate performance. Moreover, despite the fact that leaders are appointed by shareholders, there is the need to guarantee that the appropriate approach to managing a firm that is not wholly directed by the demands of the shareholders is utilized. Therefore, this strategy provides the means of safeguarding interests of all stakeholders within the organization but above all, it secures perpetuity of the establishment. Hence, it is evident that CEOs do not owe their duties to shareholders only but need to make certain that they find the optimum balance of meeting the demands of all relevant parties within a company.


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