Duties of directors Essay Example

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Duties of directors 8

Duties of directors

Introduction

Over the last few years, many of the Australian firms have experienced many challenges and some of them have to collapsing of some corporations. Examples of corporations which failed include the Quintex, Pyramid and Bond Corporation. This failure is associated with poor corporate governance and especially the incompetency of the directors. Although there were some competent directors, they did not manage to help the corporations achieve their goals. In this regard therefore, the government of Australia came up with laws that govern corporations and the body that regulates the corporations is called Australian Securities and Investment Commission. This body differentiated the different roles played by different stakeholders of the corporations starting with the directors in order everyone will be held responsible for the doings that will lead to failing of the corporations (Australian Securities and Investment Commission 2001). A debacle is the description associated with the failures of the corporations. In this effect, in this paper I will discuss the various duties of directors through corporate debacles and some of the challenges they face. I will finally give a conclusion based on the findings of this paper.

Duties of directors through debacles

The first duty of the directors is to ensure that they are honest and competent in conducting their obligations. This means that the directors should be trusted in whatever they do and they should act in the best interest of the organization (Michae 2005). For instance, the financial records should be put clear and open to all stakeholders to know the progress of the corporation. In this effect, there will be transparency and will promote good management of the corporation and the activities and competency of the directors is being monitored by all stakeholders. If the director does not do this, the Australian Securities and Investment Commission will take action on that particular director or directors.

Another duty of the directors according to ASIC is to ensure that they know what the company is doing. This is the day to day running of the company and monitoring the operations of the organization in order to make sure there are no deviations from the core objectives of the organization (Cai et al 2009). For instance, the director should check the weekly or monthly records of how the organization performed and design better strategies if it did not succeed well in that reporting period. Through this monitoring of what the company is doing, there are high chances of performing better in the market thus there will be no cases of corporations collapsing. If the director fails to take up this responsibility, ASIC will take action against the director.

It is also the responsibility of the director to know how various strategies will impact on the organization whether it will help the organization to improve its performance and add value to the organization. It is the duty of the director to know different courses of actions and how they will influence the organization (Cai et al 2009). For instance, the director can decide to implement capital intensive strategy instead of applying human capital. In any of these actions, the manager should be able to focus on the possibility of each course of action and if not, the ASIC is entitled to take action on the director.

The director also has the duty of seeking the professional advice for example from the lawyer or a business consultant. Some aspects of the organization require special skills from a professional like the lawyer (Apgar 2006). A good example is when the corporation wants to take up another small organization. In this deal there has to be a legal advisor and therefore it is the duty of the director to hire a lawyer to take part in legal negotiations on behalf of the company. The director has to find a legal expert to advice the company on legal matters so that incase there is misunderstanding if the director failed to hire legal expert, ASIC will take action on the director because he or she had the right to hire a professional expert of which he or she did not do.

In addition, the director has the duty of questioning the staff members on the progress of the business regularly to establish if the organization is performing well or not (Beinhocker 2006). Before the director faces the disciplinary actions by ASIC, he or she has the right to question other staff members on how the company is going. For example the director should hold regular meetings with heads of departments and inquire from them the progress of the company and perhaps take some advice from them that will enable the organization perform better.

Furthermore, it is the duty of the director to actively participate in the regular meetings of the directors. The director should hold meetings regularly to discuss issues with the board of directors and decide on the progress of the company (Cai et al 2009). The director should always get involved in the meetings and needs not to skip any meeting so that he or she will be able to know the issues affecting the organization as discussed by the stakeholders. For example the director should attend the annual general meetings with the stakeholders and discuss issues with them. This will help to improve the management of the organization instead of collapsing.

The director also has the duty to ensure that the financial records of the company are well kept and updated. The director of the company will be liable for all defaults that may rise as a result of poor record keeping and ASIC has the right to sue the director (Robert et al 2000). He should ensure that all the records of the company are properly edited so that auditing will be easy to detect any defaults from the books of accounts. Therefore, the director has the responsibility of keeping financial statements well. Some of the financial records the director should ensure are up to date include the cash records, general ledger, inventory records, debtor and creditor records, legal records tax records and other many more records. These are the documents which are used to audit the financial records of the company.

On the other hand the director has the duty of ensuring that the company does not go insolvent. This is when the company is not able to pay its debts (Cai et al 2009). The role of the director is to ensure the company meets its debts because it is against the ASIC laws to leave the company continue operating when it cannot meet its debts. Therefore it is the responsibility of the manager to make sure the company is not bankrupt because it cannot be allowed to continue operating with debts and the director can be sued by ASIC.

Reporting duties

On the other hand there are also strict reporting duties set by ASIC which the directors should observe. To start with, the director is expected to submit the annual returns to ASIC by 31 January. It is the duty of the director to ensure that the company returns are prepared and updated in advance before the due date of submission. Failure to submit the annual returns by January 31st according to form 16, ASIC has the right to take a legal action against the director (ASIC 2001). Initially many directors never used to submit the annual returns of their companies and that is why many corporations failed because there was no close monitoring on how the companies are managed.

According to form 205, ASIC requires that any intention to change the name of the company should be lodged with ASIC after the company itself has made clear resolutions (ASIC 2001). This law is meant to protect consumers and other company stakeholders from exploitation because the company may change the name to deceive customers but the products or services offered are incompetent. Therefore, it is the duty of the director to engage ASIC when they want to change the name of the company failure to do so will lead to a legal action taken by ASIC against the director of the company for failing to comply with the laws of the corporations.

The director has the duty to notify ASIC the intention of changing the address of the company. This should be done within 14 days according to form 203 (ASIC 2001). The director should ensure that the notification is done within the stipulated time or else he or she will be sued by ASIC. This is the basic requirement that should be met by the director of the company and it helps ASIC to establish the source and reason of changing the address because there are some companies which exploit the stakeholders before they change their address so that they cannot be identified by the customers. Therefore, the stakeholders of the company are protected against unlawful changing of address by the company.

The financial statements should be reported before the end of the three months of the financial year. This is done according to form 388 of ASIC and it done by the director of the company and he or she fails, the director is personally liable to face the corporations’ law (ASIC 2001). These financial statements enable ASIC to assess the progress of the company and offer necessary advice so that incase it is not performing well it does not collapse. ASIC will then give special advice to protect the company form collapsing.

The director also has the duty of notifying ASIC on the issuance of shares before they are issued. This notification is done within one month before the shares are issued or cancelled according to form 207 and 288. This enables ASIC to determine and assess what the company is to offer and if it is worthy to give to shareholders to protect shareholders from exploitation (ASIC 2001). This is the duty of the director to make submit this report fail to which will lead to a legal action especially when there are misunderstandings between the company and the stakeholders. The director will be held responsible for not submitting the issuance of shares before giving out to the public.

The directors also have the duty to notify any charges of the company property or any other variations within 45 days. This is the requirement of forms 309, 311 and 350. This is the duty of the director to make such notifications failure to which there can be a legal action taken against him on behalf of the company. However not many directors abide by this law and that is why they find themselves in crisis because they did not abide by the corporations law.

Also the director has the duty to notify the division of shares within 14 days. This reporting is done according to form 211 of the corporations laws. ASIC requires that if a company wants to change the division of the shares, it has to make the notification within 14 days and failing to report there will be penalties against the company through the director. In this regard therefore, the director has a greater role in reporting various events of the company to ASIC and if he fails, there will be penalties which the company will face as a result of dishonoring the corporations laws.

The director of a company further has the responsibility of ensuring that the company succeeds in its operations. This is achieved when the director is competent in conducting his or her operations and acts in the best interest of the company and its members (ASIC 2001). The director has the duty to ensure that the decisions made should benefit the company and help it to grow and benefit its stakeholders. The director can also ensure success of the company by avoiding the conflicts of interests among the stakeholders.

However, there are some challenges that face the directors in executing their duties effectively and they include the following; the first one is the poor communication with other stakeholders. Poor communication comes in as a result of lack of transparency among the directors (Apgar 2006). In some instances you find that the director has not put clear the financial statements hence wants to hide some information from the stakeholders. This comes in as a big challenge because there will be communication breakdown between the parties leading to differences and thus there is poor management of company leading to poor performance due to mismanagement of resources.

The company directors are also faced with external influence. The company director can be under pressure form the board of directors some of who may not be competent in making policies for the company thus the director will not have adequate and humble time to execute the official duties effectively (Apgar 2006). For instance, ASIC requires that the director of the company report any division of shares within 14 days but the board of directors may ignore this law and the person to be held responsible and face penalties is the director. This becomes a challenges as the company director is greatly influenced the board of directors in making legal reporting of the company as required by ASIC.

Another issue that faces the company directors in executing their duties is lack of adequate risk management. Many directors do not focus better on the risks that might challenge their organization (Michae 2005). For instance there are high chances of an organization not succeeding in the market due to lack of good financial focus. This leads to financial risks such as inflation and changing interest rates. Other risks that affect the organization include operational and environmental risks. Therefore, it becomes hard for the director to solve these risks once they are encountered.

Conclusion

The company directors play great roles in the success of their companies. Companies used to perform poorly in Australia that led to establishment of Australian Securities and Investment Commission (ASIC) whose responsibility is to regulate the management of the corporations. According to ASIC, the following are the roles of the company directors; the director should be honest and competent, should be able to know what the company is doing, know how various decisions will impact on the company, ensure good keeping and updating of the financial statements, duty to seek professional advice on behalf of the company, ensure that the company is not insolvent and actively participate in regular company meetings. The director also has the duty of making various reports like division of shares, changing of the company address and notification on the issuance of shares. On the other hand, the company directors face some challenges in executing their duties which include external interference, inadequate risk management and ineffective communication with other stakeholders.

References

Australian Securities and Investment Commission 2001, Australian Securities and Investment Commission directories, Retrieved on August 30, 2013

at http://australia.gov.au/directories/australia/asic

Apgar, D 2006, Risk intelligence: learning to manage what we don’t know, London, Harvard

Business School Press.

Cai, J., Garner, J & Walkling, R 2009, Electing Directors, Journal of Finance,

Vol. 64, No. 5, pp. 2387–2419.

Beinhocker, E 2006, The origin of wealth: evolution, complexity, and the radical remaking

of economics, London, Random House Business.

Michae, K 2005, Company Law in Australia: Principles and Applications, Cornell

Robert, H. M., William, J. E., Daniel, H & Thomas, J 2000, Robert’s Rules of Order

Newly Revised, Cambridge, MA: Da Capo Press.