This is part III of a series of blog posts looking at the corporate objective and practical steps that could be taken to further either shareholder primacy or stakeholderism.

Go to: Introduction -> Part II -> Part III -> Conclusion

In this part, I shall explore ways to give a voice to stakeholders, which I shall take to mean those who “bear some form of risk as a result of having invested some form of capital, human or financial, something of value, in a firm”1 – these may be called ‘primary stakeholders’2 – an approach endorsed by a substantial number of commentators3.

1. Enlightened Shareholder Value under s.172: a stakeholder perspective?

As mentioned previously, stakeholders are seen as instrumental to achieving a shareholder-oriented goal under s.1724. Besides this critique, flaws are to be found in the low standard imposed5 and the lack of effective enforcement mechanisms6.

Section 172(1) contains a subjective test based on ‘good faith’, an extremely high threshold for any challenge to be mounted against a director7. Furthermore, stakeholders faced with a director’s breach of duty will, unlike shareholders, be unable to initiate derivative proceedings8.

2. A remedy based approach and its enforcement

It has been argued that stakeholderism requires a reformulation of directors’ duties9. Indeed, under a stakeholder perspective, these interests should not automatically be defeated in cases of conflict with shareholders as is the case under s.17210. Yet formulating an alternative duty is extremely difficult in light of competing constituencies. This problem was noted by Berle back in the 1930s11, as well as by his opponent Dodd12.

I would, therefore, suggest removing shareholder interest as the overriding objective under s.172, thereby re-centering the duty onto the long-term future of the company in a way which mandates directors to take into account the interests of all participants13, and would provide for a remedy-based regime, similar to that found in Canada14, for stakeholders.

Stakeholders instrumental to the welfare of the company: derivative actions

Section 238(d) of the Canada Business Corporations Act 1985, which regulates who may initiate derivative claims, includes “any  other  person  who,  in  the  discretion  of  a  court,  is  a   proper  person”15.

I would endorse a similar statutory change in the UK to protect what has been termed ‘associative rights’ (JJ Du Plessis and J Dine, ‘The Fate of the Draft Fifth Directive on Company Law’ [1997] Journal of Business Logistics at 45)). The main beneficiaries would be those, such as employees and lenders, who have a ‘very close’ relationship with the company16, with the premise that their continued support is essential for its survival and prosperity17.

Stakeholder interests valuable in their own right: unfair prejudice

It may also be appropriate, according to the extent of their relationship with the company and their reasonable expectations, for these parties to be able to bring an action where the business of the company has been conducted in a manner which is unfairly prejudicial to their interests18.

I would, however, tend to prefer derivative actions, as these are ‘orientated towards collective outcomes’ as opposed to personal benefits19.

The practicalities of enforcement

Vasudev argues convincingly, based on an analysis of Canadian litigation, that courts are ill-equipped to handle the ‘business’ issues underlining stakeholder disputes20. In light of this, he advocates recourse to specialised agencies to adjudicate stakeholder disputes21. These would not be constrained by legal tradition, and would have a broad representation of interests, thus enabling a holistic approach, whilst also featuring safeguards to management freedom22 (for example, a defense that directors made appropriate and substantive references to stakeholders interests23 ).

3. Direct representation and participation

Germany’s co-determination system grants employees a say in management decisions by offering them board-level representation, as do Denmark, Sweden and Luxembourg24. I believe such approaches, which are in line with Kent Greenfield’s proposals25, are an effective way of balancing the interests of different consistencies. I would, however, agree with Kiarie’s proposal for this model to be implemented differently according to the type of company26.

4. Disclosure requirements

Information can be a powerful tool which empowers stakeholders in the bargaining process, as well as the markets, and places external pressure on the directors27. A good example of this is Apple’s comprehensive ‘Supplier Responsibility Reports’28, and the ensuing public controversy over the working conditions of the employees of their Chinese suppliers29.

As such, it is regrettable that the government sidelined the Operating and Financial Review30 in favour of the watered-down s.417 business review31. This was to provide, as part of an audited process, key factors likely to affect company performance and stakeholders. There have, nonetheless, already been considerable moves in this direction spearheaded by EU law32, and the coalition’s agreement contains a commitment to reinstate the OFR33. Beyond minimum legislative standards, I would seek to encourage industry self-regulation, as this is more likely to create a climate of accountability, as opposed to mere ‘box-ticking compliance’34.

1. Max Clarkson quoted in: Andrew Keay, The Corporate Objective (Edward Elgar Publishing 2011) at 123 [↩]
2. Ibid. at 124 [↩]
3. E Orts and A Strudler, ‘The Ethical and Environmental Limits of Stakeholder Theory’ [2002] 12 Business Ethics Quarterly at 215 [↩]
4. Shuangge Wen, ‘The magnitude of shareholder value as the overriding objective in the UK: the post-crisis perspective’ [2011] 26 Journal of International Banking Law and Regulation at 321 [↩]
5. Andrew Keay, ‘The Duty to Promote the Success of the Company: Is it Fit for Purpose?’ [2010] at 29 [↩]
6. Ibid. at 27 [↩]
7. Sarah Kiarie, ‘At crossroads: shareholder value, stakeholder value and enlightened shareholder value: Which road should the United Kingdom take?’ [2006] 17 International Company and Commercial Law Review at 338 [↩]
8.  ‘Moving Towards to Stakeholderism? Enlightened Shareholder Value, Constituency Statutes and More : Much Ado About Little?’ [2011] 22 European Business Law Review at 15 [↩]
9. Sarah Kiarie, ‘At crossroads: shareholder value, stakeholder value and enlightened shareholder value: Which road should the United Kingdom take?’ [2006] 17 International Company and Commercial Law Review at 338 [↩]
10. Paul Davies, Introduction to Company Law (2nd ed. Oxford University Press 2010) at 156 [↩]
11. Alfred Berle, ‘For Whom Corporate Managers are Trustees: A Note’ [1932] 45 Harvard Law Review 1367; Janice Dean, Directing Public Companies: Company Law & The Stakeholder Society (Cavendish Publishing 2001) at 14 [↩]
12. E.M. Dodd, ‘Is Effective Enforcement of the Fiduciary Duties Of Corporate Managers Practicable?’ [1932] 2 University of Chicago Law Review at 199 [↩]
13. Janice Dean, Directing Public Companies: Company Law & The Stakeholder Society (Cavendish Publishing 2001) at 127; Partial support in: Canadian Supreme Court in: Peoples’ Department Stores v Wise [2004] SCC 68 at [42]-[43] [↩]
14. PM Vasudev ‘The Stakeholder Principle, Corporate Governance and Theory – Evidence from the Field and the Path Onward’ [2011] at 25 [↩]
15. Section 238, Canada Business Corporations Act 1985; Also: Section 216A(1)(c) Singapore Companies Act [↩]
16. See for eg. ‘Creditors’ Derivative Suits on Behalf of Solvent Corporations” [1979] 88 Yale Law Journal at 1299 [↩]
17. Janice Dean, Directing Public Companies: Company Law & The Stakeholder Society (Cavendish Publishing 2001) at 19 [↩]
18. Ibid. [↩]
19. Andrew Keay, The Corporate Objective (Edward Elgar Publishing 2011) at 255, citing S Botomley, The Constitutional Corporation at 166 [↩]
20. PM Vasudev, ‘Stakeholders in the Canada Business Corporations Act: An Appraisal and Some Proposals’ [2011] at 38 [↩]
21. Ibid. at 39 [↩]
22. Ibid. at 40 [↩]
23. Janice Dean, Directing Public Companies: Company Law & The Stakeholder Society (Cavendish Publishing 2001) at 177 [↩]
24. Deryn Fisher, ‘The enlightened shareholder – leaving stakeholders in the dark: will section 172(1) of the Companies Act 2006 make directors consider the impact of their decisions on third parties?’ 20 International Company and Commercial Law Review at 14 [↩]
25. Kent Greenfield, ‘Reclaiming Corporate Law in a New Gilded Age’ [2008] 2 Harvard Law and Policy Review at 24 [↩]
26. Sarah Kiarie, ‘At crossroads: shareholder value, stakeholder value and enlightened shareholder value: Which road should the United Kingdom take?’ [2006] 17 International Company and Commercial Law Review 333 [↩]
27. Company Law Review Steering Group, Modern Company Law: Strategic Framework [1999] at [5.2.16] [↩]
28. Apple Inc., Supplier Responsibility Reports [↩]
29. Financial Times, ‘ Apple has Incentive to worry about workers’ rights’ [Feb 15th 2012] ; 
The Economist, ‘Foxconn and labour laws: Using globalisation for good’ [24th Feb 2012] [↩]
30. The Companies Act 1985 (Operating and Financial Review and Directors’ Report) Regulations 2005; Chapter 6 of Company Law Reform Bill 2006. [↩]
31. Andrew Johnston, ‘After  the  OFR  :  Can  UK  Shareholder  Value  Still  Be  Enlightened?’  [2006]  7  European Business Organization Law Review 841 [↩]
32. See for eg. EU Accounts Modernisation Directive 2003/51/EC [↩]
33. Department for Business, Innovation an Skills, The future of narrative reporting: a further consultation ; Financial Times, ‘OFR reinstated’ [24 May 2010] [↩]
34. Sarah Kiarie, ‘At crossroads: shareholder value, stakeholder value and enlightened shareholder value: Which road should the United Kingdom take?’ [2006] 17 International Company and Commercial Law Review at 342 [↩]