Companies, authority and agency

Begin with the organisation, not the job title

A governance problem often starts with a decision: borrowing money, approving an investment, appointing a leader or reporting performance. Before evaluating that decision, identify the legal entity, its purpose and the source of the decision maker's authority. A business name, a group of companies and a particular incorporated company are not interchangeable.

A company has a legal identity separate from its members. It can own property, enter contracts and be responsible for obligations in its own name. Its assets do not become a shareholder's personal property merely because that person owns most of the shares. The company's existence can continue despite changes in its shareholders or directors, until it is deregistered.

This separation allows capital and management expertise to come from different people. It also creates a need for accountability: people who control resources may not bear all the consequences of their decisions. Governance provides structures for granting authority, obtaining information, challenging conduct and correcting misuse.

Limited liability has a specific meaning

For a company limited by shares, a member's liability as a member is generally limited to any unpaid amount on the shares. That does not mean the shares cannot lose their value. Nor does it remove separate obligations arising from a personal guarantee, the person's own misconduct or their responsibilities as a director.

A company limited by guarantee uses a different arrangement: members undertake to contribute an agreed amount if it is wound up. This structure is common in organisations established for a purpose other than distributing profits to members. Unlimited companies and the specialised no-liability form also exist. The no-liability form is subject to particular requirements associated with mining; it is not a general label for a business without obligations.

Public, proprietary and listed are different classifications

A proprietary company is subject to restrictions on its membership and fundraising. The familiar limit is 50 non-employee shareholders, but the statutory counting rules exclude specified people, including qualifying crowd-sourced funding shareholders. Public company status is not defined by a requirement to have more than 50 members. A public company may have only a small number of members.

Listing is a further distinction. A public company can be unlisted; a listed entity has additional obligations arising from its market participation. Do not apply every ASX recommendation to every small private company, or assume that an unlisted organisation has no reporting or governance responsibilities.

The guide also distinguishes small and large proprietary companies. Its 2023 framework uses a two-out-of-three test involving consolidated revenue, gross assets and employees, with thresholds of $50 million, $25 million and 100 employees respectively. These are a company-law classification, not a universal definition of a small business. Different legislation and statistical publications can use different size tests.

Financial records remain important across company types. The Corporations Act requires relevant records to be retained for seven years. The obligation to prepare, audit and lodge particular financial reports depends on the entity and applicable provisions; small proprietary companies can still be required to report in specified circumstances. It is unsafe to reason that 'small' means no accounting obligations.

Concept sources: Corporations Act 2001, compilation dated 15 September 2023, Volume 1 — see sections 113–114 for proprietary-company membership and the minimum number of members. The distinctions here use the guide's historical setting.

Separate ownership rights from management authority

Shareholders have important rights, including voting on matters reserved to them. Those rights do not ordinarily make each shareholder a manager. The board manages, or directs the management of, the business under the applicable constitution and statutory arrangements. Section 198A is a replaceable rule: the company's constitution and the Act must be considered when identifying the precise allocation of powers.

Shareholders can influence board membership and certain fundamental decisions. Examples include director elections, constitutional changes and relevant major transactions. The procedure matters: a conversation with a large investor is not a substitute for a required shareholder resolution. In public companies, director removal has statutory protections and procedures; directors cannot simply treat disagreement as permission to remove a fellow director themselves.

The board commonly delegates day-to-day management to a chief executive. A useful delegation states its purpose, financial and risk limits, required reporting and matters that must return to the board. Authority to operate within an approved budget does not necessarily include authority to change the company's strategic direction.

Voting can signal a problem without immediately removing directors

The Australian two-strikes mechanism links repeated opposition to a listed company's remuneration report with a possible vote on a further meeting. In the guide's framework, at least 25% of votes against the remuneration report at successive annual general meetings can trigger a spill resolution, subject to the statutory conditions.

The remuneration vote and the spill vote are different. Two strikes do not automatically dismiss the board. If the spill resolution passes, the statutory process requires a meeting within 90 days to address the relevant director positions, with particular rules concerning which directors are affected. The managing-director exception is specific; avoid assuming every director must leave immediately.

This mechanism illustrates a broader point. Accountability involves both an opportunity to express dissatisfaction and a process capable of producing consequences. A vote, disclosure or consultation that cannot influence any subsequent action may have little practical effect.

Agency theory explains a particular risk

Agency theory examines a relationship in which one party relies on another to act on its behalf. In corporate analysis, investors provide resources while managers possess much of the operational knowledge and decision-making power. Their interests can diverge. Managers may prefer a larger organisation, a safer personal career or a bonus-producing short-term result even when investors would favour another course.

The agency model is an analytical lens, not a conclusion that every manager is dishonest. It helps identify incentives and information gaps. A legal duty to act in the company's interests should also not be replaced by a loose statement that a director must obey whichever shareholder speaks most strongly.

Information asymmetry means relevant information is unevenly held. A manager may know that a profitable project depends on an unusually fragile supplier while investors see only the forecast margin. Hidden information and actions make performance difficult to assess and can allow behaviour that would not be accepted if fully visible.

Monitoring, bonding and residual loss

Agency costs can be examined in three groups. Monitoring costs arise from efforts by the principal to oversee the agent, such as assurance and reporting. Bonding costs arise when the agent provides commitments or arrangements that help establish reliability. Residual loss is the remaining reduction in the principal's welfare from decisions that still differ from the principal's preferred outcome.

These are not three labels for every ordinary operating expense. Explain the link to the agency relationship. A quality inspection might be an operating control, an agency-monitoring mechanism, or both depending on the relationship being analysed. Likewise, a larger monitoring budget is not automatically better: controls have costs and can discourage useful judgement if designed badly.

Stewardship and stakeholder perspectives add other questions

Stewardship theory places greater emphasis on identification with organisational goals, professional commitment and the motivation to do useful work. It can support arrangements that give trusted managers the authority and resources needed to perform well. The practical implication is not to abandon oversight, but to avoid designing every relationship as though commitment and trust were impossible.

Stakeholder theory broadens attention to those affected by the organisation, including workers, customers, lenders, suppliers and communities. A board concerned with durable performance should understand these relationships. Their interests may be connected: reliable payment supports suppliers, which can support product quality and customer service.

Stakeholder analysis also raises difficult questions. Who is included? Which interests receive priority? How are trade-offs justified? A vague claim to be 'balancing stakeholders' can conceal managerial self-interest. Clear objectives, evidence and accountability are needed so that the language of responsibility does not become an excuse for unreviewable discretion.

Work through an authority problem

Cedar's chief executive proposes buying a laboratory owned by a major investor. The price exceeds the acquisition limit delegated to management. The investor wants a quick decision and says that the majority of shareholders support it.

Begin by separating the issues. The company would acquire the asset; management's delegation is insufficient; the related relationship needs proper disclosure and assessment; and shareholder support does not remove the board's responsibilities. Independent valuation, consideration of alternatives, an authorised approval process and appropriate conflict management are needed before deciding whether the acquisition serves the company.

Then apply the theories. Agency analysis asks whether the chief executive's incentives or the investor's influence distort the decision. Stakeholder analysis asks how the purchase affects finance, workers and customers. Stewardship analysis considers whether management has a sound long-term purpose, while still requiring evidence. A useful answer links each perspective to a fact instead of merely naming theories.

Sources and further reading

Study-guide reading: CPA Australia, Ethics and Governance, fourth edition, November 2023, Module 3, printed pages 123–144. Read these pages for the guide's treatment of the corporate form, authority and agency.

• Corporations Act 2001, September 2023 compilation, Volume 1, particularly sections 113–114, 198A and 250U–250W.
• Corporations Regulations 2001, July 2023 compilation, Volume 1, regulation 1.0.02B, proprietary-company thresholds.
• G20/OECD Principles of Corporate Governance 2023, a primary international framework for ownership rights and accountability.