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– Phuong D. Nguyen (LLM International Business Law, Newcastle University) p.d.nguyen@newcastle.ac.uk
I. Introduction
Within the context of corporations, the crux of the matter at issue lies in the concern of what the optimal objective of companies is, “for whose benefit are the managers of a company to run the company” (Andrew Keay, The Enlightened Shareholder Value Principle and Corporate Governance (1st edition, Routledge, 2013), 15). This relates to the two noteworthy theories related to shareholder value and stakeholder in corporate governance, whether either of them should prevail. According to the spirit of the latest UK Corporate Governance Code, with the aim of reaching the target of good corporate governance, the managers of companies shall act in favour of its owners (shareholders), concomitantly give consideration to all stakeholders in terms of their interests (Justine Simpson and John Taylor, Corporate Governance, Ethics and CSR (1 edition, Kogan Page Limited, 2013), 105). Hence, apparently, under each theory, profits of all of members of companies are worthily considered. In a general view, the most favourable objective of companies is to serve the interests of both shareholders and stakeholders (Simpson J and Taylor J, at [121]). This paper work will lay down some major points regarding the two cornerstone values in corporate governance in order to sharpen the perception why both should be taken into account and harmonized with each other to fortify the general development of corporations.
II. Shareholder value – Why shareholder value should be taken into account in the light of shareholder theory?
In the case of Dodge v Ford Motor Corp (1919), shareholder value was highlighted by the Court as “business corporation is organized and carried on primarily for the profit of stockholders.” With the primary emphasis on the stockholders’ interest, the managers were censured for not meeting the requirement of operating the company as a business corporation according to the charter. The concept of shareholder value theory, also known as “shareholder primacy theory” or “shareholder wealth maximization” has been pervasive and determined as the aim of large public corporations, certainly as prominence since 1970s. (at [370]) The theory of shareholder value was emboldened as “the orthodox assumption” by Adolf Berle and Gardiner Means as the exercise of powers conferred to management was based on “the benefit of all of the shareholders as their interest appeared”. (at [373])
The shareholder value has been created to protect the remuneration of shareholders who are considered as the real owners of companies. As “the shareholders receive residual earnings in the form of dividends by virtue of their contract” which may be reinvested in companies, nonetheless, the share might come back to the central agent not by its origin, hence, “in no case, either legally, contractually or statutorily, does profit belong exclusively to the shareholders.” (Michel Aglietta, Antoine Reberioux, Corporate Governance Adrift: A Critique of Shareholder Value (Edward Elgar Publishing Limited, 2005), 33).
On the other hand, this also links to the agency theory which is radically discerned that “the managers or directors are agents for the investors or shareholders as beneficiaries or principals” since they are conferred with the principals’ money and powers to generate profits, increase the value of investment for their investors. (Simpson J and Taylor J, at [25]). Nevertheless, in practice, it hardly implies that the objective of the company is to manage in the exclusive interest of its shareholders. (Aglietta M, Reberioux A, at [34]). Since the objectives and targets of the shareholders and the benefits of the managers may be in conflict, thereby, naturally the managers may make decisions that benefit them the most which may not be the most profitable choice for their investors. (Simpson J and Taylor J, at [25]).
In addition, compared to stakeholders like employees whose benefits are assured from the approach of taking stock and salary payment, notwithstanding, “the shareholders do not get anything because they only receive any repayment of capital if the corporation is solvent” (at [400]) or merely have dividends whilst the company is prosperous. As being the risk-bearers having residual claims in the company, they are highly likely to be at risk, thereby, the risk-bearers should take precedence and optimum in the distribution of power and profit. Hence, the allocation of interests in favour of shareholders might be in accordance with the basic principle of externality management. (Aglietta M, Reberioux A at [34]).
In the other camp, under the theory of shareholder primacy, in respect of the mentioned theory, managers are employed by the principals to operate the business. Hence, the shareholders are the best suited to guide and discipline managers in the conduct of their powers and duties (at [380]). Moreover, inevitably, the operation of corporations would be well-run as “both the managers and the non-executives are fully accountable to shareholders for what they do in running the corporation’s business.” (at [381]). The shareholders absolutely have the rights to intervene the business operation as well as other lawful rights which are not bestowed on stakeholders (at [448]), for instance, if the managers or directors breach their duties, accordingly, a shareholder can bring derivative actions against the managers, directors.
III. Stakeholder value – Why stakeholder value should be taken into consideration under the stakeholder theory?
It is ostensibly apparent that if a company merely concentrates on delivering high shareholder value today, it may tend to be on the brink of collapse tomorrow (at [449]). In other words, firms of which the sole concentration is to maximize profits to shareholders may diminish the wealth currently created by the company. Moreover, as the shareholders are also listed as a special genre of stakeholders (at [448]), thereby, taking other values into consideration is a wise approach that the company establishes and sustains its wealth capacity for the future. It is unexaggerated that corporate success is contributed by shareholders, however, it is also significantly dedicated by stakeholders who are significantly affected by the actions of companies (Keay A, at [42]). Thereby, the stakeholder theory holds that the cardinal responsibility of a corporation should not solely maximize shareholder wealth as with the contribution towards companies, the stakeholders deserve protection, their interests should be taken into account by managers (Keay A, at [42]). Comprehensively, “the company is an agent that serves all stakeholders and not just the shareholders.”(Florent Noel, “Downsizing, Financial Performance and Corporate Social Responsibility” in J. Allouche, Corporate Social Responsibility (Palgrave Macmillan, 2006), 69)
Additionally, stakeholders, in the essence of short-term advantage, are much more susceptible than shareholders “who have more of an opportunity” to get rid of corporations. (at [379]) As “they can “do the Wall Street Walk” and sell their shares on a stock exchange, whilst other stakeholders are not able to exit so easily. (at [379]) Furthermore, it is ostensibly reasonable that shareholders, based on the target of profits, may somehow sabotage and deteriorate the generally progressive growth of companies by merely concentrating on gaining short-term profitability. Hence, the assurance of long-term success and profitable growth of companies by balancing the interests of all members including both shareholders and stakeholders are necessarily required (Simpson J and Taylor J, at [120]). Accordingly, pursuant to the UK Company Act 2006, directors are obliged to promote the process of the company by acting in good faith to create benefits for the corporation’s members and also in the respect to the interests of employees, a good rapport with suppliers, customers and others, the impact of the company’s operations towards the community and the environment, the maintenance of reputation for high standards of business conduct and the fairness of acting between members of the company. (Article 172(1)).
III. Whether there should a dominant value in corporate governance?
It is plain that companies are considered as “profit-making” corporations (Keay A, (at [3])), in addition, concurrently as the most critical institutions “for social wealth creation in capitalist economies” [at 195]. It has been for several years since the early years of twentieth century, shareholder value theory and stakeholder value theory have been underlined to answer the query based on what purpose that directors should manage their companies [at 448]. Blatantly, it might be a mistake to separate the shareholder theory and the stakeholder theory as rivalling in the day-to-day management of companies since the maximisation of profits is emanated from well-managed companies and how companies are well-managed is based on the idea of stakeholder theory. Correspondently, they should be appropriately emerged to be taken advantage of positive and beneficial advantages – generally, a so-called proper constellation of shareholder primacy and stakeholder theory.
IV. Conclusion
In general, there is a predicament which is that “directors can’t serve two masters” (at [74]). However, the advent of a further elaboration of shareholder value – “enlightened shareholder theory” – radically grounded on the conventional stewardship theory – differently underlines the contentment of stakeholders’ benefits to consolidate the long-term survival and prosperity of corporations (at [74]). This is also what the UK Company Act inclines to pursue to reinforce stable and long-term corporate governance.