Directors are legally responsible to the shareholders and must Essay

Directors are legally responsible to the shareholders and must prioritise their interests - Essay Example what a court may consider is in the interests of the company but also introduces the new concept of enlightened shareholder value (Re Smith & Fawcett). It has been argued that the English company law inched closer to, but has not firmly adopted the stakeholder theory. Thus, the test in s.172 remains subjective because what mainly constitutes the success of the company depends on the director’s good faith judgment which may not be objective. It appears that there are no objective criteria in s.172 against which the actions of directors can be assessed. Therefore, it becomes very difficult to prove a breach of this duty. At common law, the objective considerations were introduced by the courts to supplement the subjective test. For instance, in Charterbridge Corp Ltd v Lloyds Bank Ltd, the courts considered whether an intelligent and honest director could in the whole of the circumstances reasonably believe the transaction to be for the benefit of the company as a whole. However, Section 172 makes no reference to this objective consideration in view of the significant role of common law rules in the interpretation and application of the codified duties (s.170(3) and (4). Keay (2007) argues that it is most likely that the courts would conside r the objective test in assessing directors’ actions in any given scenario. There are quite a number of theories the questions the main interests that are supposed to guide the operations of the company. For instance, the traditional approach in the UK is the shareholder value principle (or shareholder primacy), which stipulates that a company should be run for the wealth maximization of its shareholders above those of other parties such as customers and suppliers. For instance, the directors have a duty to act in the interests of the company (Percival v Wright), which are interpreted as the best interests of present and future shareholders (Hutton v West Cork Railway Company). The shareholder value theory states that

MGM624-0901A-01 Applied Accounting for Decision-Making - Phase 1 Essay - 1

MGM624-0901A-01 Applied Accounting for Decision-Making - Phase 1 Discussion Board 2 - Essay Example However, a steep increase in the prices will have an adverse effect on the sales volume. Hence an increase of 5% in the sales price will bring the break even volume back to [500,000 / (315 – 115)] 2,500 units. It is evident that JTI has invested heavily in the initial manufacturing of the new luggage line. Steps have to be taken to increase productivity of the entire manufacturing process, by reducing wastage and increasing the effectiveness of the labour. The effectiveness of the resources can be attained by introducing incentives based on performance. Awards can also be presented to the most effective employees every month and this will act as a motivating factor for the employees to increase the productivity (Samuels et al, 2000). Assuming that theses schemes reduce the variable costs to $110, then the break even volume becomes [500,000 – (315 – 110)] 2,440 units. There is a risk of losing sales volume, when the price is increased. The increase in price is profitable as long as the sales volume remains at 3,600 units. It is essential to consider the number of customers JTI stands to lose by increasing the prices (Baker et al, 2008). There are a number of risks involved in introducing incentives based on performance to increase the performance. The management has to set up benchmarks to quantify performance. In case the goals set are impossible to attain, the scheme will de-motivate the employees and can have a negative impact on productivity. Also, if the goals are very simple to attain, then the company stands to lose more in terms of incentive payouts to the employees (Latham, 2004). Hence excessive care has to be taken to set the benchmarks against which the performance of the employees will be measured. From the above arguments, it is clear that JTI has to increase prices and also increase the productivity in order to maintain