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Shareholder Primacy and Stakeholder Theory in Corporate Governance

Abstract

Over the last decade or so, there has been significant debate over the manner in which a corporation should model its objectives pursuant to corporate governance. Two theories of corporate governance have dominated this debate: the Anglo-American model which emphasizes shareholder primacy or the European model which emphasizes stakeholder primacy.[1]  Essentially, shareholder primacy is aimed at putting the interest of shareholders above the interest of a broader class of stakeholders, namely creditors, the community, consumers and employers.[2] Stakeholder theory on the other hand takes the position that companies have a social contract with a wider class of stakeholders and are accountable to those stakeholders as well.[3]

The purpose of this research is to analyze the merits of both sides of the debate and to determine if one theory of corporate governance is superior to the other. After a review of the literature and data, it is determined that both theories of corporate governance have their strengths and weaknesses and that a convergence of the two models will resolve the gaps and weaknesses left by adapting a single theory of corporate governance.

 

Contents

Abstract 2

Chapter One. 5

Shareholder Primacy and Stakeholder Theory: Issues and Background. 5

1.1      Introduction. 5

1.2      Research Questions. 7

1.3 Statement of the Problem.. 8

1.4 Significance of the Study. 10

1.5 Aims and Objectives. 11

1.6 Research Methodology and Design. 12

1.6.1 Research Methodology. 12

1.6.2 Research Design. 14

1.7 Chapter Summary. 14

2.1 Introduction. 15

2.2 Shareholder Primacy. 16

2.2.1 Definition. 16

2.2.2  The Origins of Shareholder Primacy Theory. 18

2.2.3 Developing and Current Concepts of Shareholder Primacy. 21

2.2.4 Criticism of Shareholder Primacy. 25

2.3 Stakeholder Theory. 29

2.3.1 Definition. 29

2.3.2 Origins of Stakeholder Theory. 31

2.3.3 Developments and Current Stakeholder Theory. 33

2.3.4 Criticisms of Stakeholder Theory. 36

2.4 Conclusion. 38

2.5 Chapter Summary. 39

Chapter Three. 40

Shareholder Primacy in Corporate Governance. 40

3.1 Introduction. 40

3.2  Shareholder Primacy in Practice. 40

3.3 Shareholder Primacy and Corporate Governance in the UK.. 44

3.4 Conclusion. 48

4.5 Chapter Summary. 49

Chapter Four 50

Stakeholder Theory and Corporate Governance. 50

4.1 Introduction. 50

4.2 Definition of Corporate Social Responsibility. 50

4.3 Stakeholder Theory and Corporate Social Responsibility in Practice. 51

4.4 Conclusion. 56

4.5 Chapter Summary. 56

Chapter Five. 58

Findings/Conclusion. 58

Bibliography. 61

 

Chapter One

Shareholder Primacy and Stakeholder Theory: Issues and Background

  • Introduction

Historically, the shareholder primacy theory has occupied a significant role in the corporate governance strategies based on the Anglo-American model.[4] Shareholder primacy theory takes the position that the corporation is owned by shareholders and thus exists for the sole purpose of maximizing shareholder value.[5]  The role of shareholder primacy in corporate governance has been challenged by the European model of corporate governance which recognizes stakeholder value.  Stakeholder theory looks more keenly at relationships between the corporation and its stakeholders, and presumes that profits flow naturally from improving stakeholder value and should not drive corporate decisions and behaviour.[6] It therefore follows that theories of shareholder and stakeholder value espouse divergent presumptions on what factors should drive corporate behavior.

In light of the recent global financial crisis of 2008-2009, there has been considerable debate over whether or not shareholder primacy should play an even greater role in making management accountable.[7] Even so, these arguments are countered by arguments that express concern over the possibility that shareholder primacy would have a negative impact on the corporation or organization’s wider class of stakeholders; employees, creditors, the community and consumers.[8]

With globalization and the interconnectedness of cultures, societies and economies, the debate over shareholder and stakeholder has taking on a renewed significance. The emphasis is increasingly on the need for corporations to incorporate stakeholder-centered thinking into their corporate objectives and strategies.[9]  The question typically debated is whether or not corporations are required to take on a more determined effort to address social realities. For instance, pharmaceuticals are encouraged to donate vaccinations and drugs to poorer states. Businesses are asked to be environmentally conscious.[10]

It has been argued however, that shareholder primacy compromises any attempt at supporting and promoting the interests and concerns of non-shareholding stakeholders as it sharpens the divide between private and public interests and thus shareholders and stakeholders.[11] Stakeholder theory however is argued to be more conducive to corporate social accountability as it directs corporations to take account of the wider class of stakeholders rather than focus merely on shareholders.[12]

On the other side of the debate however, shareholder primacy theory argues that it does support social responsibility strategies. For instance, even the most serious promoters of shareholder primacy argue that in maximizing shareholder value, this objective must be pursued within the limits of business ethics and the law.[13] Likewise, stakeholder theorists argue that pursuing social objectives and safeguarding the interests of stakeholders will maximize shareholder value.[14] For instance it is argued that safeguarding the interest of employees improves firm productivity and thus improves profits for shareholders.[15]

This research paper analyzes both sides of the debate and seeks to identify the common objectives of both stakeholder and shareholder theories. The idea is to determine which side of the issue is more consistent with or amenable to the modern realities of corporate functioning.  Thus the demands of corporate governance and more especially the emerging significance of taking account of stakeholder interests in assessing the stakeholder/shareholder debates and the relevant issues.

  • Research Questions

 

In order to assess the value of the stakeholder and shareholder theories relative to appropriate modern corporate governance strategies, this paper is organized and researched around a primary research question.

The primary research question is:

Is stakeholder theory or shareholder primacy theory more relevant in terms of driving modern corporate governance?

 

1.3 Statement of the Problem

 

The global financial crisis of 2008-2009 focused more intense attention on unsatisfactory nature of corporate governance.  The global financial crisis was primarily attributed to the failure of corporate governance.[16] Commentators and observers have essentially agreed that corporate governance systems whether based on the Anglo-American model or the European model of governance fail to live up to expected standards of governance and therefore failed to forestall or minimize the consequences of excessive risk-taking and fail to manage it effectively.  Cumulatively, corporate governance systems were blamed for the failure of management, risk management, weak accountability and transparency weaknesses.[17]

Specifically, a number of questions were raised relative to the efficacy of the shareholder primacy theory implicit in the Anglo-American corporate governance model and its excessive penetration of world markets.[18] The primary issue was an observation that the Anglo-American model of corporate governance which promotes the shareholder primacy theory did not prevent nor safeguard against the risks associated with market failure. Those risks spread globally as a result of the interconnectedness of global markets.[19]  A number of concerns were specifically directed toward the greed of shareholders.  In fact it has been argued that the 2008-2009 financial crisis was a direct result of management emphasising the “short-term interests of their shareholders”.[20]

This is not the first time in recent history and modern times that the efficacy of the Anglo-American model of corporate governance was called into question.  In 2002, corporate failures left corporations facing billions of dollars in losses inclusive of shareholding, joblessness, criminal prosecution relative to business executives and a number of corporate bankruptcy claims. The corporate governance failures was more obvious in the scandals associated with large multinational corporations such as the US’s Enron, Tyco, Adelphia, WorldCom and Global Crossing.[21]  The UK’s corporate governance failures were revealed during the 1990s after the Maxwell corporate scandal, the collapse of Barings Bank and the scandals associated with British Gas.[22]

Having regard to the significant roles that the Anglo-American model and its underlying shareholder primacy model of corporate governance has had in global corporate governance, and the important and influencing role of the EU and its stakeholder theory of corporate governance, it is worth considering whether or not the debate dividing the two approaches can be converged to avert corporate governance failure in the future.  It is also worth exploring whether the stakeholder theory of corporate governance and its emphasis on CSR is perhaps more appropriate for avoiding corporate governance failures in the future.  Thus assessing the debate over stakeholder and shareholder primacy theories addresses the problems implicit in the state of corporate governance globally.

 

1.4 Significance of the Study

 

The Anglo-American model of corporate governance is so-called because it encompasses the US and UK’s corporate governance constructs that place the shareholder primacy model front and centre.  This model of corporate governance has had worldwide influence and is thus blamed for contributing to and failing to avert the global financial crisis of 2008-2009.  It therefore follows that the identification of flaws in the shareholder primacy theory of corporate governance requires reconsideration, particularly in light of the growing global significance of stakeholder interests and concerns.  This research study hypothesises that if there is a correlation between good corporate governance and economic prosperity, a comparative study of corporate governance theories of shareholder primacy and stakeholder value is of primary importance.

The history of corporate governance failures relative to the Anglo-American model of corporate governance does not overshadow the successes of this model of corporate governance and thus the efficacy of implementing and subscribing to the shareholder primacy theory of corporate governance.  UK firms like other firms have under European models of corporate governance that operated under the stakeholder theory have failed and succeeded throughout history.  The impact of corporate governance on the economic productivity of firms is well documented.[23]  For instance, a post-war era study reveals that UK firms performed unsatisfactorily in terms of international competition.[24] At one time, UK firms adopted multi-divisional governance practices within their companies.[25] Other studies demonstrate the UK and US firms faired quite well during the 1980s.[26]  This study is therefore important for determining whether or not shareholder primacy should be substituted by stakeholder theory or whether or not the two might be converged for optimal corporate governance strategies.

1.5 Aims and Objectives

This research study aims to determine whether or not stakeholder or shareholder theory provides the best method for improving corporate governance and achieving corporate social responsibility.  Therefore this research study has as its primary objective the assessment of the shareholder and stakeholder theories.  The aims and objectives of this dissertation are therefore to:

  • Identify the elements of the stakeholder theory in the corporate governance structure.
  • Identify the elements of shareholder primacy theory in corporate governance.
  • Identify the arguments for and against stakeholder and shareholder theories.
  • Assess the strengths and weaknesses of both stakeholder and shareholder theories.
  • Identify the practical use of stakeholder and shareholder theories in corporate governance.
  • Identify the significance of improving corporate governance.
  • Identify whether or not stakeholder or shareholder theories are more supportive of improving corporate governance and why.

1.6 Research Methodology and Design

 

1.6.1 Research Methodology

 

Although this research study is based on legal doctrine and normative legal issues, it is a comparative and interdisciplinary research study.  The comparative nature of the research arises out of an assessment of the merits and lack thereof of the theories and assumptions relative to stakeholder and shareholder primacy.  Stakeholder and shareholder theories prescribe different approaches to corporate social responsibility and corporate governance.  In assessing the merits of these two theories and their prescriptive and doctrinal bases, it is necessary to embark on an interdisciplinary research.

The interdisciplinary research not only engages legal doctrine and normative issues, but also an examination of external and internal factors that direct attention to politics, economics, history and social contexts.  In other words, an assessment of the debate over the appropriateness or effectiveness of stakeholder and shareholder theories it is necessary to examine the political, historical, social and economic factors that impact the underlying assumptions relative to these theories and in particular how they are linked to corporate governance and corporate social responsibility.

This interdisciplinary and comparative research study is therefore derived from a compilation and analysis of both primary and secondary data. The primary data is comprised of reports and data published by governments and intergovernmental organizations such as the Organization of Economic Cooperation and Development (OECD), the World Bank, United Nations Organizations and the European Union (EU).  Primary resources like statutes such as the Companies Act 2006 (UK) are also used to assess the codification of stakeholder and shareholder theories in practice.

Secondary resources are comprised of textbooks, articles and journals and some internet resources.  Textbooks, articles and journals provide the conceptual framework for this study and also provide the basis of the interdisciplinary research methods. These resources are used to compile and analyse historical, political, economic and social contexts.  More importantly, these secondary resources also provide the analytical foundations of the theories and assumptions related to stakeholder and shareholder prescriptions of corporate governance and their impact on corporate social responsibility.  Moreover, secondary resources provide the basis for analysing the effectiveness of stakeholder and shareholder theories in the context of corporate governance.

Internet resources are used for compiling the most recent data and for assessing government and intergovernmental reports that are generally available to the public.  These reports will generally available online before they are published in hard print and thus provide an up-to-date source in some cases.

1.6.2 Research Design

 

This research study is organized and presented as follows:

Chapter One provides an introduction to the study and thus sets out a statement of the problem, the significance of the study, the aims and objectives, the research questions, the research methodology and the organization/design of the study.

Chapter Two is a literature review and will set out the elements of the debate relative to stakeholder and shareholder theories in the literature.  Thus the literature review chapter is divided into three main parts. The first part of the chapter sets out the main characteristics of stakeholder and shareholder theories.  The second part of the chapter sets out the advantages and disadvantages of shareholder and stakeholder theories.  The third part of the chapter sets out the nature of corporate governance in the UK and how shareholder and stakeholder theories are adapted.

Chapter Three enlarges the analysis of shareholder primacy theories in the context of corporate governance.

Chapter Four enlarges the analysis of stakeholder theory in the context of corporate governance.

Chapter Five is the final chapter and provides the conclusion and findings and recommendations for resolving the conflicting assessments of shareholder and stakeholder theories with a view to improving corporate governance constructs.

1.7 Chapter Summary

This first chapter introduced the study undertaken and identified the significance of the research, a statement of the problem, the research questions and the aims and objectives of this research.  The conceptual framework is therefore presented and the research methods of achieving the aims and objectives of this study are therefore set out. Finally this chapter set out how this research study is organized and set out.

 

Chapter Two

A Review of the Literature

2.1 Introduction

The dominant corporate law norm is said to be one that focuses management’s attention to the promotion of the rights and desires of shareholders (shareholder primacy).[27]  To a lesser and increasingly important degree, legal theorists and academics are advancing the stakeholder theory in that, taking account of the interests of creditors, suppliers, employees and the community can not only improve the company’s power, but raise its prestige.[28]  In order to effective assess both sides of the debate relative to stakeholder and shareholder theories, this chapter explores the main components of the shareholder and stakeholder debates. Thus a review of the literature establishes the conceptual framework for this research study.

2.2 Shareholder Primacy

2.2.1 Definition

Shareholder primacy is defined as the “obligation of corporate decision-makers to focus on shareholder interests”.[29] Thus, shareholder primacy by definition encapsulates two distinct conceptualizations. First there is the concept of the corporation’s objectives which are constructed around the shareholders as the corporation’s lawful beneficiaries.[30] Secondly, there is the concept of the distribution of authority throughout the corporate structure.[31]

In other words, shareholders are the owners of the corporation and directors owe the shareholders a fiduciary duty. Thus the distribution of authority within the corporate entity is constructed around this concept of the fiduciary duty of directors to the shareholders under the shareholder primacy theory.[32]  Therefore under shareholder primacy theory, the fiduciary duty of directors to shareholders remains an important part of corporate law and corporate governance.[33]

Shareholder primacy theory has emerged as a concept that requires that the company is managed so as to maximize shareholder wealth.  Keay explains that:

Simply this means that the directors will endeavour to make as much money as they can for the shareholders. Effectively this can be seen to involve the directors protecting and enhancing the investment of shareholders in the company. Hence, in this theory managers only have economic goals and responsibilities.[34]

It therefore follows that if there are conflicts between the interests of shareholders and the interests of a broader class of stakeholders, the directors are bound to pursue the interests of shareholders.  Arguably the interest of the shareholders is to enhance or maximize wealth and this means that they may do anything for this end provided it is lawful.  It is also argued that a failure to act within in the law will only create risks that are detrimental to the wealth of the shareholders in the long run. Thus under shareholder primacy theory, shareholder value is not only “expressed in price terms” but also in terms of “realized” value.[35]

Shareholder theory is therefore defined in a such a way as to place shareholders at the core of corporate law theory and corporate governance constructs.  The interests of shareholders are perceived as the fundamental rationale for decision-making, policies and practices within a corporate structure. Since the interests of shareholders is expressed in terms of shareholder value maximization, corporate governance constructs centre around an objective approach to protecting and enhancing the interests of shareholders.

2.2.2  The Origins of Shareholder Primacy Theory

 

Deakin argues that shareholder primacy theory did not originate “in company law” but “rather in the norms and practices surrounding” an increase in the “hostile takeover movement in Britain and America” during the decades of the 1970s and 1980s.[36] Even so it is generally accepted that Adolf A. Berle, Jr. is the “grandfather of shareholder primacy” beginning with his 1931 article Corporate Powers as Powers in Trust.[37]

Berle’s formulation of shareholder primacy theory emerged during the 1930s in the course of debates with E. Merrick Dodd relative to the duties of management and directors in respect of the shareholders and non-shareholder stakeholders.  At the time company law and corporate practices were granting directors a wide discretion over the management of corporations. Berle observed that the courts were increasingly using equitable principles of law to confer upon directors a duty to also safeguard the “ratable benefit of all the shareholders as their interests appears”.[38]

According to Stewart Jr., Berle’s advocacy for shareholder primacy corresponded with a transformation of shareholder class structures.  During the 1920s, increasingly middle and working classes began to own shares in companies.  Berle’s insistence on shareholder primacy thus reflected his general tendency to advocate for increased power among the working and middle classes.[39]  As shareholding shifted toward middle and working classes corporate law and practices began to emphasise corporate management and discretionary powers.  It was these two corresponding changes that motivated Berle to take a stance in favour of shareholder primacy.[40]

Berle expressed the view that the corporation as a pivotal part of the economy could reach its full potential by ensuring that the “property and fiduciary rights of shareholders” was a firmly established in the corporate governance mechanisms of the corporation.[41]  By taking this approach, the managerial risks associated with corporate powers could be controlled as it would make management and directors accountable to those who invested in and owned the corporation.[42]  At the time, this movement for shareholder primacy was characterized as radical and thus formed the backbone of the Corporate Liberal Revolution which was “at the core of the shareholder primacy argument” formulated by Berle during the 1920s.[43]

Essentially, Berle was in favour of democratic corporate governance and for him shareholder primacy was a means to promote democratic governance within the corporation.  Therefore, as Stewart Jr. explains “shareholder primacy was not an end for Berle, it was merely a means to an end”.[44]

By the 1930s, Berle’s shareholder primacy theory was firmly established.  He argued that directors were trustees for the shareholders.  As such, corporate directors were not at liberty to freely deal with the shares and the interests of the company.  In other words, management:

were accountable to exercise their discretion within, and only within, the scope of their pre-existing obligations to shareholders in order to ensure some measure of accountability within corporate operation and thus avoid at least some incidents of managerial opportunism.[45]

Berle’s theory of shareholder primacy which was motivated by his sympathy for the working and middle classes was for the improvement and promotion of democratic governance.  The fact that more and more working and middle classes were obtaining shares on the corporation persuaded Berle that these hard working individuals deserved to benefit from the fruits of their labours.  Therefore managing risks within a corporation owned by these hardworking individuals by safeguarding and promoting the value of their shares was not only fair but democratic.

2.2.3 Developing and Current Concepts of Shareholder Primacy

Berle’s characterisation of shareholder primacy as founded on concepts of private trust laws gave way to a prevailing preference for viewing shareholder interests in terms of property rights. The corporation thus became viewed as the property of shareholders which in turn conferred upon shareholders absolute power.[46]  The significance of this view of the corporation is found in the observation of Thomas Grey.  According to Grey, in a majority of “English speaking countries” property is perceived as a thing that is owned by individuals. Thus:

to own property is to have exclusive control of something – to be able to use it as one wishes, to sell it, give it away, leave it idle, or destroy it.[47]

Shareholder primacy has therefore developed to reflect a position that the corporation is the property of the shareholders.[48] This conceptualization of shareholder primacy is the basis for the view presented by Neoliberal economist Milton Freidman who argued in a 1970 essay The Social Responsibility of Business is to Increase its Profits:

In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business.  He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.[49]

Friedman’s assertion of shareholder primacy builds on Berle’s concept that shareholder primacy provides a method by which management is accountable and thereby deterred from self-dealing.  As Berle responded to Dodd’s stakeholder theory, management cannot be held in check if they are made accountable to employees and other non-shareholding stakeholders.[50]

Underpinning shareholder primacy in current parlance is the idea that management will likely take advantage of opportunities if given too much discretionary power.  It therefore follows that in the interest of efficiency, corporate management must be accountable to the shareholders of the company on the basis that shareholders appointed them to manage their shares and the interests attached to them.[51] Arising out of this view is the idea of agency theory.  In fact, much of today’s conceptualization of shareholder primacy theories reflects a correlation with agency theory.  For instance Blair and Stout maintain that:

Public corporations are little more than bundles of assets collectively owned by shareholders (principals) who hire directors and officers (agents) to manage those assets on their behalf.[52]

For many academics there is a strong link between agency theory and shareholder primacy.  Fernando’s description of agency theory bears this out.  According to Fernando, agency theory is at the core of corporate governance.[53] The basis for this conceptualization is linked to shareholder primacy because, according to Fernando:

Shareholders are the owners of any joint stock, limited company, and are the principals of the same.   By virtue of their ownership, the principals define the objectives of the company.[54]

In this regard, management take office because they are selected by shareholder solely for the purpose of realizing the objectives defined by the shareholders of the corporation.  Principals however must be safeguarded against the risk that agents will not always pursue those objectives.[55]  Thus shareholder primacy constructs of corporate governance are seen as a justified method for ensuring that management are mindful of their purposes and the principals whom they represent.

Corporate governance in the UK is guided by the concepts implicit in both agency theory and shareholder primacy theory.  The City Code on Takeovers and Mergers, the Combined Code on Corporate Governance and the common and statutory laws of the UK are “strongly oriented towards the norm of shareholder primacy”.[56] A World Bank publication maintains that agency theory provides the main basis by which corporate governance is analysed and thus prescribes the “structures” and “incentives” within governance constructs.[57]  Agency theory provides a method by which the tensions associated with acting for another may resolved.[58] In other words, the temptation to act for one’s own benefit may be tempered by governance constructs that fall within the scope and agency theory and thus shareholder primacy.

Ireland maintains that it is largely agreed among policymakers and academics alike that essentially favours shareholder primacy as the leading guide for corporate governance.  Ireland specifically states that among the academics, businesses and governments, it is largely agreed that:

Ultimate control over the corporation should rest with the shareholder class and that managers should manage in its interests.[59]

Thus it is largely accepted that corporate governance should be about the maximization of shareholder value.[60] According to Ireland, even advocates for stakeholder theory tend to argue that it is best to pursue stakeholder interests since it will ultimately improve shareholder value in the long-term.[61]

Ultimately, shareholder primacy as a model of corporate governance is justified on the following grounds:

  • Stakeholders’ interests are protected and prescribed by law, particularly contract, tort and employment laws. It therefore makes sense that directors should be accountable to shareholders by virtue of the imposition of a fiduciary duty.[62]
  • Shareholder primacy makes sense in terms of efficiency because shareholders have the “best incentive” to ensure that directors and corporate management abide by the laws and work for the benefit of corporate success.[63]

In short, shareholder primacy is thought to provide the best method for guiding efficient and  honest corporate governance.  By virtue of shareholder primacy, directors and corporate management are forced to take on an agency role and are therefore required to put aside personal aspirations and greed.  Shareholders, have the most to lose when corporate management and directors fail to do so and are therefore in the best position to ensure that directors and corporate management do not pursue personal desires and greed. The utility of these arguments have been tested by critics of shareholder primacy and as we will see, by those who support and promote stakeholder theory as a model for efficient and effect corporate governance.

2.2.4 Criticism of Shareholder Primacy

 

For academics and other observers and commentators in the field of corporate governance, the efficacy of shareholder primacy in corporate governance is criticised by referencing corporate scandals. For example, Reberioux argues that the “Enron-era financial scandals” demonstrate that permitting shareholders to control (indirectly but ultimately) the corporation fails because it facilitates a “partial” disconnect “between access to internal knowledge and empowerment”.[64] Thus “corporate insiders” are more prone to “deceptive behaviours”.[65]

This disconnect arises more prominently in times of corporate hardship.  Valsn and Yahya explain that:

When a firm is on the verge of bankruptcy and the cash is almost gone, the directors of the firm may be tempted to gamble the remaining cash on a very risky venture in hopes of striking it rich.[66]

This criticism is fuelled by the fact that the fiduciary duties of directors as reflective of shareholder primacy provide little or no incentive for directors to safeguard the interest of creditors, a non-shareholding class of stakeholders.  Minded only by the fiduciary duty owed to shareholders, when a firm is on the verge of collapse, directors care little about the interests of anyone else, particularly since they are no longer in a position to maximize the wealth of the shareholders.

More recent criticism of shareholder primacy has been centred on the 2008-2009 global financial crisis.  The global financial crisis is said to provide evidence that shareholder primacy systems of corporate governance has resulted in Anglo-American companies losing “their competitive edge in innovation”,  the collapse of big industries, the “transfer of manufacturing overseas”, “the stagnation of wages” and the “exponential rise in executive compensation”.[67] In fact, it has been stated that:

Today’s doctrines of shareholder primacy and managerial self-interest have brought many companies to the brink of self-destruction.[68]

This is because, there is no outside pressure on corporate management to succeed as shareholder primacy depends on inside pressure: from the shareholders.  Economic theorists argue that in order for a firm to achieve long-term value, it needs outside pressure, such as the pressure from non-shareholding stakeholders.[69]

Another criticism of the shareholder primacy model of corporate governance is expressed by Bainbridge. Bainbridge argues that shareholders represent a diverse group of individuals, with different levels of knowledge, shares and concepts of wealth maximization.  It is therefore impossible to set a standard for maximizing share value that is common to the diverse group of shareholders. There is bound to be a conflict of interests in terms of maximizing the shareholder value for a diverse group of shareholders.[70]

These criticisms of shareholder primacy invite consideration of whether or not stakeholder theory offers a viable alternative.  This is particularly so in considering Bainbridge’s argument of diverse shareholders and the diversity among their share value, knowledge and priorities.  If the potential for conflict of interests in these circumstances may compromise the efficiency of a shareholder primacy model of corporate governance, the question is equally valid in considering the efficiency of stakeholder models of corporate governance. Certainly there is a greater opportunity for stakeholders to have diverse interests and demands of the corporation.

Tung informs that “attacks on shareholder primacy have come from numerous quarters” and have advocated for the “expansion of the class of beneficiaries of directors’ fiduciary duties”.[71]  This has been a particularly important argument for stakeholder theorists and promoters of CSR.  The development of team production theory has also added to the literature criticising shareholder primacy.  In this regard, team production theorists argue that directors should not be accountable directly to shareholders “or any other specific corporate stakeholder”.[72] Rather, it is argued that:

In order to promote and protect firm-specific investment by diverse team members, directors owe fiduciary duties to the corporate coalition as a whole.[73]

Significant public attention has been directed toward the merits of shareholder primacy following the corporate failures of large multinational corporations such as Enron and Parmalat. These failures tended to indicate that shareholder primacy is not in a position to deliver “sustainable development of corporation activities”.[74] It has therefore been suggested that stakeholder models of corporate governance provide a more efficient model of corporate governance as it takes account of all stakeholder interests. [75]

Therefore an examination of the theory of stakeholder models of corporate governance is necessary to further understand the criticism of shareholder primacy. Stakeholder theory is held out as the polar opposite of shareholder primacy and as such is held out as the solution to the perceived weaknesses in shareholder primacy.[76]  An understanding of the nature and mechanisms of stakeholder theory will therefore expose the perceived weaknesses and the actual criticisms of shareholder primacy.

2.3 Stakeholder Theory

2.3.1 Definition

 

A basic definition of stakeholder theory is the conceptualization that the corporation’s wealth ought to be “distributed fairly to all stakeholders” and coupled with this idea is the concept that corporations have “social responsibility that goes beyond mere maximization of shareholder wealth”.[77]  A more informative definition of Stakeholder theory holds that any group or individual that can be impacted by the corporation has a right be taken into consideration in the company’s decision-making process.[78]

Argandona links stakeholder theory to CSR and defines stakeholder theory as a theory of “social responsibility”.[79]  In this regard, Argandona defines this aspect of stakeholder theory as oscillating:

Between two extremes: one that reduces the firm’s responsibility to the obtainment of (the greatest possible) profit for its shareholders, and another that extends the firm’s responsibility to include a wide range of actors with an interest or “stake” in the firm.[80]

Donaldson and Preston’s define stakeholder theory by reference to the practical and realistic structure and operation of the corporation.  In doing so, Donaldson and Preston maintain that stakeholder theory is predicated on the view that the corporation cannot be “simply” viewed as a “legal fiction”.[81]  In fact, realistically, it is an institution and as such, management are fiduciaries for an institution comprised of a number of “constituents” and not merely the shareholders.[82]

In other words, stakeholder theory is defined as a theory of the firm and advances the notion that business and society are intricately linked.[83] As such it proposes an “integrative framework” for business and society to co-exist in a manner that is beneficial to society and the corporation.[84]  The underlying rationale is that companies need not ignore profit maximization, but they ought to focus on engaging with the broader class of stakeholders with whom they not only engage with, but depend on for the corporation’s survival and/or success.[85]

Stakeholder theory by definition involves accountability from a broader perspective than shareholder primacy.  While shareholder primacy focuses more intently on the relationship of trust between the shareholders (beneficiaries) and the management (trustees), stakeholder theory focuses on the socio-economic contract between corporate management and all stakeholders, not only the trusteeship between management and shareholders.  Stakeholder theory insists that management’s fiduciary duty to shareholders should be extended to all stakeholders.

2.3.2 Origins of Stakeholder Theory

 

Mary Parker Follet’s work The New State which was published in 1918 espoused a theory of management which is strikingly similar to modern concepts of stakeholder theory.  Follet argued that the real individual was found via his connections to the world in which he lived.  Therefore individuality was realized by virtue of “interdependencies with the group”.[86] From a macro perspective, this conceptualization of the individual would influence the manner in which governance was built.  From a micro perspective, the interdependencies and interconnectedness would impact the manner in which groups and individuals perceived and interacted with one another.[87]

Follet expanded this theory to conceptualize how the business organization should be structured.  In this regard:

The structure, management and even the very purpose of the firm could be redefined to better reflect this interconnectedness, and enable the business to better fulfil its role in society.[88]

Despite the close correlation of Follet’s theory of management to stakeholder theory, Follet’s work is rarely if ever associated with stakeholder theory in the literature.[89]  Berle’s contemporary Harvard Professor, E. Merrick Dodd was also a significant contributor to the stakeholder theory in his identification of four primary stakeholders: shareholders, employees, customers and the public.[90] R. Edward Freeman is largely referred to as the “father of stakeholder theory in his 1984 publication Strategic Management: A Stakeholder Approach.[91] In this work, Freeman described the stakeholder as:

Any group or individual who can effect or is affected by the achievement of the organization’s purpose.[92]

Freeman’s stakeholder theory therefore advances the significance of stakeholders in the functioning of the corporation.  Freeman explains his stakeholder theory in a later publication and describes stakeholder theory as assuming “that values” are a necessary and significant part of business activities.[93]  It calls upon management to express “the shared sense of the value they create” and those values that are common to the more central stakeholders.[94]

2.3.3 Developments and Current Stakeholder Theory

 

Since Freeman’s stakeholder theory publication in 1984, the stakeholder theory has received considerable attention in the literature.  Increasingly attention is paid to the corporation’s role in society with an emphasis on the consequences of corporate activities and conduct on employees, the environment, communities and shareholders. In response interest groups such as environmental organizations have been keeping an eye on corporate conduct and have paid specific attention to corporations that have “treated their stakeholders in an unethical manner.”[95]

The contracts nexus theory and the productivity theory have become essential components of the stakeholder theory.  The contracts nexus theory which subscribes to the belief that companies are not owned and are institutions that function in society, ignores the assumption that shareholders own corporations.  Instead the contracts nexus theory looks more intently at corporation contributors. Based on this view, it is firmly believed that shareholders are not the corporation’s only contributors and thus are not solely responsible for the corporation’s success.  In fact there are a large number of non-shareholding stakeholders that contribute to the corporation’s success.  As a result the corporation must be defined in terms of the compilation of a “nexus of contractual relations between various resource providers.”[96]  This wider group of stakeholders or contributors include a number of actors such as employees, investors, suppliers, creditors, contractors and consumers and many more.[97] Thus there are a number of moral, social and economic contracts within the broad array of corporate functioning and operations that contribute to the success of the corporation in achieving its objectives.

The theory of productivity focuses on the corporation’s productivity, as such, the role and significance of shareholder primacy is minimized. Productivity theory does not ignore profit maximization, but it looks at it from a more protracted perspective and hones in on human capital as a major asset of the corporation.  In this regard, profit maximization is intricately linked to human capital rather than merely cash capital.  It is believed that human capital is a necessary investment for the ultimate goal of realising profit maximization.[98] It therefore follows that stakeholders in terms of employees, suppliers, creditors, contractors, consumers and the community are all important aspects of profit maximization goals and objectives.[99]

For the most part, stakeholder theory is characterized as a polar opposite to the theory of shareholder primacy although it does not ignore shareholder primacy’s constituent of maximization of shareholder value. [100]  Instead, the stakeholder theory promotes the view that the corporation’s primary objective should be to maximize its value in its entirety and this is achieved more effectively by distributing value “among all corporate stakeholders”.[101]  In this regard stakeholders are not simply the shareholders but also a number of other actors such as employees, consumers, tax collectors, suppliers and any number of other.[102]

Despite the significant role of shareholder primacy in the UK, the stakeholder theory, has gained currency in the UK in more recent times.  In particular it has been statutorily implied by virtue of the Companies Act 2006. The stakeholder theory forms a part of section 172 of the 2006 Act where directors’ general duty is characterized as a duty to promote the company’s success.  As a result directors are required to take into account not only the business implications relative to their decisions, but the implications relative to social factors, including the company’s community presence, the environmental impact of their decisions and the general interests of their employees.[103] It is important to note however, that despite the wording of Section 172 of the Companies Act 2006, there are no remedies in the Act for stakeholders should directors fail to take account of their respective interests.  Therefore, the significance of stakeholder theory under Section 172 is questionable and the prevalence of shareholder primacy is sustained.[104]

The US did not codify stakeholder theory and thus corporate obligations to be socially responsible.  However, stakeholder theory and corporate social conscience has become a major part of US corporate governance structures.  For example the utilization of the “Balanced Scorecard” a demonstratively “multidimensional performance measurement system” is an attempt to take account of the stakeholder theory.[105] Thus for both the US and the UK, corporate social responsibility and stakeholder theories of corporate strategies are voluntary while shareholder primacy continues to remain a mandatory aspect of corporate governance under the Anglo-American model of corporate governance.

2.3.4 Criticisms of Stakeholder Theory

 

Stakeholder theory was criticised by Berle and Means in 1932 who argued that the relationship between the corporation and its wider category of stakeholders is unclear and incapable of satisfactorily identifying and describing.  In addition, it is impossible to define that relationship in contractual terms in law and would also compromise the objectives of corporate governance.[106] The major objective of corporate governance is to prevent corporate management taking excessive risks at the expense of the shareholders and thus inspires accountability to shareholders.[107]

In other words, stakeholder theory compromises the objective of corporate governance in terms of tailoring excessive risk taking at the expense of shareholders.  Stakeholder commands attention to a variety of interest groups and as such makes it difficult to safeguard against excessive risks taking.  Essentially, excessive risk taking can be defended on the grounds that while it sacrificed shareholder value, it benefited a wider good.  For example, a corporate manager may take out a loan that the corporation can ill afford for the purpose of saving jobs. When the corporation defaults on the loan and the corporation collapses, management can defend this action based on the stakeholder theory of corporate governance.

Jensen argues that stakeholder theory is “fundamentally flawed” since as a workable theory:

it violates the proposition that  a single-valued objective is a prerequisite for purposeful or rational behaviour by any organization. In particular a firm that adopts stakeholder theory will be handicapped in the competition for survival because, as a basis for action, stakeholder theory politicises the corporation and leaves its managers empowered to exercise their own preferences in spending the firm’s resources.[108]

Thus according to Jensen, the stakeholder theory is impractical and can lead to a number of conflicts and tensions within the organization which will in turn compromise the corporation’s objectives and purposes.  Considering that the range of stakeholders that the stakeholder theory requires that corporations take account of, it is impossible to reconcile each of those conflicting interests and compartmentalize them into the purpose and objectives of the corporation.  Moreover, the diverse political, social, and economic values of corporate management will not only conflict with each other, but with any number of shareholders. Therefore corporate governance will be impossible to strategize and follow.

Other criticisms of the stakeholder theory hold that an enlargement of the corporate relationship with the wider category of stakeholders places an onerous burden on the shoulders of the corporate executives. Not only are they exposed to a myriad of conflicting and competing fiduciary duties, they are forced to choose which duties to prioritize, thus short changing some stakeholders and therefore always leaving themselves open to a breach of their duties.  On the other hand, they are also always able to defend their actions on the basis that they are safeguarding the interest of other stakeholders.  Therefore stakeholder theory is not only impractical, but calls for duties and entitlements that are impossible to follow and to enforce.[109]

2.4 Conclusion

 

A review of the literature reveals that stakeholder theory is gaining currency in the Anglo-American corporate governance structures.  Thus there is at the very least, some acknowledgement that traditional Anglo-American preferences for shareholder primacy is being revised.  On the other hand, the implementation of stakeholder theory by Anglo-Saxon corporate governance constructs is merely voluntary, thus validating the criticisms that stakeholder theory is incapable of enforcement.  Therefore despite the failure of shareholder primacy models of corporate governance in the recent global financial crisis, the belief that shareholder primacy provides the more efficient method of corporate governance persists.

2.5 Chapter Summary

 

This chapter examined the literature on shareholder primacy and stakeholder theories as a means of setting the conceptual framework for assessing the merits of the arguments relative to both theories.  Therefore this chapter set out the literature relative to the origins and rationale for the theories and the main arguments for and against the use of shareholder primacy and stakeholder theories as model of corporate governance.  This chapter identified the main features of these theories and their potential for influencing corporate governance frameworks.  The next two chapters takes a closer look at the current influences of both models of corporate governance with a view to identifying whether one will eventually replace the other, or if both with be converged to provide a more efficient model of corporate governance.

 

 

Chapter Three

Shareholder Primacy in Corporate Governance

3.1 Introduction

Thus far it has been established that shareholder primacy continues to be the dominant form of corporate governance and company law jurisprudence in the Anglo-American jurisdictions which includes virtually all of the English speaking world.  This chapter is committed to identifying how shareholder primacy operates in current company functioning.  In order to fully assess the arguments relative to shareholder primacy and stakeholder theories it is necessary to analyse how those theories operate in practice.  This chapter is therefore divided into two parts. The first part of the chapter provides an overview of the operative factors of shareholder primacy. The second part of this chapter will examine how shareholder primacy is applied in the UK’s corporate governance constructs.

 

3.2  Shareholder Primacy in Practice

 

Shareholder value and maximization of shareholder value have been expressed in diverse ways among corporations.  For instance in 1984 Coca-Cola expressed its shareholder objectives in the following way:

Growth in annual earnings per share and increased return on equity are still the names of the game.[110]

In the annual statement of a large US company shareholder value was expressed as being created when a corporation “generates free cash flow in excess of the shareholder’s investment in the business”.[111]

These expressions of shareholder primacy offer a simplification of the methods deployed in putting the theory to practice.  Ultimately, what is described is a commitment to increasing shareholder dividends.[112] However, as Keay reminds, there are any number of methods by which shareholder primacy can be realized.  For instance a firm may consider realizing shareholder primacy objectives by cutting costs.[113]

Regardless, shareholder primacy strategies for corporate governance are preferred in Anglo-American jurisdictions because it is regarded as a “measurable” and “observable”.[114]  Keay explains that this aspect of shareholder primacy also explains why many economist favour shareholder primacy over stakeholder theory. The reality is, shareholder primacy is easier to incorporate into a corporate governance strategy.[115]

Putting shareholder primacy objectives and strategies into practice is not always as simple as typically expressed.  The fact is, shareholder primacy objectives and strategies are not flawless as evidenced by the public corporate scandals and the recent global financial crisis of 2008-2009.  In other words, pre-existing methods for setting out and pursuing shareholder primacy objectives have not always been effective or efficient.

One such method of pursuing and setting shareholder primacy objectives is the measuring of corporate success via share pricing.  As Keay explains:

The strong version of the theory of efficient markets…posits that the share price will take into account all the information, public and private, available at a particular time about a company’s performance and prospects, with the result that market capitalisation will indicate what a company is worth to the shareholders.[116]

In other words, it is often believed by some corporate strategists that share performance on the stock market is a robust indicator of whether or not the directors are fulfilling their fiduciary duties to company.

There are problems with taking this approach to shareholder primacy. For example, Blair maintains that management may deliberately misrepresent financial statements so that the price of the shares will improve.[117]  Moreover management may use indirect methods for manipulating pricing such as deliberately announcing the price as late as possible. [118]  The fact, is dishonest and deceptive management is a safeguard that can be prevented by hiring and training protocols and ultimately can be a detriment to any company regardless of what kind of corporate governance constructs are adopted.

There is no way to predict or determine whether stakeholder theory of corporate governance or shareholder primacy theory of corporate governance inspires more honest and moral management.  Moreover, share pricing initiatives as a method of measuring and promoting shareholder primacy is a tried and true method for improving and promoting corporate success. It not only measures short-term value but also paves the way for future value, by setting a standard for future success.[119] As Keay puts it:

While accounting mechanism are backward looking, focusing on share value is  forward looking as it involves the market’s best idea as to what is the value of the investments that a company has made and what is the value of investments to be arranged in the future.[120]

Moreover, share pricing provides a fairly simple mechanism for determining whether or not management are performing satisfactorily and it also allows shareholders to know whether or not they are actually profiting from their investment. [121]

The use of shareholder primacy as a method of corporate governance also provides an observable and measurable metric for assessing corporate performance. It in fact permits management and corporate performance to be ranked.[122] Shareholder primacy facilitates a method by which financial worth can be applied to investments “such as the company’s shares, business strategies, mergers and acquisitions and capital expenditures” by offsetting “forecasted cash flows by the cost of the capital”.[123]

The problem however, is that a number of metrics can be used and quite often lay persons, such as shareholders may not be familiar with the metrics used and thus may not understand the results.[124] However, these kinds of problems can be avoided by producing a statement that is easy to follow and understand.  At the very least, shareholders are put in a position to ascertain whether or not the company is meeting its objectives in terms of maximization of shareholder value.

A significant problem with shareholder primacy as a model for corporate governance is that the theory itself fails to ascertain whether or not maximization of shareholder value should be a short-term or long-term goal. If a firm opts for short-term value, this could compromise the company’s long-term success. For example, management may inject funds into a short-term project at the expense of research and development.[125]

 

3.3 Shareholder Primacy and Corporate Governance in the UK

 

The UK has a long history of common law principles that express the place of shareholder primacy in corporate governance.  Essentially shareholder primacy is reflected in the director’s duties.  These duties have evolved to require that directors act in good faith in the best interest of the company and to use a level of skill and care of a reasonable business person.[126] Described as having a fiduciary duty relative to the shareholders, the duty was described by Millett LJ in Bristol and West Building Society v Matther  as:

The distinguishing obligation of a fiduciary is the obligation of loyalty.  The principle is entitled to the single-minded loyalty of his beneficiary. This core liability has several facets.  A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict.[127]

At common law, directors did not have a duty to take account of the interests of the wider class of stakeholders.  The interests of stakeholders were only relevant if it had some benefit for shareholders and advanced the corporate objectives and purposes.[128]  It was generally accepted that stakeholders such as employees could look to other areas of law for protection and remedies against a company that conducted business in a manner that caused them harm.  The employee could of course look to employment law, the supplier could look to the law of contract, members of the community could seek recourse in tort and consumers could seek remedies via consumer protection law or the law of contract. Certainly, company law was of no avail to stakeholders.[129]

With greater attention to the stakeholder theory, the UK passed Section 309 of the Companies Act 1985.  Even so, Section 309 did not entirely adapt a stakeholder approach to corporate governance.  Sealy observes that:

It is now widely accepted that the claims of other interest groups, such as the company’s work force, its customers and suppliers, may call to be recognized quite as much as those of the people who are no more than passive investors in the enterprise; and there are those who would go even further and require that ‘responsible company’ of today and its directors to have regard to wider consideration such as the community, the environment, charitable causes and other goods causes and the national interest.[130]

Sealy was restating what is known as the stakeholder theory.  In that regard, Section 309 of the Companies Act 1985 invited some speculation as to whether or not the UK was changing its approach to corporate governance and steering away from shareholder primacy.  However, a closer examination of Section 309 reveals that any change was tenuous at best.  Section 309 merely required that companies conduct their business so as to protect the interests of their employees.[131]  Noticeably absent were any remedies for an employee in the event a director failed to protect his or her interest pursuant to Section 309. Thus the employee’s grief with a company remained a matter for the law of contract or employment law.

Moreover, Section 309(2) of the Companies Act 1985 provides that in the event there is a conflict between the employee’s interest and the shareholders’ interest, the interests of the shareholders must prevail. Therefore shareholder primacy continued to be the dominant method of corporate governance.  The general test was whether or not protection of the employees was consistent with the interest of shareholders. For instance, the court held in Re Welfab Engineers Ltd  that the company’s sale of assets as a means of saving the company and employees’ jobs was not inconsistent with it duty to shareholders since the shareholders would also benefit if the company was salvaged.[132]  Likewise in Re Saul D Harrison and Sons Plc it was held that:

The company’s duties to its employees was clearly a matter which the directors were entitled to take into account if they are of the opinion that there was a reasonable prospect that the company’s business could be salvaged.[133]

On occasion, the courts demonstrated a tendency to observe and subscribe to the stakeholder theory of corporate governance.  For instance in Fulham Football Club v Cabra Estates the Court of Appeal noted that the company was not only comprised of shareholders but was a confluence of different interests.[134]  However, rulings of this sort were far too infrequent and rare to form a consensus capable of changing the shareholder primacy approach.  At best, stakeholder theory merely arises as a defence to claims of breach of directors’ duty.  Certainly there were no instances where the court enforced a duty to protect or safeguard the interests of stakeholders who were no shareholders.[135] The fact is, shareholder primacy and continues to remain the yardstick by which the law in the UK measures and tests directors’ duties and therefore corporate governance.[136]

Section 172 of the Companies Act 2006 did in fact enhance the stakeholder theory. Pursuant to Section 172 of the Companies Act 2006 directors are required to manage the company’s affairs  “in good faith”  and in a manner that will “promote the success of the company” and will benefit the company’s “members as a whole.”[137]  Specifically, the director must take account of:

  1. The impact of business decisions in the long-term
  2. Employees’ interests.
  3. The necessity of fostering business relationships with consumers, suppliers and other groups.
  4. The consequences for the environment and the community.
  5. The benefits of a good reputation.
  6. The necessity of acting fairly relative to the company’s members.[138]

Like Section 309 of the Companies Act 1985, Section 172 does not provide for remedial action for the wider group of stakeholders.  It therefore follows that stakeholder theory may be adopted in corporate governance constructs on a voluntary basis.  The fact that it has been codified however, ensures that companies will likely take the duty more seriously.  However, the fact that shareholders have a right to sue the company and directors for failure to safeguard their interests means that shareholder primacy remains the dominant theme in corporate governance in the UK.  It is entirely unlikely that directors would take any action to protect a stakeholder if by taking that action they could be sued by shareholders.

 

3.4 Conclusion

Shareholder primacy has been largely accepted as a robust method for directing corporate governance because it applies to an identifiable group: shareholders. Therefore it can set specific standards and best practices designed to deliver shareholder value for this group of shareholders.  In other words accountability is much easier to construct and control.  Shareholder primacy also facilitates observable and measurable metrics which means that shareholders and directors are in a better position to determine whether or not directors are meeting corporate objectives.            Although some practical problems have been identified, as in share price manipulations by directors, these problems can be overcome.

The UK has always focused its company law on the shareholder primacy theory.  However, beginning in 1985, there was evidence that stakeholder theory gained some degree of currency in UK companies law.  Even so, shareholder primacy continues to dominate judicial temperament and statutory laws. Although the 1985 and 2006 Companies Acts called upon directors to take account of stakeholders, they both fell short of making this duty a mandatory duty.  Therefore, the UK is a long way off from codifying stakeholder theory.

3.5 Chapter Summary

This chapter took a closer look at shareholder primacy by exploring the methods by which shareholder primacy is pursued in corporate governance.  The UK’s company laws also provided an example of how shareholder primacy is expressed by the courts and the statues of the UK. Essentially, this chapter demonstrated why shareholder primacy is a dominant theme in corporate governance and how it is mandated by law.

 

Chapter Four

Stakeholder Theory and Corporate Governance

4.1 Introduction

Stakeholder theory is an expansion of CSR and sits at the centre of CSR.[139] Therefore in order to fully understand the corporate governance underpinnings of stakeholder theory, it is important to analyse the place of CSR in corporate governance. To that end, this chapter will first define CSR with a view to identifying its stakeholder theory outgrowth. Secondly, this chapter will explore the practices and perceptions of CSR and by extension, stakeholder theory.

4.2 Definition of Corporate Social Responsibility

CSR is defined by Kotler and Lee as:

…a commitment to improve community well-being through discretionary business practices and contributions of corporate resources.[140]

It has been argued that although CRS “is in vogue” it is nonetheless “a concept” that “is vague and means different things to different people”.[141]  For instance, environmentalists see perceive CSR as an environmental duty.[142] Other advocated for CSR  are concerned with society and others perceive that CSR is about instilling public confidence and legitimizing the corporation, its behaviour and resolving  the perpetual conflict “between economic wealth and social wellbeing”.[143]

Regardless of the diverse concepts or views of CRS a common thread runs throughout: stakeholder theory.  CRS focuses just as intently on a wider group of non-shareholding stakeholders.  Thus stakeholders for the purpose of CRS as a model of corporate governance includes environmentalists, interest groups, employees, members of the community and a large array of persons, parties and entities.

4.3 Stakeholder Theory and Corporate Social Responsibility in Practice

There are essentially two theoretical approaches to putting CSR and thus stakeholder concepts into practice. The two theories are neoliberal and neo-Keynesian.  A third theory is radical political economy theory but this theory is sceptical of stakeholder theory and CSR.  Neoliberalism as a form of CRS and stakeholder theory of practice is voluntary and is accomplished by codes/guidelines.  Neo-Keynesian theorists emphasized the active interest of stakeholders.

Neoliberalism  came to the forefront of the CSR debate during the1980s and basically holds that corporations should subscribe to shareholder primacy and other social contracts should be governed by a code of ethics and by the government. A company should be at liberty engage in financial gain as long as it did so within the limits of the law.[144] Neoliberal economist Milton Friedman maintained that CSR was merely distracted corporations from their primary responsibility to safeguard the financial interests of their shareholders.  Therefore, CSR should be voluntary .[145]

Broomhill argued that although neoliberal CSR theorist view CSR as unduly invasive and unnecessarily limits the corporation’s pursuit of its objectives, CSR can actually produce profits in the long-term.  In fact, according to Broomhill even neoliberalism theories are unable to discount the reality that subscribing to CSR practices can  be a significant sours or insurance that mitigates risks associated with poor publicity, government intervention and pressure for consumers and shareholders in circumstances where corporate behaviour is under intense scrutiny. [146]

Neoliberal theories therefore favour shareholder primacy and as such see CSR as a voluntary practice on the part of corporations.  For the most part, shareholder primacy is the guiding force for neoliberalists. The fact is however, neoliberalist do acknowledge that CRS practices can benefit the corporation in the long-term and as such they do not dismiss it outright.  The emphasis is on voluntary prescriptions for CRS. Governments should not legislate to force corporations to safeguard the interests of the wider class of stakeholders.

From the neo-liberal perspective, corporations wishing to be competitive will naturally implement CSR prescriptions in their corporate governance constructs.  Realistically, as corporations come under increasingly intense scrutiny, they will feel inclined to  adopt some measure of CSR policies and strategies.  If they conduct business in a way that ignores social demands in terms of respecting the environment, investor preferences, consumer concerns and so on, profits may decline.  In other words, neoliberalists expect that CRS will be an automatically adopted practice.

John Maynard Keynes’ employment theories in 1920s and 1930s was a reaction to the growing unemployment rates and the economic depressions of the time. Keynes’ theories countered neo-classical theories that “market forces” would create economic “equilibrium”.[147]  For Neo-classical theorists, unemployment was a result of the imbalance between wages and the cost of capitalism.  If wages were decreased, employment would improve.[148] Keynes response was that employment would increase by virtue of three stages: supply, consumption and investment.[149]

In this regard, investment was not only financial.  Governments should “absorb excess production and to create full employment”.[150]  Investments should also be in “social capital” in terms of improving confidence, legal frameworks and the quality of culture and ethnic equality, pride in work and other forms of human capital.[151]  The government and corporations should also focus on improving human capital by investing in educating and training workers.[152]

Put another way, neo-Keynesianism argues for the implementation of CRS by virtue of government support in that both the government and corporations should cooperate to improve the working and living standards of employees as well as their ability to produce for the good of the corporation and society as a whole. This could be accomplished by subscribing “socially responsible policies”.[153]  By taking this approach corporations and society prosper as growth, demand and “output” are stimulated and improved.[154]  Employment would increase, therefore living standards would improve, and workers would spend money from which corporations would benefit.[155]

More recently Keynesianism holds that CSR should not be controlled or regulated by either stakeholders or the government.  Instead, CSR should be a voluntary exercise on the part of the organization.  Neo-Keynesianism theories of CSR can be identified in the EU’s Green Paper Promoting a European Framework for Corporate Social Responsibility where CSR is defined as:

…a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.[156]

The EU Green Paper also observes that European companies have been increasingly implementing CSR practices and policies into their corporate governance structures as a direct consequence of pressure from a number of factions inclusive of environmental, economic and social.  These CSR practices are way of letting stakeholders know that corporations are acting in a way that is socially. The stakeholders include, shareholders, investors, consumers, employees, official authorities and non-governmental organizations (NGOs).  By putting CSR into practice, corporations are making investments in their future. They therefore expect that “the voluntary commitment they adopt will help to increase their profitability”.[157]

Neo-Keynesianism can be seen as expecting that companies will voluntarily implement CSR practices.  Therefore there is no need to force companies to implement CSR strategies. The EU’s Green Paper explains that CSR is fuelled by issues that a competitive and successful organization cannot simply ignore.  These issues are:

  • The interests and concerns of a variety of stakeholders which necessarily follow from globalization and “large scale industrial change”.[158]
  • Social concerns are “increasingly influencing the investment decisions of individuals and institutions both as consumers and as investors”.[159]
  • Environmental concerns.
  • Transparency of corporate activities of organizations brought about by advanced information technology.[160]

CSR Reports have emerged as a significant instrument for companies to inform stakeholders of their socially responsibility practices. Some of these reports include Gap’s 2003 CSR Report which document vendors’ violations of Gap’s Code of Conduct. Another CSR Report was issued by Nike in 2004 providing a list of its global suppliers. Timberland’s 2006 report lists the social and environmental aspects of production. Stoneyfield Farm’s 2008 CSR report details its work with Climate Counts in measuring “carbon emissions” ; and Patagonia’s CSR 2009 Report reports on, environmentally conscious production, employee values and its code of conduct.[161]

4.4 Conclusion

A practical problem can be immediately identified.  Corporations, regardless of their commitment to CSR practices and policies can only commit themselves to a limited group of stakeholders.  As evidenced by the CSR reports listed above, corporations are unable to generate reports that reflect responses to all stakeholder concerns and thus the list is very narrow.  Another practical problem is that corporations cannot realistically identify and respond to all the interests of all the stakeholders.  Therefore in being selective, there is no way of accurately measuring performance based on CSR or stakeholder theory.

4.5 Chapter Summary

This chapter defined CSR and made the connection between CSR and stakeholder theory.  This chapter also analyzed the main theories that interpret the practical implications of CSR and stakeholder theories as frameworks for corporate governance.  Therefore this chapter was important for providing a basis by which to assess the practicality of putting stakeholder theory in the forefront of corporate governance frameworks as opposed to shareholder primacy.

Chapter Five

Findings/Conclusion

Shareholder primacy and stakeholder theories have been the subject of intense debate ever since the 1930s as Dodd and Berle took opposing sides on the issue.  Shareholder primacy has  been the dominant theory in  Anglo-American corporate governance for a long time.   However, it was not until relatively recently that serious attention has been placed on stakeholder theory under the auspices of CSR in terms of paying more than mere lip service to the its merits.

Globalization has commanded that corporations take a more committed approach to how its business activities impact those with whom it comes into contact with.  A major concern is necessarily the exploitation of the environment pursuant to shareholder primacy driven corporations.  Complicating matters, the recent global financial crisis has been primarily attributed to the greed and excessive risk taking of corporate management under shareholder primacy models of corporate governance.

Even so, Anglo-American company law systems have not been comfortable transforming their corporate governance frameworks from shareholder primacy models to stakeholder/CSR models.  However, there has been an acknowledgment that companies must take into account the interests of the wider group of shareholders. However, this requirement is not backed by an enforceable law.

It can be concluded that the reason for this scant attention to CRS and stakeholder theory is practical and realistic.  It is impossible for corporate management to identify all of the stakeholders that they come into contact with.  Nor is it possible for corporate management to identify all of the interests and concerns that their stakeholders may have.  Even more impossible, is the task of  balancing interests.  Thus, a corporation would have an onerous and impossible task in determining the appropriate CSR practices to employ.  There is always the risk that some stakeholders will feel shortchanged or simply ignored by the corporation and thus profits will ultimately suffer.

The neo-Keynesian approach to CSR appears to be more realistic.  Therefore it is recommended that corporations be left to respond to social issues as they arise.  Governments should not dictate the extent to which corporations should be socially responsible.  In this regard, the EU’s Green Paper is perhaps the best approach to take.  Corporations wishing to remain competitive would automatically volunteer to be socially responsible in the conduct of their business.

The reality is, shareholders have to be protected as they are considered by many to own the company and they have a financial stake in the success of the company.  Responsible and competent managers know where to draw the line on delivering shareholder value and preserving relations with stakeholders.  Moreover, there are a number of laws dictating the manner in which not only natural individuals, but legal persons should behave.  For instance there are environmental laws and consumer protection laws and the law of contract and tort to ensure that natural and legal persons act in a manner consistent with preserving the social order and by extension to act in a way that is socially responsible.

In the final analysis, the approach taken by the UK in the Companies Act 2006 appears to be the appropriate manner of incorporating stakeholder accountability and stakeholder theory to a certain extent.  In this regard, statutes should merely remind companies of the interests of stakeholders and how observance of these interests will positively promote the success of the company. It provides shareholders with a general right to sue directors if they fail to take account of these interests to the detriment of the company. This is because Section 172 of the Companies Act 2006 requires that corporate directors promote the success of the company.  If they fail to do so, shareholders can sue directors for breach of directors’ statutorily imposed fiduciary duties.

 

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Rendtorff, J. D. Responsibility, Ethics and Legitimacy of Corporations. (New York, NY: CBS Press, 2009).

Sarra, J. Corporate Governance in Global Capital Markets, (Bancouver, BC: University of British Colombia Press, 2003).

Sealy, L. Cases and Materials in Company Law. (London, UK: Butterworths, 2001).

Solomon, J. Corporate Governance and Accountability. (London, UK: Wiley Blackwell, 2007).

Tully,  S. Research Handbook on Corporate Legal Responsibility. (Oxon, UK: Edward Elgar Publishing Limited, 2005).

Werther, W. B. and Chandler, D. Strategic Corporate Social Responsibility: Stakeholders in a Global Environment. (Thousand Oaks, California: SAGE Publications, Inc., 2011).

Articles/Journals

  1. Argandona, A. ‘The Stakeholder Theory and the Common Good.’ (1998)17(9-10) Journal of Business Ethics, 1093-1102.

Armour, J.; Deakin, S. and Konzelmann, S. ‘Shareholder Primacy and the Trajectory of UK Corporate Governance.’ (September 2003)41(3) British Journal of Industrial Relations, 531-555.

Berle, A. Jr. ‘For Whom Corporate Managers are Trustees: A Note’, (June 1932) Harvard Law Review Vol. 45(8): 1362-1372.

Blair, M. and Stout, L. ‘A Team Production Theory of Corporate Law.’ (March 1999) 85 (2) Virginia Law Review, 248-328.

Blair, M. ‘Directors’ Duties in a Post-Enron World: Why Language Matters,’ (2003) 38 Wake Forest Law Review, 885-909.

Blankenburg, S.; Plesch, D. and Wilkinson, F. ‘Limited Liability and the Modern Corporation in Theory and in Practice.’ (2010) 34(5) Cambridge Journal of Economics, 821-836.

Branco, M. and Rodrigues, L. ‘Positioning Stakeholder Theory Within the Debate on Corporate Social Responsibility.’ (2007) 12 (1) Electronic Journal of Business Ethics and Organization Studies, 5-15.

Bratton, W. and Wachter, M. ‘Shareholder Primacy’s Corporatist Origins: Adolf Berle and The Modern Corporation.’ (2008)34 The Journal of Corporation Law, 100-150.

Broadberry, S. And Crafts, N. (1996) ‘British Economic Policy and Industrial Performance in the Early Post-war Period,’ (1996) 38 Business History, 65-91.

Broomhill, R. ‘Corporate Social Responsibility: Key Issues and Debates’ (2007) Dunstan Paper No.1/2007, 1-31.

Buchholz, R. and Rosenthal, S. ‘Social Responsibility and Business Ethics’. Cited in R. Frederick (Ed.) A Companion to Business Ethics. (Massachusetts, USA:  Blackwell Publishers 2002).

Carrillo, E. ‘Corporate Governance: Shareholders’ Interests’ and Other Stakeholders’ Interests,’ (Summer 2007) 4(4) Corporate Ownership and Control,96-102.

Clark, G. and Knight,E. ‘Implications of the UK Companies Act 2006 For Institutional Investors and the Market for Corporate Social Responsibility.’ (2009)11(2) University of Pennsylvania Journal of Business Law , 259-296.

Clarke, T. ‘Corporate Governance Causes of the Global Financial Crisis.’ Cited in W. Sun; J. Stewart and D. Pollard, (Eds). Corporate Governance and the Global Financial Crisis, (Cambridge, UK: Cambridge University Press 2011).

Clarke, T. ‘Recurring Crises in Anglo-American Corporate Governance’,  (Nov. 2009) Contributions to Political Economy, Vol. 29(1): 9-32.

Crafts, N. ‘Reversing Relative Economic Decline? The 1980s in Historical Perspective,’ (1991) 7 Oxford Review of Economic Policy, 81-98.

Deakin, S. ‘The Coming Transformation of Shareholder Value.’ (January 2005) 13(1) Corporate Governance: An International Review, 11-18.

Donaldson, T. and Preston, L. ‘The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications.’ (1995)30(1) Academy of Management Review, 65-91.

Fisch, E. ‘Measuring Efficiency in Corporate Law: the Role of Shareholder Primacy.’ (2006) 31 Journal of Corporation Law, 637-674.

Freeman, R. E.; Wicks, A. and Parmar, B. ‘Stakeholder Theory and “The Corporate Objective Revisited”’. (May-June 2004) 15(3) Organization Science, 364-369.

Freeman, R.E. ‘Stakeholder Theory and “The Corporate Objective Revisited”’. (2004) 15(3) Organization Science, 364-369.

Froud, J.; Haslam ,C.; Johal, S. and Williams, K. ‘Shareholder Value and Financialization: Consultancy Promises, Management Moves.’ (2000) 29(1) Economy and Society, 80-110.

Grey, T. ‘The Disintegration of Property’. Cited in J. Pennock and J. Chapman (Eds). Nomos XII: Property. (New York, NY: New York University Press 1980).

Hillman, A. and Keim, G. ‘Shareholder Value, Stakeholder Management, and Social Issues: What’s the Bottom Line?(2001)22 Strategic Management Journal, 125-139.

Ho, V. ‘Enlightened Shareholder Value: Corporate Governance Beyond the Shareholder-Stakeholder Divide’. (2010)36(1) The Journal of Corporation Law, 61-112.

Hsieh, N. ‘Corporate Social Responsibility and the Priority of Shareholders.’ (2009) 88 Journal of Business Ethics, 553-560.

Hutchinson, H. and Alley, R. ‘Against Shareholder Participation: A Treatment for McConvill’s Psychonomicosis.’ (October 2007) 2 Brook. J. Corp. Fin. And Com. Law, 41-67.

Ireland, P. ‘Shareholder Primacy and the Distribution of Wealth.’ (2005) 68(1) Modern Law Review, 49-81.

Jensen, M. ‘Value Maximisation, Stakeholder Theory, and the Corporate Objective Function.’ (2001) 7 (3) European Financial Management 297-317.

Keay, A. ‘Shareholder Theory in Corporate Law: Has it Got What it Takes?’ (January 2010) University of Leeds-School of Law, Working Paper, 1-52.

Kirkpatrick, G. ‘The Corporate Governance Lessons From the Financial Crisis’, (2009) Financial Market Trends, OECD vol. 2009/1, 1-30.

Macey, J. ‘An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties.’ (1991-1992)21 Stetson Law Review, 23-44.

MacIntosh, J. ‘The Issues, Effects and Consequences of the Berle-Dodd Debate, 1931-1932’. (1999) 24(2) Elsevier, 139-153.

Morsing, M. and Schultz, M. ‘Corporate Social Responsibility Communication: Stakeholder, Information, Response and Involvement Strategies.’ (October 2006)15(4) Business Ethics: A European Review, 323-338.

Munlia, L. and Miles, M. ‘The Corporate Social Responsibility as a Component of Stakeholder Theory.’ (December 2005) 110(4) Business and Society Review, 371-387.

Orts, E. and Strudler, A. ‘Putting a Stake in Stakeholder Theory.’ (2009) 88 Journal of Business Ethics, 605-615.

Page, A. ‘Has Corporate Law Failed? Addressing Proposals for Reform.’ (April 2009) 107 Michigan Law Review, 979-998.

Reberioux, A. ‘Does Shareholder Primacy Lead to a Decline in Managerial Accountability?’ (2007) 31(4) Cambridge Journal of Economics, 507-524.

Schilling, M. ‘Decades Ahead of Her Time : Advancing Stakeholder Theory Through the Ideas of Mary Parker Follet.’ (2000)6(5) Journal of Management History, 224-242.

Sharfman,  B. ‘How the Strong Negotiation Position of Wall Street Employees Impacts the Corporate Governance of Financial Firms’. (Winter 2011) 5(3) Virginia Law and Business Review, 350-374.

Sklair, L.‘Capitalist Globalization, Corporate Social Responsibility and Social Policy.’ (November 2010) 30(4) Critical Social Policy, 472-495.

Sprague, R. ‘Beyond Shareholder Value: Normative Standards for Sustainable Corporate Governance.’ (2010)1 William and Mary Business Law Review, 47-81.

Stewart, Jr. , F. ‘Berle’s Conception of Shareholder Primacy: A Forgotten Perspective for Reconsideration During the Rise of Finance’. (2011) 34 Seattle University Law Review, 1457-1499.

Stout, L. ‘Bad and Not-So-Bad Arguments for Shareholder Primacy.’ (2002)75 Southern California Law Review, 1189-1210.

Sundaram, A. and Inkpen, A. ‘The Corporate Objective Revisited.’ (May-June 2004)15(3) Organization Science,350-363.

Toms, S. ‘Divergence and Convergence within Anglo-American Corporate Governance Systems: Evidence From the US and UK, 1950-2000’, (2005) 47(2) Business History, 267-295.

Tung, F. ‘Gap Filling in the Zone of Insolvency.’ (2007)1(2) Journal of Business and Technology Law, 608-631.

Valsan, R. and Yahya, M. ‘Shareholders, Creditors, and Directors’ Fiduciary Duties: A Law and Finance Approach,’ (Spring 2007)2(1) Virginia Law and Business Review, 2-51.

Velasco, J. ‘The Fundamental Rights of the Shareholder.’ (2006)40 University of California, Davis, 407-467.

Velasco, J. ‘Taking Shareholder Rights Seriously.’ (2007) 41, University of California, Davis, 605-681.

Williamson, O. ‘Managerial Discretion, Organisational Form and the Multi-Divisional Hypothesis,’ cited in Harris, R. And Woods, A. (eds) The Corporate Economy,(Oxford, UK: Oxford University Press, 1971).

 

Official Publications

EU Green Paper. Promoting a European Framework for Corporate Responsibility. Burssels, COM (2001) 366, 1-32.

Musalem, A.  and Palacios, R. Public Pension Fund Management: Governance, Accountability, and Investment Policies. (Washington, DC: World Bank Publications 2004).

 

Internet Sources

Friedman, M. ‘The Social Responsibility of Business is to Increase its Profits.’ (13 September 1970) The New York Times Magazine http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html (Retrieved 21 August 2011).

 

Table of Statutes

Companies Act 2006.

Companies Act 1985

 

Table of Cases

Bristol and West Building Society v Matther [1998] Ch 1.

Fulham Football Club v Cabra Estates [1994] 1 BCLC 363.

Re Saul D Harrison and Sons Plc [1995] 1 BCLC 14.

Re Welfab Engineers Ltd [1990] BCLC 833.

[1] A. Keay, ‘Shareholder Theory in Corporate Law: Has it Got What it Takes?’ (January 2010) University of Leeds-School of Law, Working Paper, 1-52, 1.

[2] J. Armour; S. Deakin and S. Konzelmann, ‘Shareholder Primacy and the Trajectory of UK Corporate Governance,’ (Septempber 2003)41(3) British Journal of Industrial Relations, 531-555, 531.

[3] R. Buchholz, and S. Rosenthal, ‘Social Responsibility and Business Ethics’, cited in R. Frederick (Ed.) A Companion to Business Ethics, (Massachusetts, USA:  Blackwell Publishers 2002), 303.

[4] B. Horrigan, Corporate Social Responsibility in the 21st Century in the 21st Century: Debates, Models and Practices Across Government, Law and Business, (Glos, UK: Edward Elgar Publishing Limited, 2010) 10.

[5] L. Stout, ‘Bad and Not-So-Bad Arguments for Shareholder Primacy,’ (2002)75 Southern California Law Review, 1189-1210, 1190.

[6] E. Freeman; A. Wicks, and B. Parmar, ‘Stakeholder Theory and “The Corporate Objective Revisited”’, (May-June 2004) 15(3) Organization Science, 364-369, 364.

[7] V. Ho, ‘Enlightened Shareholder Value: Corporate Governance Beyond the Shareholder-Stakeholder Divide’, (2010)36(1) The Journal of Corporation Law, 61-112, 61.

[8] V. Ho, ‘Enlightened Shareholder Value: Corporate Governance Beyond the Shareholder-Stakeholder Divide’, (2010)36(1) The Journal of Corporation Law, 61-112, 61.

[9] L. Sklair, ‘Capitalist Globalization, Corporate Social Responsibility and Social Policy,’ (November 2010) 30(4) Critical Social Policy, 472-495, 472.

[10] A. Hillman and G. Keim, ‘Shareholder Value, Stakeholder Management, and Social Issues: What’s the Bottom Line?(2001)22 Strategic Management Journal, 125-139, 125.

[11] S. Blankenburg; D. Plesch and F. Wilkinson, ‘Limited Liability and the Modern Corporation in Theory and in Practice,’ (2010) 34(5) Cambridge Journal of Economics, 821-836, 821.

[12] L. Munlia and M. Miles, ‘The Corporate Social Responsibility as a Component of Stakeholder Theory,’ (December 2005) 110(4) Business and Society Review, 371-387, 371.

[13] R. Mullerat, International Corporate Social Responsibility, (The Netherlands: Kluwer Law International 2010) 39.

[14] M. Branco and L. Rodrigues, ‘Positioning Stakeholder Theory Within the Debate on Corporate Social Responsibility,’ (2007) 12 (1) Electronic Journal of Business Ethics and Organization Studies, 5-15.

[15] M. Jensen, ‘Value Maximisation, Stakeholder Theory, and the Corporate Objective Function,’ (2001) 7 (3) European Financial Management 297-317, 298.

[16] T. Clarke, ‘Corporate Governance Causes of the Global Financial Crisis,’ cited in W. Sun; J. Stewart and D. Pollard, (Eds). Corporate Governance and the Global Financial Crisis, (Cambridge, UK: Cambridge University Press 2011), 28.

[17] G. Kirkpatrick, ‘The Corporate Governance Lessons From the Financial Crisis’, (2009) Financial Market Trends, OECD vol. 2009/1, 1-30, 2.

[18] T. Clarke, ‘Recurring Crises in Anglo-American Corporate Governance’,  (Nov. 2009) Contributions to Political Economy, Vol. 29(1): 9-32, 9.

[19] Ibid 9.

[20] B. Sharfman, ‘How the Strong Negotiation Position of Wall Street Employees Impacts the Corporate Governance of Financial Firms’, (Winter 2011) 5(3) Virginia Law and Business Review, 350-374, 351.

[21]R. Monks, and N. Minow, Corporate Governance, (London, UK: Wiley Blackwell, 2008) 2.

[22] J. Solomon, Corporate Governance and Accountability, (London, UK: Wiley Blackwell, 2007) 53-58.

[23] S. Toms, ‘Divergence and Convergence within Anglo-American Corporate Governance Systems: Evidence From the US and UK, 1950-2000’, (2005) 47(2) Business History, 267-295, 268.

[24] S. Broadberry, And N. Crafts, (1996) ‘British Economic Policy and Industrial Performance in the Early Post-war Period,’ (1996) 38 Business History, 65-91.

[25] O. Williamson, ‘Managerial Discretion, Organisational Form and the Multi-Divisional Hypothesis,’ cited in Harris, R. And Woods, A. (eds) The Corporate Economy,(Oxford, UK: Oxford University Press, 1971) 382.

[26] N. Crafts, ‘Reversing Relative Economic Decline? The 1980s in Historical Perspective,’ (1991) 7 Oxford Review of Economic Policy, 81-98.

[27] E. Carrillo, ‘Corporate Governance: Shareholders’ Interests’ and Other Stakeholders’ Interests’ (Summer 2007) 4(4) Corporate Ownership and Control,96-102, 96.

[28] Ibid, 96.

[29] J. Fisch, ‘Measuring Efficiency in Corporate Law: the Role of Shareholder Primacy,’ (2006) 31 Journal of Corporation Law, 637-674, 646.

[30] J. Macey, ‘An Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties,’ (1991-1992)21 Stetson Law Review, 23-44, 23.

[31] H. Hutchinson and R. Alley, ‘Against Shareholder Participation: A Treatment for McConvill’s Psychonomicosis,’ (October 2007) 2 Brook. J. Corp. Fin. And Com. Law, 41-67, 42.

[32] J. Velasco, ‘The Fundamental Rights of the Shareholder,’ (2006)40 University of California, Davis, 407-467, 412.

[33] J. Velasco, ‘Taking Shareholder Rights Seriously,’ (2007) 41, University of California, Davis, 605-681, 608.

[34] A. Keay, The Corporate Objective, (Glos, UK: Edward Elgar Publishing Limited 2011) 44.

[35] A. Keay, The Corporate Objective, (Glos, UK: Edward Elgar Publishing Limited 2011) 44.

[36] S. Deakin, ‘The Coming Transformation of Shareholder Value,’ (January 2005) 13(1) Corporate Governance: An International Review, 11-18, 11.

[37] W. Bratton and M. Wachter, ‘Shareholder Primacy’s Corporatist Origins: Adolf Berle and The Modern Corporation,’ (2008)34 The Journal of Corporation Law, 100-150, 101.

[38] A. Berle and C. Means. The Modern Corporation and Privare Property, (New Brunswick, NJ: Transaction Publishers, 2009 first published in 1932) 220.

[39] F. Stewart, Jr. , ‘Berle’s Conception of Shareholder Primacy: A Forgotten Perspective for Reconsideration During the Rise of Finance’, (2011) 34 Seattle University Law Review, 1457-1499, 1462.

[40] Ibid 1462.

[41] Ibid 1462.

[42] Ibid 1463.

[43] Ibid 1463.

[44] Ibid 1463.

[45] F. Stewart, Jr. , ‘Berle’s Conception of Shareholder Primacy: A Forgotten Perspective for Reconsideration During the Rise of Finance’, (2011) 34 Seattle University Law Review, 1457-1499, 1464.

[46] E. Fisch, ‘Measuring Efficiency in Corporate Law: the Role of Shareholder Primacy,’ (2006) 31 Journal of Corporation Law, 637-674, 649.

[47] T. Grey, ‘The Disintegration of Property’, Cited in J. Pennock and J. Chapman (Eds). Nomos XII: Property, (New York, NY: New York University Press 1980) 72-73.

[48] L. Stout, ‘Bad and Not-So-Bad Arguments for Shareholder Primacy,’ (2002) 70 Southern California Law Review, 1189-1210, 1190.

[49] M. Friedman, ‘The Social Responsibility of Business is to Increase its Profits,’ (13 September 1970) The New York Times Magazine http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html (Retrieved 21 August 2011).

[50] J. MacIntosh, ‘The Issues, Effects and Consequences of the Berle-Dodd Debate, 1931-1932’, (1999) 24(2) Elsevier, 139-153, 140.

[51] J. Boatright, Finance Ethics: Criminal Issues in Theory and Practice, (Hoboken, NJ: John Wiley and Friends 2010) 130.

[52] M. Blair and L. Stout, ‘A Team Production Theory of Corporate Law,’ (March 1999) 85 (2) Virginia Law Review, 248-328, 248.

[53] A. Fernando, Corporate Governance: Principles, Policies and Practices, (Mason, OH: Pearson Education 2009), 46

[54] A. Fernando, Corporate Governance: Principles, Policies and Practices, (Mason, OH: Pearson Education 2009), 46.

[55] Ibid 46.

[56] J. Armour; S. Deakin and S. Konzelmann, ‘Beyond Shareholder Primacy? Reflections on the Trajectory of UK Corporate Governance,’ (2003) 41(3) British Journal of Industrial Relations, 531-555, 531.

[57] A. Musalem,  and R. Palacios, Public Pension Fund Management: Governance, Accountability, and Investment Policies. (Washington, DC: World Bank Publications 2004), 50.

[58] Ibid 50.

[59] P. Ireland, ‘Shareholder Primacy and the Distribution of Wealth,’ (2005) 68(1) Modern Law Review, 49-81, 50.

[60] Ibid, 50.

[61] P. Ireland, ‘Shareholder Primacy and the Distribution of Wealth,’ (2005) 68(1) Modern Law Review, 49-81, 50.

[62] J. Sarra, Corporate Governance in Global Capital Markets, (Bancouver, BC: University of British Colombia Press, 2003) 90.

[63] Ibid 90.

[64] A. Reberioux, ‘Does Shareholder Primacy Lead to a Decline in Managerial Accountability?’ (2007) 31(4) Cambridge Journal of Economics, 507-524, 507.

[65] Ibid 507.

[66] R. Valsan and M. Yahya, ‘Shareholders, Creditors, and Directors’ Fiduciary Duties: A Law and Finance Approach,’ (Spring 2007)2(1) Virginia Law and Business Review, 2-51, 1.

[67] R. Sprague, ‘Beyond Shareholder Value: Normative Standards for Sustainable Corporate Governance,’ (2010)1 William and Mary Business Law Review, 47-81, 72.

[68] Ibid 72.

[69] Ibid 73.

[70] S. Bainbridge, The New Corporate Governance in Theory and Practice, (Oxford, UK: Oxford University Press 2010) 56.

[71] F. Tung, ‘Gap Filling in the Zone of Insolvency,’ (2007)1(2) Journal of Business and Technology Law, 608-631, 609.

[72] Ibid 609.

[73] Ibid 609-610.

[74] E. Carrillo, ‘Corporate Governance: Shareholders’ Interests’ and Other Stakeholders’ Interests’, (Summer 2007) 4(4) Corporate Ownership and Control, 96-102, 96.

[75] E. Carrillo, ‘Corporate Governance: Shareholders’ Interests’ and Other Stakeholders’ Interests’, (Summer 2007) 4(4) Corporate Ownership and Control, 96-102, 96.

[76] N. Hsieh, ‘Corporate Social Responsibility and the Priority of Shareholders,’ (2009) 88 Journal of Business Ethics, 553-560, 553.

[77] A. Page, ‘Has Corporate Law Failed? Addressing Proposals for Reform,’ (April 2009) 107 Michigan Law Review, 979-998, 980.

[78] J.  Dean,  Directing Public Companies: Company Law and the Stakeholder Society. (New York, NY: Routledge 2001) 93.

[79] A. Argandona, ‘The Stakeholder Theory and the Common Good,’ (1998)17(9-10) Journal of Business Ethics, 1093-1102, 1093.

[80] Ibid 1093.

[81] T. Donaldson and L. Preston, ‘The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications,’ (1995)30(1) Academy of Management Review, 65-91, 65.

[82] Ibid 65.

[83] M. Schilling, ‘Decades Ahead of Her Time : Advancing Stakeholder Theory Through the Ideas of Mary Parker Follet,’ (2000)6(5) Journal of Management History, 224-242, 225.

[84] Ibid 225.

[85] M. Morsing and M. Schultz, ‘Corporate Social Responsibility Communication: Stakeholder, Information, Response and Involvement Strategies,’ (October 2006)15(4) Business Ethics: A European Review, 323-338, 324.

[86] M. Schilling, ‘Decades Ahead of Her Time : Advancing Stakeholder Theory Through the Ideas of Mary Parker Follet,’ (2000)6(5) Journal of Management History, 224-242, 224.

[87] Ibid 224.

[88] M. Schilling, ‘Decades Ahead of Her Time : Advancing Stakeholder Theory Through the Ideas of Mary Parker Follet,’ (2000)6(5) Journal of Management History, 224-242, 224.

[89] Ibid 225.

[90] R. Freeman; J. Harrison; A. Wicks; B. Parmar and S. de Colle, Stakeholder Theory: The State of the Art, (Cambridge, UK: Cambridge University Press 2010) 50.

[91] E. Orts and A. Strudler, ‘Putting a Stake in Stakeholder Theory,’ (2009) 88 Journal of Business Ethics, 605-615, 607.

[92] R. E. Freeman, Strategic Management: A Stakeholder Approach, (Boston, MA: Pitman 1984) 53.

[93] R. E. Freeman, ‘Stakeholder Theory and “The Corporate Objective Revisited”’, (2004) 15(3) Organization Science, 364-369, 364.

[94] Ibid 364.

[95] J. Solomon, Corporate Governance and Accountability, (London, UK: Wiley Blackwell, 2007) 23.

[96] R. Mares, The Dynamics of Corporate Social Responsibility (The Netherlands: Martinus Nijhoff Publishers, 2008) 58.

[97] Ibid, 58.

[98] Ibid, 58.

[99] R. Mares, The Dynamics of Corporate Social Responsibility (The Netherlands: Martinus Nijhoff Publishers, 2008) 58.

[100] D. Chew, and S. Gillan,  U.S. Corporate Governance, (Washington, DC: Columbia University Press,2009) xii.

[101] Ibid xii.

[102] Ibid xii.

[103] Companies Act 2006, S. 172.

[104] G. Clark and E. Knight, ‘Implications of the UK Companies Act 2006 For Institutional Investors and the Market for Corporate Social Responsibility,’ (2009)11(2) University of Pennsylvania Journal of Business Law , 259-296, 262-263.

[105] Chew, D. And Gillan, S. (2009) U.S. Corporate Governance, Columbia University Press, xii.

[106] A. Berle, and G. Means, The Modern Corporation and Private Property, (New Brunswick, NJ: Transaction Publishers 2009, 10th Edition) xv-xvi.

[107] T. Clarke, International Corporate Governance: A Comparative Approach, (Oxon, UK: Routledge 2007) 23.

[108] M. Jensen, ‘Value Maximization, Stakeholder Theory, And the Corporate Objective Function,’ (2001) 7 (3) European Financial Management 297-317, 299.

[109] A. Berle, Jr., ‘For Whom Corporate Managers are Trustees: A Note’, (June 1932) Harvard Law Review Vol. 45(8): 1362-1372.

[110]A.  Keay, The Corporate Objective. (Glos, UK: Edward Elgar Publishing Limited 2011), 48.

[111] A. Keay, The Corporate Objective. (Glos, UK: Edward Elgar Publishing Limited 2011), 48.

[112] J. Brummer, Corporate Responsibility and Legitimacy, (New York, NY: Greenwood Press 1991) 20.

[113] A. Keay, The Corporate Objective. (Glos, UK: Edward Elgar Publishing Limited 2011), 48.

[114] A. Sundaram, and A. Inkpen, ‘The Corporate Objective Revisited,’ (May-June 2004)15(3) Organization Science,350-363, 350.

[115] A. Keay, The Corporate Objective. (Glos, UK: Edward Elgar Publishing Limited 2011), 48.

[116] A. Keay, The Corporate Objective. (Glos, UK: Edward Elgar Publishing Limited 2011), 49.

[117] M. Blair, ‘Directors’ Duties in a Post-Enron World: Why Language Matters,’ (2003) 38 Wake Forest Law Review, 885-909, 904.

[118] A. Keay, The Corporate Objective. (Glos, UK: Edward Elgar Publishing Limited 2011), 49.

[119] A. Keay, The Corporate Objective. (Glos, UK: Edward Elgar Publishing Limited 2011), 49.

[120] Ibid 50.

[121] Ibid 50.

[122] J. Froud; C. Haslam; S. Johal and K. Williams, ‘Shareholder Value and Financialization: Consultancy Promises, Management Moves,’ (2000) 29(1) Economy and Society, 80-110, 80.

[123] A. Rappaport, Creating Shareholder Value, (New York, NY: The Free Press 1986) 50.

[124] A. Keay, The Corporate Objective. (Glos, UK: Edward Elgar Publishing Limited 2011), 52.

[125] Ibid 53.

[126] R. Mullerat, and E. Brennan, Corporate Social Responsibility: The Corporate Goverenance of the 21st Century, (The Netherlands: Kluwer Law International, 2011) 46.

[127] Bristol and West Building Society v Matther [1998] Ch 1.

[128] S.Tully,  Research Handbook on Corporate Legal Responsibility. (Oxon, UK: Edward Elgar Publishing Limited, 2005) 89.

[129] Ibid, 89.

[130] L. Sealy, L. Cases and Materials in Company Law. (London, UK: Butterworths, 2001) 259.

[131] Companies Act 1985, S.309.

[132] Re Welfab Engineers Ltd [1990] BCLC 833.

[133] Re Saul D Harrison and Sons Plc [1995] 1 BCLC 14.

[134] Fulham Football Club v Cabra Estates [1994] 1 BCLC 363.

[135] S. Tully, S. Research Handbook on Corporate Legal Responsibility. (Oxon, UK: Edward Elgar Publishing Limited, 2005) 92.

[136] Ibid 92.

[137] Companies Act 2006 Section 172(1).

[138] Companies Act 2006 Section 172(1).

[139] M. Morsing and M. Schultz, ‘Corporate Social Responsibility Communication: Stakeholder Information, Response and Involvement Strategies,’ (October 2006) Business Ethics: A European Review, 323-338.

[140] P. Kotler, and N. Lee, Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause. (Hoboken, NJ: John Wiley and Sons, Inc. 2005) 3.

[141] D. Crowther, and L. Rayman-Bacchus, Perspectives on Corporate Social Responsibility. (Hants, UK: Ashgate Publishing 2003) 2.

[142] D. Crowther, and L. Rayman-Bacchus, Perspectives on Corporate Social Responsibility. (Hants, UK: Ashgate Publishing 2003) 2.

[143] Ibid 2.

[144] J. D. Rendtorff, Responsibility, Ethics and Legitimacy of Corporations. (New York, NY: CBS Press, 2009) 25.

[145] O. Ihlen; J. L. Bartlett, and S. May, The Handbook of Communication and Corporate Social Responsibility. (New York, NY: John Wiley and Sons, Inc. 2011) 261.

[146]R.  Broomhill, ‘Corporate Social Responsibility: Key Issues and Debates’ (2007) Dunstan Paper No.1/2007, 1-31, 7.

[147] M. Hopkins, The Planetary Bargain: Corporate Social Responsibility Matters. (London, UK: Earthscan Publications, Ltd. 2003), 45.

[148] Ibid 45.

[149] Ibid 45.

[150] Ibid 46.

[151] Ibid 46.

[152] Ibid 46.

[153] M. Hopkins,The Planetary Bargain: Corporate Social Responsibility Matters. (London, UK: Earthscan Publications, Ltd. 2003) 47.

[154] Ibid 47.

[155] Ibid 47.

[156]EU Green Paper. Promoting a European Framework for Corporate Responsibility. Burssels, COM (2001) 366, 1-32, 6.

[157] EU Green Paper. Promoting a European Framework for Corporate Responsibility. Burssels, COM (2001) 366, 1-32, 3.

[158] Ibid 4.

[159] Ibid 4.

[160] Ibid 4.

[161] W. B. Werther, and D. Chandler, Strategic Corporate Social Responsibility: Stakeholders in a Global Environment. (Thousand Oaks, California: SAGE Publications, Inc., 2011), 304.