The Modern Corporation Project, based at Cass Business School, has just released a statement on Company Law on SSRN. Based on the work of experts versed in a variety of national legal systems, including those of the US, the UK and the EU, the Company Law Statement succinctly describes certain fundamentals of corporate law that are applicable in almost all jurisdictions. These fundamentals can be summarised as follows:
Corporations are universally treated by the law as ‘legal persons’, which implies that corporate assets and liabilities are ‘locked in’ and, hence, separate from shareholder assets and liabilities. Corporate personhood ensures that corporations have certain rights, including especially the rights to own property, enter contracts, and commit torts in their own names. It also means that shareholders own shares of stock, but they do not own corporations; nor do they own the assets of corporations.
Shareholders have limited political rights, in particular the typically exclusive collective right to elect the members of the corporation’s board of directors. These rights and their scope are limited, however, and differ substantially from jurisdiction to jurisdiction and from corporation to corporation. Corporate officers and employees are agents for the corporation as a separate, property-owning legal entity. They are not the agents of the shareholders or any subset of shareholders, and are under no legal obligation to obey the directives of the shareholders or any subset of shareholders.
Contrary to widespread belief, corporate directors are generally not under any legal obligation to maximise profits for their shareholders. Where directors pursue the latter goal, it is usually a product not of legal obligation but rather of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.
The Company Law Statement is of great importance due to the impact of public corporations on society and the environment which, in turn means that many pressing problems cannot be solved without the contribution from corporations or, in its absence, by regulation alone. Similarly, public corporations depend on a social license and a favourable institutional framing for their long-term survival. Both corporations and society are therefore directly affected by the dominant model of corporate governance.
Since the 1970s the dominant corporate governance model has put the maximisation of shareholder value at the centre of corporate attention. After the financial crisis, there has been considerable debate about shareholder primacy, as the normative direction this model puts into place affects corporate resilience and the ability to create long-term sustainable value by encouraging excessive risk taking, while taking away a focus on investment in R&D and innovation, and in human and social capital. More broadly, it diminishes the capacity of boards to anticipate and mitigate the impact of ‘externalities’ and systemic risks, providing the basis for a range of negative environmental and social impacts. The shareholder primacy model for corporate governance, therefore, damages the interests of corporations, of long-term shareholders and end beneficiaries, and society at large.
The cross-jurisdictional legal consensus provided by leading international academics in the Company Law Statement (complemented by the Economics, Accounting, Management and Politics statements), presents a basis for the development of a new vision on corporate governance. To develop this basis further, the Modern Corporation Project and the Purpose of the Corporation Project organized a series of international roundtables between 2014 and 2016 in London, New York, Zurich, Amsterdam, Paris, and Oslo. More than 260 leaders in business management, investment, regulation, civil society, and academia attended these roundtables.
A key conclusion of the roundtables is that shareholder primacy presents a socially constructed norm that is not subscribed to in most jurisdictions in the world, including the U.K. and the U.S. Company law worldwide permits a broad perspective on the purpose of the corporation and mandates the direction of fiduciary duties toward the corporation, not shareholders. These outcomes are further substantiated by outcomes of the Materiality Project at Harvard and the Sustainable Companies Project at the University of Oslo.
On September 28, 2016 the global roundtable series concluded with an event in Brussels that featured the presentation of the report ‘Corporate Governance for a Changing World’ which provides a comprehensive approach to pressing issues in the field of corporate governance. The event brought together more than 30 high level speakers and 140 participants. Keynote speeches were delivered by Věra Jourová, EU Commissioner for Justice, Consumers and Gender Equality; John Kay, well known author, economist and columnist at Financial Times; and Richard Howitt, MEP and incoming CEO of the International Integrated Reporting Council.
The Company Law Statement stands at the heart of an academic and practitioner debate on the foundations and direction of corporate governance.
Jeroen Veldman is a Senior Research Fellow at Cass Business School, City University.