Corporations can act in ways that seem amoral, claiming a legal responsibility to shareholders as justification. But Deakin Law School Professor (Corporate Law), Jean du Plessis, sees a way out of this bind.
Corporations are widely seen as pursuing profit, and a strong share price, while disregarding the plight of their workers, communities, environment and even customers. Why do they behave this way? Because, they claim, it is their legal responsibility to “maximise shareholder value”.
Professor Jean du Plessis of Deakin Law School recently presented the Ross Parsons Corporate Law Lecture at the University of Sydney, exploring the history of corporate law to put this claim to the test and outline a clear path to reform.
Prof du Plessis says “maximising shareholder value” has been the mantra of corporate leaders for decades and over that time it has come to be seen as a legal constraint limiting their ability to acknowledge employee, community and environmental concerns.
The concept was enshrined as the core purpose of the corporation in a 1997 statement from the Business Round Table, a powerful organisation of the CEOs of the 200 largest US corporations. But it dates back to a 1970 New York Times article by highly influential economist Milton Friedman.
Friedman’s impact is beyond doubt, but the social and environmental cost is another matter altogether.
So what’s the remedy? Prof du Plessis says, “to a large extent, changing the behaviour of corporations depends on the legal liabilities of company directors. Whose interests are they legally required to consider when making decisions on behalf of their firms?”
For CEOs and directors, their decisions are governed by company law, which around the world traces its origins back to the UK’s Joint Stock Company Act of 1844, Limited Liability act of 1855 and Consolidated Act of 1856. The model laid out in these laws still affects almost every single aspect of company law today, so the history and developments of company law around the world can be highly relevant to our own situation in Australia.
The closest “shareholder value” doctrine has come to achieving legal status is in the UK, where an “enlightened shareholder value approach” is enshrined in section 172 of the Companies Act of 2006. Company directors may only have regard to the interests of employees, customers, communities, suppliers and the environment if it is to the benefit of the company (and its shareholders).
The negative consequences of this approach were revealed in the aftermath of the 2018 collapse of Carillion, a multi-billion pound construction and services company. This exposed management and board practices which, even as the company slid deeper into debt trouble, sought to enrich shareholders and executives at the expense of all other interests, especially the company’s 43,000 employees.
Here, there is a growing view that interests other than those of shareholders will have legal standing to bring actions against company directors. In 2019, two Australian authorities, Huntley and Hartford-Davis, said “The exposure of individual directors to “climate change litigation” is increasing, probably exponentially with time.”
This all hinges on the status of shareholders in relation to the corporation – a matter of legal definition. From this we get to the legal liabilities of company directors, and to what or whom their duties lie.
For some decades, Australian rulings have acknowledged the community’s interest in administrative decisions in the public law. The judiciary have developed a set of practices to accommodate this, which have been demonstrated in a number of significant cases.
In the law itself, company directors’ fiduciary duty is to the corporation, but Prof du Plessis points out that the corporation is defined simply as a “separate legal entity” in both the Corporations Act (Cth) 2001 and the common law.
Consequently, the legal requirement for directors to act in the best interests of the corporation does not mean they must act solely in the best interests of the shareholders. In fact, we already have a legal framework that allows for employee, supplier, community and environmental interests to have recognised status in the decision making of directors. However, it is not yet law.
It would be possible to cement this in law with a plain language amendment to Section 181(1) (a) of the Corporations Act (Cth) 2001 to state that the interests of any group, groups, person or persons can be regarded by directors discharging their duties. There are models from Canada, Germany, the Netherlands and India, for the acknowledgement of other stakeholder interests. Further, we have a corporate regulator in ASIC that is almost unique in the world in its ability to bring actions for breaches of directors’ duty of care on behalf of the corporation as separate legal entity.
After decades of business school and boardroom primacy, the Business Round Table issued a new “Statement on the purpose of the corporation” in August 2019. Prof du Plessis notes that it “acknowledged the corporation’s duties towards customers, employees, suppliers, the community, and only at the end acknowledges shareholders. And then, only as providers of capital, not as owners.”
“So,” he says, “if this change percolates through business culture quickly enough, we might see some change for the better in corporate behaviour before it’s too late to make a difference.”
Several of Professor du Plessis’ sentiments have been echoed by one of the most influential corporate law intellectuals, Leo E Strine, Jr, former Chief Justice of the Delaware Supreme Court (a jurisdiction in which over 1 million US corporations are registered).
In a piece for the New Yok Times on 10 April, co-authored by Dorothy S Lund, he makes the point that corporations have not fulfilled their corporate social responsibilities, leaving ordinary people hanging-out-to-dry, especially during the crisis caused by COVID 19.
Despite receiving massive tax relief atop a long run of record earnings, corporations had not built up reserves and were living “paycheck to paycheck”, calling for government bailouts as soon as the crisis hit.
The record profits of recent years had primarily gone towards pay massive dividends and share buybacks, exclusively benefitting shareholders and executives, leaving workers and other stakeholders to bear the brunt of the impact.
Professor du Plessis says “this illustrates that we cannot continue with ‘business as usual’. Our corporate law and corporate governance system is fundamentally flawed and without significant law reforms, all communities, all employees and all other stakeholders will be exploited by corporations.”