DD - Shareholder vs Stakeholder Essay PDF

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Director Duties Shareholder vs stakeholder Structure It has been stated that new duty to promote the success of the company clearly makes changes of form to the existing (D. Kershaw, Company Law in Context: Cases and Materials, (Oxford: Oxford University Press, 2009), p.) However, a change in form a...

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Director Duties - Shareholder vs stakeholder - Structure It has been stated that “The new duty to promote the success of the company clearly makes changes of form to the existing law”. (D. Kershaw, Company Law in Context: Cases and Materials, (Oxford: Oxford University Press, 2009), p.351.) However, a change in form and a change in substance are two very different things. and subsequent case law on the section is of the opinion that s.172 of the Companies Act 2006 appears “to do little more than set out the pre-existing law on the subject”.2

Intro 1. shareholder, stakeholder value 2. esv - ideal - get best of both 3. however in reality it does not work 4. better with shareholder approach - leave stakeholder interest ot be protected by other areas of law

1. Reason of this debate The occurrence of corporate scandals, problems of corporate governance

2. Shareholder value approach Shareholders as the owners of the firm (residual risk owner). Believed in shareholders supremacy. Focuses on profit maximization and private ownership rights (foundations of a free market and a competitive and economically efficient system) Ensured effective allocation of capital and resources

3. Stakeholder value approach Sees the firm as encompassing all those affected by its activities (employees, suppliers, creditors, customers and the environment) Emphasises sustainability, inclusion and broader accountability Four levels of responsibility: economically, be profitable and satisfy consumer demand; legally, obey the law; ethically, do what is fair and just and avoid (focus on human capital) stakeholders should be involved in corporate decision making

Less regulation of company - focus on monetary capital – free market society Anglo-American countries – US and UK Agency problem - owners are not managers

should recognize their contribution to corporate success More regulated regime Continental European countries, Japan

Why UK embrace shareholder value? - Believe in shareholder supremacy - The managerial power / shareholder base of companies in UK are very dispersed / spread out Directors are therefore obliged to advance shareholders' interests as a whole and the company law framework reflects this objective Nexus of contract theory/contractarian approach Does not regard company as a citizen (hence no citizen responsibility) Underscore the principle of freedom to contract (that’s why you should protect your own interest, and having less government intervention to protect people’s interest)

Organic theory/communitarian approach See company as corporate citizen – hence have social and conscience responsibility

The aspect of company law which demonstrate it: directors’ duties, minority protection, and the shareholder’s unfettered right to remove directors. 4. Benefits and weaknesses of each approach Benefit of shareholder value 1. Efficiency (very important!) - Profit maximisation is an incentive for businesses to serve consumers’ needs. Shareholder value maximises directors' knowledge and experience. 2. Clear line/criteria of accountability to shareholders – profit-maximization = assessment of success of company (very important!) 3. Respect the notion of private properties 4. Meet other social objectives (eg provide employment, quality good, taxes etc) Criticism of shareholder value 1. Encourage short-term perspective 2. Discourage trust relationship

Criticism of stakeholder value 1. Unclear how directors will discriminate between the legitimate competing interests of different stakeholders 2. Difficulties to measure performance of directors – not accountable to anyone (Hampel report 1997, para 1.17) 3. Demands constraints on shareholder control and more stakeholder control – radical change in UK corporate regime 4. diverting directors' attention from maximising shareholder value will affect competitiveness Benefit of stakeholder value 1. Encourage long-term perspective 2. Encourage trust relationship

5. CLRSG recommendation – ESV Maintains profit maximisation as the objective of the firm

But subject to developing relationships of trust with shareholders A compromise between shareholder value and the stakeholder model Hoped to ensure accountability to dispersed shareholders While using market forces to nudge companies towards the stakeholder model

6. s.172 CA 2006 s.172(1): A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a) likely long term consequences of any decision (b) interests of employees (c) the need to foster company's business relationships with suppliers, customers and others (d) impact of company's operations on community & env (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.

7. In reality, does it really work? – examine the practicality of s.172 Advantage 1. It did not necessitate changes in the current company law framework. 2. It requires a change in perspective from short-term to long-term shareholder value 3. Maintaining efficiency and accountability

Major weaknesses of s.172(1) – hence cannot achieve the objectives 1. It works at the unfettered discretion of directors - Cannot make directors liable – ‘good faith’ Prof Andrew Keay, Section 172(1) of the Companies Act 2006: an interpretation and assessment (2007) Resurrecting the subjective test – the standard of the test has been lowered again. But if it is objective test – professionals (NEDs) will refuse directorships if directors duties easily breached Re Smith & Fawcett Ltd (1942) - Lord Greene MR – subjective test - directors must exercise their discretion bona fide in what they consider is in the interests of the company, not what a court may consider * Note: s.172(1) restates it Agreed by Item Software v Fassihi [2005] (duty to disclose wrongdoing – duty of good faith), Regentcrest v Cohen [2001] – relates to D’s state of mind

c/f Charterbridge Corporation v Lloyd’s Bank (1970) - Pennycuick J – should be objective test - whether an intelligent and honest man in the position of a director of the company concerned could have reasonably believed that the transactions were for the benefit of the company in the whole of the existing circumstances

2. Uncertainty of the meaning of ‘have regard to’ – merely ‘consider’ – to discharge the duty, just need to raise and discuss certain interest in a board meeting and it is decided that there are other more pressing considerations - It is therefore difficult to anticipate the kind of situations where directors may be held to be in breach of this duty. Liability may only arise where the company can prove that it has suffered loss as a result of breach of this duty And (a) to (f) is not even exhaustive! Section 172 was not intended to introduce widespread judicial review of the decisions of directors or a “tick-box” culture (Gower and Davies, Principles of Modern Company Law (2008), p.513.)

3. “Success of the company” – hard to determine There is uncertainty as to what is meant by “success of the company”, particularly in light of the discretionary and good faith element. If it is too vague, it militates responsibility and make it impossible to make directors liable. Whilst on paper they require the directors to take into account the stakeholder’s interest, it can only be enforced by company (majority shareholders control it). At most, it confers a right without the remedy. Prof Andrew Keay, Section 172(1) of the Companies Act 2006: an interpretation and assessment (2007)

4. No one can sue except company - Damages payable would also be paid to the company and not the aggrieved stakeholders, since the duty is owed to the company. This provision does not confer on stakeholders any locus standi. Any action if brought must be by the company or its shareholders. Sarah Kiarie, At crossroads: shareholder value, stakeholder value and enlightened shareholder value: Which road should the United Kingdom take? (2006) Foss v Harbottle (only member can sue) & derivative claim (s.260 – brought by member for and on behalf of company – not by ‘creditor’ or ‘stakeholder’)

5. Directors duties to take into account of creditor’s interest (not captured in s.172) Read SM – maybe judges are better in making law to take into account of stakeholder’s interest at appropriate circumstances. (Use cases as example)

A. Directors of a company do not owe any duty to the company’s creditors. (i) Multinational Gas and Petrochemical Co v. Multinational Gas and Petrochemical Services Ltd (ii) Yukong Line v Rendsburg (No 2) [1998] - Toulson J - creditors have no standing, individually or collectively

B. Where a company is insolvent - the interests of the creditors intrude. (i) Kinsela v Russell Kinsela Pty (1986) (NSW CA) - They become prospectively entitled to displace (take over) the power of the shareholders and directors to deal with the company’s assets. - It is in a practical sense their assets and not the shareholders’ assets that - The assets are under the management of the directors pending in liquidation through the medium of company. (ii) West Mercia Safetywear v Dodd [1988] CA applied Kinsela (iii) Colin Gwyer v London Wharf (iv)Brady v Brady

C. Company always owes a general duty to its creditors, present and future (not specific duty - GHLM Trading Ltd v Maroo [2012], Re HLC Environmental Projects [2013]) GHLM Trading Ltd v Maroo [2012] - The courts held in a same way that a director has a duty under s.172 to act in a way he consider in good faith to promote the success of the company for the benefit of his members as a whole, if the company was insolvent, or doubtful solvency, or on the verge of insolvency, he had a duty to have to regard to the interest of creditors as a class if their interest were relevant, and it was a breach of duty to advance a particular duty of a particular creditor if he did not believe that to be in the interest of the creditor as a class - The courts also held that a director has a duty to disclose his material interest under s.172 when in which case, such material interest may include his own wrongdoing – This resonates with the principle in Item Software Ltd v Fassihi Re HLC Environmental Projects [2013] – similar case (i) Winkworth v Edward Baron [1986] HOL – Lord Templeman - A duty is owed by the directors to the company and to the creditors of the company to ensure that its property is not dissipated or exploited, and available for the repayment of its debts. (ii) Lonhro v Shell Petroleum [1980] HOL – L.Diplock obiter - Re Pantone [2002] - Richard Reid QC - if the directors act consistently with general creditors’ interest, but inconsistently with creditors’ with special rights – not breach * Liquidator can also sue under respective statute: s.212 Insolvency Act 1986 - action for misfeasance s.214 Insolvency Act 1986 - liquidator as the court to declare the director personally liable, to make such contribution to the company’s assets, as the court thinks proper, for the benefit of the unsecured creditors - he knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. Effect of s.172

If s.172 is all bark and no bite, Elaine Lynch in Section 172: a ground-breaking reform of director's duties, or the emperor's new clothes? (2012) argued that s.172 at least serves as a tool for the education of directors

10. Alternative By changing other area of law: employment law, environment law, UCTA, law on creditors (rather than changing the very core of UK corporate governance culture, which is more confusing and less desirable in achieving the aim)

11. Conclusion CA 2006 did not modernize the company law, but make it be more outdated.

# Own: maybe ESV is possible (in real life we still have to take care of stakeholder value), but not by way of implementing it into CA 2006 – cuz it will be ineffective and impossible to achieve the aim

# success of s.172 lies in the hand of shareholders (if shareholders are conscionable, they will make the company account for any harm on the interest of stakeholders) Institutional investors (like pension fund) or trade union representative investor – if have large enough portion of shares – can make company accountable...