Post-Concession Company Models in Potential European Company Law.
Janet Dine
Abstract
Humans are frightened. For Christians this is the real moral of the Genesis
story, God is all benevolent but since Adam and Eve understood freedom, all people
are doomed to live in fear. Of course, other religions have similar doctrines and
myths. What does this mean in modern society? How can our economic model cope
with the fear factor? During the Soviet regime its theory in society was to found an
equal system, allowing the resources of the state by sharing, thus minimise risk for the
populace. . As we know, it didn‟t work well, but the opposite, the capitalism system
has also significant problems, a market based economy predicates freedom as a
priority. This risk allows powerful actors to become rich, others live in poverty. The
paradoxes of both system shows that there needs to be a balance. In capitalism a
powerful instrument is used to construct society. Contract is fundamental for markets.
The reason that contract has such resonance in buying and selling is that the theory of
a bargain is supposed to be fair, however powerful forces means that bargains are
asymmetric. In the west, companies are fundamentally contract based. Therefore they
are unfair. This is clear in the way that huge Multinational and Transnational
companies behave. What is needed is a radical reform allowing society to own
companies. Using the new UK Companies Law Act 2006 is a way to reform directors‟
duties. Directors have a duty to have regard to a large constituency of stakeholders. A
radical structural reform could reform companies into an instrument of equality using
new concept known as a Post-concession system. Stakeholders would be assessed on
the way that companies run risks for their stakeholders, not only economic risks but
also psychological risks and the happiness of their constituents.
Risk
Humans are frightened. Perhaps this is the real moral of the Genesis story,
God is all benevolent but since Adam and Eve understood freedom, since then all
people are doomed to live in fear. What does this mean in modern society? How can
our economic model cope with the fear factor? Since human beings are social
animals, we banded into groups organising our needs. Each individual fears risk,
however each person has different things that she is frightened about. Probably basic
needs are paramount; they are water, food, warmth and shelter, including the shelter
of each other. What does this mean in contemporary society? One way that human
beings have used to lessen their fear is to cooperate in organised groups. However this
immediately means that there is another risk which is that each individual person fears
other human beings. This is the paradox of the human condition. This is crudely
shown by the two opposite way of organising economic concerns, capitalism and
communism. The fear is in the way that risk is lessened by these two diverging
concepts. Capitalism fears domination by other people, this means that society is
1
individually based however communism prefers to ameliorate the risk by banding
together therefore meeting society‟s needs that way. There are paradoxes on
paradoxes, because the tension is exacerbated by the way that the opposing societies
organises its concerns. This leads to strains. This is extremely acute in post transition
Europe where this anxiety is very real. It is trite that the communism block tried to
organise their affairs in an egalitarian way and that led to dictators, a wonderful
paradox itself. On the other hand, capitalism wanted freedom and found that the risk
was inequality, leading to poverty which constrains freedom anyway, again there are
paradoxes, and they are fundamental. Each system went too far, in the communism
system not enough individual autonomy was allowed so that democracy started to
shrivel, for capitalism poverty meant that the very poor had no freedom1, since if
people do not get their basic wants satisfied, this mean also that their political
aspirations are thwarted. Both system were/are extreme meaning that some
individuals were/are killed by the regime. Can there be some compromises, some
way of balancing the risk? For lawyers contract is one of the most crucial implement
of economic management for needs in a market based economy. The theory is that
each individual has freedom to trade and this leads to each person getting their needs
and desires being satisfied. However a contractual system has some problems one risk
has been already identified, that is the difficulty of inequality. This dilemma was on
my mind then I wrote my inaugural lecture at QM. I hope that you will like the
powerpoint slides. The cartoons emphasises that what is a benign instrument can get
out of hand. I said that command economies try to allocate making goods and
property equally therefore decreasing risk (of course, this is only the theory!).
However in market economies the instrument of choice is contract. This illustration
shows the way that contract can be a malign construct and the paradox is in the way
that freedom is devaluing freedom although the whole idea of contract was to enhance
freedom.
1
Amartya Sen, Development of Freedom, Penguin-Allan Lane, 2010.
2
• Contract
Of course, lawyers use contract as a construct but this is only another way of saying
of bartering, marketing , swops, buying-selling etc. However, contract has particular
implications, not least because governments have the possibility to construct
sanctions, therefore regulate contracts. Similarly the courts can use some powers to
mitigate unfair bargains. The philosophy of Western capitalism believes that bargains
should be equal, this is supposed to lead to a vibrant economy. The whole system is
predicated on contract. However the equality equation has been lost in western
capitalism, powerful interests stop any vestige of equality, and the most egregious
villains of the slide into the inequality morass are the Multinational and Transnational
companies. Neo-liberal economic theory posits a theory of rational individual
bargaining in perfect harmony, if this is possible this is the best way to allocate all
resources, all goods and services. However this is a Utopian dream which has been
usurped by the economists‟ assumptions. All commercial bargains are asymmetric.
The theory predicates the way that markets should work and therefore the economy
should be optimised. This is the way that it should work; rational individual persons
bargaining in freedom. For example; think of a bargain to sell and buy a gadget; the
bargainers are equal in terms of power relations i.e neither is related to the workplace,
since this is often a fraught reason for inequality since the workplace is often
hierarchal. Both individual is not related by family ties, both are the same sex, both
have equal possessions, intelligence, opportunities and beauty. In this nirvana the
transaction would be fair. Therefore there is no way that the theory of Pareto
efficiently could work. Reality is more like this:
3
There is a less rigorous theory which economists use to understand the
economy, which is the Kaldor- Hicks system. However this theory realises the
pragmatic way that markets works to the disadvantage of poor people, since
immediately a disadvantaged person who has less bargaining power will inevitably
get a bad deal. This will snowball in all bargains including international relations;
leading to this:
An Underestimate
• 799 million people
undernourished
• 50,000 people DAILY die of
poverty-related causes
• 34,000 children under five die
DAILY from hunger and
preventable diseases
This imbalance is so extreme because of the western universal instrument of
contract which is built into the Anglo-American model of companies and the
4
importance of freedom. In Companies, International Trade and Human Rights2, I
wrote that the UK-US model of capitalism is the traditional one known as the neoliberal economic model which is used to organise companies structures in this country
and which informs the structure of many of the biggest corporations in the world.
Many scholars believe that the global recession and the financial crisis which hit
international money markets shows that we need a different model of economic
arrangement. Some people think that it is time to change tack and that the old model
which we follow now to arrange company law is bust! The Anglo-American model
is now found in many Multinational and Transnational companies even in developing
countries although this model is an aggressive mode of capitalism. Now since the
shine of neo-liberalism has been tarnished because of the global recession, it is time to
reappraise our ideas.. This might be a new reawakening and we should be ready to be
at the forefront of the challenge. Despite the argument that there are many different
corporate models in the world and that the Anglo-American model will be inevitably
triumphant, The European socially based model is not finished, it has been around for
many years and although comparisons are extremely difficult, since each country has
a particular culture and therefore laws which are distinct for that reason. Some
scholars have attempted comparisons. Carlin3 tried to show that the model of
corporate governance is not the most important thing, other significant indicators are
more crucial. Using a statistical analysis, she firstly uses the slogan „The end of
history for corporate law‟4 to see whether that it is true. She eventually concludes that
it is not, believing that the two models, shareholder versus blockholder system is too
simplistic but uses two hypothesis to test the efficiency of the two systems. She says:
“A simplified version of Luigi Zingales‟ (2000) typology of models of the firm helps
to pin down the origins of the two different views about the role that ownership
structures play. The „ownership is all about finance‟ view arises from the corporate
finance literature based on the conception of the firm as a nexus of explicit contracts.
. . Hypothesis 1: Unless inefficient resistance intervenes, shareholder-oriented
corporate governance leads to convergence in ownership structures and improved
performance. . . . Hypothesis 2: Shareholder-oriented corporate governance reforms
lead to country-specific responses.” After her investigation she concludes . . . “How
do the reported empirical patterns relate to our hypothesis? . . . A major impediment
to the evaluation of these hypotheses is the absence to date of detailed descriptive data
on how ownership and control patterns have changed over the past decade. The
fragmentary evidence on ownership changes and on the engagement of different
institutional investors assembled in this chapter suggests that the second hypothesis
cannot be revealed out.”5 Thus the investigation is not conclusive, particularly
because of the diversification of the variables. Dignam and Galanis take a different
perspective, they believe that open markets make it inevitable that institutional
shareholders will be more powerful than managers in the long term, and also that
governments might be unable to stem any change of corporate governance 6. A
different tack was taken by Clerc, who questions the legitimacy of shareholder power.
2
J. Dine, Companies, International and Human Rights, CUP, 2005.
Wendy Carlin, “Ownership, “Corporate governance, Specialilization and Performance: Interpretation
of recent evidence for the OECD countries” , in Does Company Ownership Matter, Edired by JeanPhippe Touffut, Edward Elgar, Cheltenham, UK, 2009.
4
Article published by Henry Hansmann and Reinier Kraakman, 89, Georgetown Law Journal, pp 439.
2001.
5
Carlin, Does Company Ownership Matter, p9-42
6
A, Dignam and M. Galanis, “Corporate Governance and the Importance of Macroeconomics
Context”, Oxford Journal of Legal Studies, Vol. 28. No. 2 (2008) pp201-243.
3
5
He says that a number of faulty arguments are used by people to augment shareholder
legitimacy7. He argues that many people oppose the shareholder model and wishes to
investigate the traditional company governance structures that we saw in the
triumphant literature in which all other models will shrivel.8 Firstly he remembers that
one fundamental foundation of commercial company structure is the institution of
limited liability: “Several theoretic reasons help to explain the enthusiasm for limited
liability, but the most important and most obvious is that: it enables shareholders to
hope for unlimited profits while risking only limited losses. If this were betting, it
would be called a „winning formula‟.9 Clerc uses a number of examples to show that
society must pay for reorganisations and (appositely) oil spills, he says that this means
that shareholders have a moral hazard problem: “From a practical point of views , the
result of the principle of non liability is clear: society as a whole plays the role of
insurer for the risk taken by the shareholders. After all why not? Is you want a
dynamic society, it may be desirable to protect entrepreneurs from the risk they
take.”10
First Clerc realises that in our system the executive managers are not the
entrepreneurs, but more importantly, this means that society has all of the risk but no
control to limit the risk or the damage . . “there is a major problem of moral hazard:
the insurance is free, the risk is largely determined by the behaviour of the insured
party, and the insurer is granted no specific role in the internal control of the risk.
What private insurer would accept such conditions? . . . how can society minimise its
risk?11” Clerc doesn‟t really find a solution although he does suggest a possibility for
society representatives in company boards. However he does not explain any further.
We will bring back this train of thought that Clerc suggests later, particularly in this
article where we will use some possible solutions of the contractual company
structural which could mitigate the equality predicament
Corruption
Firstly we should say something about the history of the depth to which be
were plunged into corruption because of the neo-liberal philosophy and its economic
theories and those twisted priorities of properties rights and concepts. The evil of
extreme poverty could be truly said to be a sort of corruption which feeds the
philosophy of inequality using a twisted freedom concept. In fact there is no settled
definition of corruption. “Corruption is often discussed in the kinds of language and
symbolism reserved for life-threatening diseases‟12. The World Bank insists that it
„has identified corruption as the single greatest obstacle to economic and social
development‟13 This is problematic as no-one seems to have found a definition which
is universally agreed. Nor is there absolute consensus on what types of behaviour
within a loose definition “Corruption is often discussed in the kinds of language and
7
Christopher Clerc, “Questioning the Legitimacy of Shareholder Power”, Does Company Ownership
Matter, p92.
8
Article published by Henry Hansmann and Reinier Kraakman, 89, Georgetown Law Journal, pp 439.
2001
9
Clerc Does Company Ownership Matter, p93.
10
Clerc Does Company Ownership Matter, p94.
11
Clerc Does Company Ownership Matter, p94-95.
12
M. Johnson‟ Political Corruption‟, Colgate University 2003.
http://www.worldbank.org
13
6
symbolism reserved for life-threatening diseases‟14. The World Bank insists that it
„has identified corruption as the single greatest obstacle to economic and social
development‟15 This is problematic as no-one seems to have found a definition which
is universally agreed. Nor is there absolute consensus on what types of behaviour
within a loose definition are harmful. Johnson, however, argues that in some respects
there is “too much consensus. The new wave of concern has been driven primarily by
business and by international aid and lending institutions. While there is nothing
inherently wrong with that, their vision of corruption, like any other, is partial.”16
Johnson points out that the major anti-corruption players (USAID, World Bank,
OECD, UNDP and TI)17 rarely address differences in the societies whose corruption
they seek to cure. Noting the way in which corruption and ant-corruption has emerged
on to the international agenda, Samson notes; “In the last five or six years, anticorruption practices have diffused transnationally and have become organised
globally. We have seen the emergence of a world of anti-corruption with its own
actors, strategies, resources and practices, with its heroes, victims and villains”18
Samson moots two possible explanations for this powerful recent emergence of the
anti-corruption movement “The fight against corruption is virtuous, and those who
form part of the anti-corruption community‟ are thus „integrity warriors‟. The second
explanation focuses on the need to increase system rationality; fighting corruption, it
is “argued, will make market economies more efficient, state administration more
effective, and development resources more accessible.”19 Pointing out that when anticorruption norms are applied to projects “‟global morality‟ [becomes] . . . a social
process. It is a process by which virtue is transformed into a specific activity called a
project- one which includes formulating a funding strategy, approaching donors,
analysing stakeholders, hiring consultants, developing NGOs, conducting project
appraisals, making evaluations . . . Anti-corruptionism . . . is a stage in which moral
projects are intertwined with money and power.”20 Because of this “Anti-corruption . .
. is not innocent. It can be manipulated to serve the interest of even the most
unscrupulous actors.”21
Further, the interdependence of world economies makes the condemnation of
certain behaviours one-sided; that is, the behaviour of one set of actors is condemned
while those on the other side of the transaction are regarded with complacence. This is
the micro prism which informed our individual bargain showing that the way that
tiny imbalances inform huge global differences. As Thomas Pogge points out the
belief that corruption is a „pathology of primitive nations‟ is common to „many
citizens of the affluent countries‟ who hold that the global economic order is not to
blame for severe poverty and increasing global inequality; rather “poverty is
14
M. Johnson‟ Political Corruption‟, Colgate University 2003.
http://www.worldbank.org
16
M. Johnson “Comparing Corruption” in Heffernan and Kleinig (Eds)Private and Public
Corruption, p276.
17
United States Agency for International Development, Organisation for Economic Development and
cooperation, united Nations Development Programme, Transparency International.
18
S. Samson “Integrity Warriors: Global Morality and the Anti-Corruption Movement in the Balkans”
in D. Haller and C. Shore (eds) Corruption, p106 Italics in original.
19
S. Samson “Integrity Warriors: Global Morality and the Anti-Corruption Movement in the Balkans”
in D. Haller and C. Shore (eds) Corruption, p107.
15
20
S. Samson “Integrity Warriors: Global Morality and the Anti-Corruption Movement in the Balkans”
in D. Haller and C. Shore (eds) Corruption, p109-10.
21
S. Samson “Integrity Warriors: Global Morality and the Anti-Corruption Movement in the Balkans”
in D. Haller and C. Shore (eds) Corruption, p129.
7
substantially caused not by global, systemic factors, but – in the countries where it
occurs – by their flawed national economic regimes and by their corrupt and
incompetent elites, both of which impede national economic growth and a fairer
distribution of the national product.”22 This comforting belief is accompanied by
demands that the poor countries must first help themselves by giving themselves
respectable political regimes. Since, until imposition of regime change in Iraq, it is not
the responsibility of rich nations to impose regimes on others, nothing can be done.
Aid, if given, would only be lost to corrupt elites. However these comfortable beliefs
“are nevertheless ultimately unsatisfactory, because it portrays the corrupt social
institutions and corrupt elites prevalent in the poor countries as an exogenous fact: as
a fact that explains, but does not itself stand in need of explanation.”23 We know that
companies are critical in making this imbalance since corporations are so powerful,
often more powerful than states. Therefore the culture of companies is crucial in
understanding the world that we have and therefore if the theories that informs the
structure of companies is corrupt this is a way to change the system. Is the system
which we use to found companies corrupt? However, although this article focuses on
companies, we should remember that company culture and law are originally made by
each nation, from this perspective Pogge is completely able to use his moral deflective
devices to use our culture as a scapegoat for companies24. Companies are created by
laws adopted by societies. Creating a company to obtain or manufacture goods
cheaply and to provide investment opportunities means that rich societies are
benefiting from the cheap prices obtained for resources from poorer societies,
resources here include labour25. Furthermore the global financial crash should show
us that our greed has impoverished the poor and the rich have used the banks and
financial industry as a whipping boy for our moral deflective device since our
pensions were too large and could not be sustainable. Neverthess, although some
pensions have been curtailed many have been completely unaffected. However, this is
an attempt to talk about company structures and the traditional economic philosophy.
In a brief investigation of corporate culture, MacLennan notes the prevalence
of “shared corporate values predicated on the rights of property and the rule of the
market”26 She traces the roots of the current waves of corporate corruption in America
to early industrialisation; the inevitable and fundamental conflict between the
emergent values of market capitalism and democratic goals to protect the public
interest.”27 MacLennan argues that this conflict was met by a network of regulations
creating an American „welfare state‟ which “not only provides a social safety net for
the disadvantage in the economy, but also welfare for the very rich and their
corporations.28 Examining why this system seems to have failed so spectacularly over
recent years, MacLennan advances the argument that, while the regulatory system is
based on the idea that regulation is needed only during “moments of business
failure”29, the clash of values runs deeper as “Market values, which have their root in
22
Pogge World Poverty, p110
Pogge World Poverty, p112
24
Pogge World Poverty, 78-79
25
J. Dine Companies, International Trade and Human Rights. CUP, 2005
26
C. MacLennan “Corruption in Corporate America: Enron-Before and After” in D. Haller and C.
shore (eds) Corruption, pp165
27
C. MacLennan “Corruption in Corporate America: Enron-Before and After” in D. Haller and C.
shore (eds) Corruption , p156.
28
C. MacLennan “Corruption in Corporate America: Enron-Before and After” in D. Haller and C.
shore (eds) Corruption, p157-8
29 29
italics in the original
23
8
a pre-industrial, liberal society based upon democratic citizenship and agrarian, small
business enterprises , have morphed into a new ethic of corporate capitalism which no
longer resembles the business culture of the past.. . . Corporate behaviour in the US
has become increasingly „corrupt‟ and the behaviour of officials in the Enrons and
Worldcoms is not isolated. . . . it is pervasive and institutionalised. That means, it is
more than criminal behaviour by a few bad actors in an otherwise clean enterprise. It
is institutionalised in the everyday world-view and processes of corporate action.”30
MacLennan‟s study is into the close networks which link the political and economic
elites but also notes that “ Definitions of morality, public interest and personal
responsibility in corporate board rooms and executive offices may in fact be quite
different from those of the rest of the middle, working and poor classes.”31 An
interesting example of this is Skilling‟s belief that he is entirely innocent of
wrongdoing. This is unlikely to be mere denial and may well stem from an unholy
mixture of the „Alpha male entitlement‟ syndrome which leads powerful people (not
always males to refuse to believe that the rules of ordinary life apply to them and by
the fact that by constantly driving up the share price he believes that he was doing
precisely the job that the company required in accordance with its aggressive market
forces culture. MacLennan insists that “corruption implies something systematic,
institutionalised and perhaps endemic to an organisation or culture. It is pervasive,
infused or embedded in the system.. . Corrupt or criminal behaviour is individual. If
an alleged crime occurs, individuals are held responsible and receive punishment
through the courts. But corruption is institutional, patterened – perhaps criminal and
unethical from outside, but not necessarily perceived as such by insiders All of the
attention to the individual criminal executive is a detaour from figuring out how
corruption works. An example is the coverage of the prosecution of Enron‟s
executives, CEO Jeffery Skilling and Chief Financial Officer Andrew Fastow. All
eyes are on the courtroom . . . and on possible jail sentences – thus isolating the
executive as the criminal. The corporate culture that bred corruption, and the social
expectations of the elite that ruled the organisation, have escaped scrutiny”32Let us
look at some instances of the Enron culture as translated into action by Skilling;
“Skilling introduced a rigorous employee performance assessment process that
became known as „rank or yank‟ under this system the bottom 10 per cent in
performance were shown the door. There was heavy pressure to meet targets, and
remuneration was linked to the deals done and profits booked in the previous
quarter.”33
“One thing the traders all loved about Enron was the sense they had of operating in
the purest environment that had ever been created in corporate America. By pure, they
meant that the trading floor operated strictly by the dictates of the free market. The
company‟s credo had always been that free markets worked best, of course. But the
traders grabbed on to that belief with a cult-like fierceness. . . Maximising profit was
not inconsistent with doing good, they believed, but an inherent part of it. . .”34
30
, C. MacLennan “Corruption in Corporate America: Enron-Before and After” in D. Haller and C.
shore (eds) Corruption, p158
31
C. MacLennan “Corruption in Corporate America: Enron-Before and After” in D. Haller and C.
shore (eds) Corruption, p163
32
C. MacLennan “Corruption in Corporate America: Enron-Before and After” in D. Haller and C.
shore (eds) Corruption, pp164-165, italics in original
33
S. Hamilton and A. Micklethwait Greed and Corporate Failure, Palgrave, Basingstoke, 2006, p36
34
B. McLean and P.Elkind The Smartest Guys in the Room, Viking, London 2003, p219.
9
“And always, hovering over everything and everyone at Enron, was Wall Street. . . .
In the Skilling era, the stock became . . . Enron‟s obsession. A stock ticker in the
headquarter‟s lobby offered a constant update on the price of Enron shares. TV
monitors broadcast CNBC in the building elevators. . . for Skilling himself . . . „the
stock price was his report card‟. When it rose, he was exultant; when it dropped , he
was glum”35
“Skilling‟s methods of arriving at Enron‟s quarterly and annual targets was downright
perverse. Instead of going through a rigorous budget process and arriving at a number
by analyzing all the business units and their prospects for the coming year as Kinder
used to do, he would impose a number based solely on what Wall Street wanted. He
would openly ask the stock analysts “What earnings do you need to keep our stock
price up?” And the number he arrived at was the number Wall Street was looking for,
regardless of whether internally it made good sense. . . . Invariably, as the quarter
drew to a close, Enron‟s top executives would realize that they were going to fall
short of the number they‟d promised Wall Street. . .. when the realisation took place
that the company was falling short, its executives undertook a desperate scramble to
fill the holes in the company‟s earnings.”36
A similar corruption was evident in the fall of Barings. The lack of supervision of
Nick Leeson was attributable in a substantial degree to the feeling that he was „the
goose‟ laying the golden eggs so that stringent enquiries into his activities or
limitation of them should be avoided at all costs.
The US/UK model of companies and corporate law has shareholders as the
primary focus; the company must serve the interests of shareholders and directors are
appointed and dismissed by shareholders. Nevertheless directors are to act in the
interest of the company and usually owe no direct duties to shareholders. This
structure does not necessarily equate shareholders with the company nor does it
equate shareholder interests with „profit maximisation‟ and impose a duty on directors
to achieve such a goal. Nevertheless recent discourse has imposed the concept of
profit maximisation on the assumption that this is what shareholders require and the
second assumption that shareholders and the company is one and the same thing. Such
an understanding of corporate aims has wide implications for their behaviour since all
considerations other than profit are seen as „negative externalities‟ to be adhered to or
to be bargained away if possible. There is no doubt that this philosophy was one of
the underlying causes of spectacular bankruptcies such as Enron and WorldCom.
Pogge‟s concept of „moral deflection device,‟ it is essentially a way to deflect a
morally inconvenient truth because rich humans prefer wealth rather than moral
duties. In terms of moral responsibility the traditional construct of corporations
means that they become another method of moral deflection: because the purpose of
corporations is to make as much money as possible. Those who tolerate and profit
from their existence have no responsibility for the methods they pursue. This ignores
the fact not only that companies are structured by national laws but also that those
who profit from an activity have a responsibility to prevent that activity harming
others. While the damage of the poor nations and the catastrophic raping of the
environment are desperate, we need to focus more particularly on the structure of
corporations and their governance. There are two misnomers at the root of the AngloAmerican model of corporate governance system: one is the illusion of a contractual
35
36
B. McLean and P.Elkind The Smartest Guys in the Room, Viking, London 2003, p125.
B. McLean and P.Elkind The Smartest Guys in the Room, Viking, London 2003, p127
10
foundation for companies and the second is the belief that shareholders hold property
in the company37. I tried to show that one mistake in the contractual model is the way
that once the articles of incorporation have been drafted the promoters are redundant.
After the company business‟s starts all sorts of the stakeholders have a part to play.
Thus the contractual model is an illusion38. Other scholars have also been worried by
the nexus of contracts concept. So is Clerc
“The theory of the nexus of contacts (which I shall refer to as „nexism‟‟ for the sake
of convenience), proceeds differently, . . . On the ground that legal entity is a fiction,
nexism defined the company as “ a set of complex arrangements of many sorts that
those who associate voluntarily in the corporation will work out among themselves”
(Easterbrook and Fischel, 1991, p. 12).39” Clerc realises that the company is a fiction
but for this theory he is happy to understand there are other institutions which are also
fictional but have a profound influence on people.40 He is more interested by the
range of the contracts which are supposed to make the company work: “a theory,
which places contracts at the heart of its analysis, is only worthwhile if it examines
the real conditions of negotiation, execution and termination of those contracts. In
particular, the following questions can be raised. What is the negotiation position of
each party (for example, do employees have the choose of whether or not to work, do
investors have the choice between investment and consumption) . . .”41 In fact Clerc is
mischievous since the whole philosophy which he calls „primacism‟42 is predicated on
a sole stakeholder, the shareholders. In a way the contractual device is not useful for
primacism as I wrote earlier, because once the company has been founded, the real
business starts, and also what about in a contractual context if the company has only a
single shareholder43? In fact a contractual theory harks back to tired philosophy rather
than looking forward to reflexive theories which have a more inclusive reach, using
writers and scholars like Teubner or Luhmann44. As Teubner rightly says:
“Putting it quite bluntly, a corporate enterprise does not exist simply as a self
serving and self-realizing institution for the unique benefits of its shareholders
and workers, but rather exists, above all, to fulfill a broader role in society.”45
Indeed, large companies have a huge influence on our social, economic and
political lives. In the words of Chayes, “[T]hey are repositories of power, the biggest
centers of nongovernmental power in our society.”46 In the UK, the influence of
companies is just as evident as in the United States. The food we eat is dependent on
37
Paddy Ireland, “Property and Contract in contemporary Corporate Theory”, (2004) Legal Studies,
451
38
J. Dine Governance of Company Groups, CUP 2000.
39
Clerc Does Company Ownership Matter, p102-103.
40
Id
41
Id
42
Id
43
The EC 12th Company Harmonisation Directive (667/1989), implemented in the UK by SI
2007/297. see F. Wooldridge (2006) 27 Co Law 309.
44
See Niklas Luhmann, “Law as a Social System” 83 Northwestern University Law Review1989,
p136, and see also Gralf Peter Calliess and Peer Zumbansen, Rough Consensus and Running Code,
Hart, Oxford, 2010‟
45. Gunther Teubner, “Corporate Fiduciary Duties and their Beneficiaries: A Functional Approach to the Legal
Institutionalization of Corporate Responsibility” in Hopt and Teubner (eds) Corporate Governance and Directors’ Liabilities
(1987, de Greuter, Berlin) 149, at p. 157.
46. Chayes, noted above, at p. 25.
11
how it is grown, processed, packaged, advertised and sold to us. Every one of these
stages is determined or influenced by companies. Increasingly companies are
involved in the provision of public services with the government having created
mechanisms such as private finance initiatives, and more recently the proposals for
community interest companies. Such mechanisms are recognition of the influence of
companies and their role in society. In such a context it seems that the two company
law assumptions that share the structure of company law and corporate governance
are not only anachronistic but in fact wholly inaccurate in their representation of the
character of companies today. Teubner argues for a proceduralization of fiduciary
duties that enables non-shareholder interest-groups to participate in the monitoring
and decision-making functions. The role of the law, in Teubner‟s view should be to
control indirectly internal organizational structures, through external regulation. The
role of the law is external mobilization of internal control resources.47 The
organizational structures should allow for “discursive unification processes as to
allow the optimal balancing of company performance and company function by
taking into account the requirements of the non-economic environment.” In short,
Teubner advocates a constitutionalization of the private corporation to make the
corporate conscience work “if that meant to force the organization to internalize
outside conflicts in the decision structure itself in order to take into account the noneconomic interests of workers, consumers, and the general public.”48 Teubner
highlights the role of disclosure, audit, justification, consultation and negotiation and
the duty to organize. He emphasizes the need to proceduralize. Ultimately, the point is
to ensure that the decision-making processes allow participation by those affected by
the decisions, whether in terms of profit, consumer choice, working conditions, or
environmental impact of corporate activities. If the decisions are made jointly with the
directors the monitoring role ought to reduce. Teubner‟s proceduralization would
mean a complete change in conceptualization of the company and directors‟ duties.
The following section of this article tries to put some flesh on the bones‟ of a
skeleton of company structure, in the context of a new look at UK company law. As
many have realized, the crunch is the way that directors should prioritize the
stakeholders‟ cut. Much angst has been written in this quest and there is not yet a
solution. This difficulty is one of the most stubborn problems and one of the reasons
that the traditional theory endures so strongly. Clerc says; “Given the many doubts
inherent in the shareholder primary theory, one may wonder how it has succeeded in
becoming dominant-although it has never ceased to be contested.”49 Unfortunately
one of this extremely intractable problem means that the „Single Master50‟ theory has
lingered. There seems no other solution: “In stakeholder theory, the managers must
take into account not only the interests of shareholders, but also those of employees,
customers, suppliers, local communities and so on. Because of the divergences
between these different groups, the managers cannot make a rational decision, and so
favour their own specific interest.51” This problem might be one of the reasons for the
huge inequality between managers and employees. “This year, the numbers speak for
themselves: while the business world reeled from the worst self-inflicted recession in
a generation, those at the top continued to reward themselves disproportionately.
Although direct bonuses were hit by the stock market crash, boards compensated by
47.
48.
Teubner, noted above, at p. 160.
Teubner, noted above, at p. 165.
49
Clerc Does Company Ownership Matter, p102.
Clerc Does Company Ownership Matter p101.
51
Id
50
12
pushing up their salaries three times faster than average pay elsewhere in the country
and relied instead on a growing range of fringe benefits such as cash in lieu of pension
contributions. Those at the very top, particularly the ten best paid directors in the
survey, beat all records. For the first time, the entire FTSE100 directors pay
themselves more than £1 billion52”.
Total salary package,
Rank
Name
Company
Job title
£m
1
Bart Becht
Reckitt Benckiser
CEO
36.76
2
Aidan Heavey
Tullow Oil
CEO
28.84
3
Chip Goodyear
BHP Billiton
CEO
23.82
4
Sir Martin Sorrell WPP
CEO
19.71
5
Bob Diamond
Barclays
President
17.48
6
Stanley Fink
Man Group
Non-Executive 15.38
Finance
7
Trevor Reid
Xstrata
15.34
Director
8
Arun Sarin
Vodafone
CEO
13.75
Santiago
9
Xstrata
Executive
12.56
Zaldumbide
10 Graham Martin
Tullow Oil
Executive
11.44
11 John Pluthero
Cable & Wireless
CEO
10.63
12 Jean-Pierre Garnier GSK
CEO
10.33
13 Frank Chapman
BG Group
CEO
10.1
14 Paul Pindar
Capita
CEO
9.86
Matthew
15
Tullow Oil
Executive
9.21
O'Donoghue
16 Sir Terry Leahy
Tesco
CEO
9.11
17 Mike Turner, CBE BAE Systems
CEO
7.22
18 Brad Mills
Lonmin
CEO
7.2
Manny Fontenla19
Thomas Cook
CEO
7.04
Novoa
20 Jeroen van der Veer Royal Dutch Shell
CEO
7.02
21 Michael Spencer
ICAP
CEO
6.73
22 Michael McLintock Prudential
Executive
6.61
British American
23 Paul Adams
CEO
6.4
Tobacco
24 Mark Bristow
Randgold Resources CEO
6.28
25 Tim Mason
Tesco
Executive
6.2853
Solutions?
52
Dan Roberts, “FTSE100 directors pay: the £1 billion in boardrooms”, Guardian Monday September
2009.
53
Id
13
Can the model of Shareholder „primacism‟ be ousted? One possibility for
changing the template might be a concession company law model. Concession
theory in its simplest form views the existence and operation of the company as a
concession by the state, which grants the ability to use the corporate form too,
particularly where it operates with limited liability.54 Thus the Charter of the
Newfoundland Company:
“. . . thinking it a matter and action well becoming a Christian King to make
true use of that which God from the beginning created for mankind . . .
therefore do of our special grace certain knowledge and mere motion . . . give
grant and confirm by these presents unto [various persons] their heirs and
assigns, and to such and so many as they do or shall hereafter admit to be
joined with them in form hereafter . . . That they shall be one body or
communality perpetual, and shall have perpetual succession, and one common
steal to serve for said body. . .”55
As we have seen it is a trite observation that the Anglo-American56 model of
companies57 has been extremely powerful, creating mega empires which have huge
economies. The US/UK model of companies and corporate law has shareholders as
the primary focus; the company must serve the interests of shareholders and directors
are appointed and dismissed by shareholders. Nevertheless directors are bound to act
in the interest of the company and usually owe no direct duties to shareholders. This
structure does not necessarily equate shareholders with the company nor does it
equate shareholder interests with „profit maximisation‟ and impose a duty on directors
to achieve such a goal. Nevertheless recent discourse has imposed the concept of
profit maximisation on the assumption that this is what shareholders require and the
second assumption that shareholders and the company is the same thing. Such an
understanding of corporate aims has wide implications for their behaviour since all
considerations other than profit are seen as „negative externalities‟ to be adhered to or
to be bargained away if possible. There is no doubt that this philosophy was one of
the underlying causes of spectacular bankruptcies such as Enron and WorldCom
As we have seen this Anglo-American model is simple, modelled on a
contractual pattern. Although we have seen that the definition of „contractual‟ is
unclear, roughly it means that the principal negotiators together design a company,
this means that all of the investments and the profit of the enterprise belongs to the
members. This model therefore has been in the forefront of the philosophy which
became the traditionally economic model, free markets, the Washington Consensus,
the neo-liberal economists construct. The Anglo-American model of companies
antedated the Washington Consensus but it coincided with the worst aggressive sort
of it. Particularly important it has in it the philosophy of deregulation which allowed
huge corporate empires. An excellent history of neoliberalism is found in Glinavos:
54
G. Mark, The Personification of the Business Corporation in American Law, [1987] University of
Chicago Law Review 1441, examining the Dartmouth College decision (Dartmouth v Woodward
(1819) 17 US 518) See also J. Parkinson Corporate Power and Responsibility: Issues in the Theory of
Company Law, Oxford University Press, 1993.
55
Taken from H. Rajak, Sourcebook of Company Law (2nd, Jordans, Bristol, 1995.
56
Australian companies also have a similar model, see Marshall, Shelley D. and Ramsay, Ian,
Stakeholders and Directors' Duties: Law, Theory and Evidence. U of Melbourne Legal Studies Research
Paper No. 411. Available at SSRN: http://ssrn.com/abstract=1402143
57
Bruner, Christopher M., Power and Purpose in the 'Anglo-American' Corporation (March 19, 2010). Virginia
Journal of International Law, Vol. 50, No. 3, 2010; Washington & Lee Legal Studies Paper No. 2009-8.
Available at SSRN: http://ssrn.com/abstract=1575039. Bruner, shows that there are significant differences
between the models.
14
“How, then, did a specifically neoliberal version of capitalism built on an
essentially American model of „laissez-faire‟ become the strand of western
free market ideology that won the day. . . it examines the theoretical
underpinnings of neoliberalism, focusing in particular on its underlying
assumptions that markets are natural; that the rationality of their operations is
threatened by governments intervention ; that the role of law is limited ; that
law should be subordinate to markets needs; that the „invisible hand‟ of the
market not only ensures efficiency but also distributive justice.”58 What this
means for companies is that the shareholders are Kings, profit maximisation is
the goal despite the fact that no company law ever says that it must be so.59
The consequences are clear many testaments are written showing the
denigration of the environment, bad labour practices, the displacement of
domestic production, the undermining of political systems and the effect of the
banking of international money systems60.
As we have seen from the ancient charter companies like the Newfoundland
Company, the traditional concessionl model was started by Queens or Kings to allow
trade in the colonies, where sovereigns wanted territories and treasures, in exchange
thrusting entrepreneurs were allowed to trade in goods. Of course the sovereign took
most of the money, but the entrepreneurs also got rich. However the company and its
directors had to be sure that the regulations which the sovereign made were
meticulously kept, because otherwise the sovereign would be enraged and the
sanctions would be savage.
Now this model is an old fashioned one. Now, modern concession company
theorists use a different understanding of the foundation of companies with some
particularly using a bottom-up concept which says that stakeholders are crucial for
the foundation of companies.
There are a number of strands of stakeholder theorists who believe that there
is a living entity in companies, and all stakeholders are privy to the enterprise. Thus
companies are a social and political entity.61 In some ways stakeholder theory
embraces the “organic” view of companies.62 The organic analysis is borrowed from
the analysis of states. Wolff63 cites John Caspar Bluntschli who “found something
corresponding in the life of the State not only to every part of the human body but
even to every human emotion, and designated e.g., the foreign relations of a State as
its sexual impulses!64”
Stakeholders are part of a company even though the shareholders and directors
are the paramount managers of the company and administrate the bureaucracy.
Employees, customers, consumers, local residents, and many others are within the
58
Ioannis Glinavos Neoliberalism and the Law in Post Communism Transition” Routledge 2010, page
12.
59
J. Dine “The Governance of Corporate Groups” CUP 2000, page 8 et seq.
60
J. Dine “The Governance of Corporate Groups” CUP 2000, page 152, See for example T. Larsson
The Race to the Top; The Real Story of Globalisation Cato Institute, Washington, 1999, D. Irwin Free
Trade Under Fire, Princeton University Press, New Jersey 2002, a slightly more balanced approach in
M. Moore World Without Walls Cambridge University Press, 2002, Ioannis Glinavos Neoliberalism
and the Law in Post Communism Transition” Routledge 2010.
61
Christine Parker, The Open Corporation, Effective Self-Regulation and Democracy, CUP 2002,
page4.
62.
63.
64
M. Wolff „On the Nature of Legal Persons‟ (1938) Law Quarterly Review 494
„Nature of Legal Persons,‟ 499.
I often use a construct to denote huge transactions of Transnational companies as “penis extensions”
15
corporate sphere of influence.65 However there is another stronger theory which holds
that the company is derived from society i.e that concession theory is entirely a
bottom up theory. In 2000 I suggested I different sort of model arrangement for
companies.66 I called this the „dual concession theory‟, the idea was that it should be
structured from the bottom. i.e instead of the monarch being the sovereign fount for
the enterprise, society itself should be the and remain foundation for companies. That
would mean that the community should have the power to change the organisation
and the structure of companies. Companies would be derived from and socially
responsible to the democratically organisation community of people. This is a variety
of a social contract idea theory.67 However it has important implications, it is an
expression of the search for a new definition of democratically shared „common‟
(good) beyond the traditional public-private distinction68. Perhaps the dual concession
approach is similar to Ruggie‟s idea of a social licence for companies69. Ruggie
doesn‟t use examples to tell us how companies could be reformed. He hides in human
rights speech, and particularly using egregious violations to illuminate the problem.
His report is entitled: “Business and Human Rights: Towards operationizing the
“protect, respect and remedy” Framework”70 It is not fair to expect that the
construction of companies would be in a „framework document, I hope that Ruggie‟s
work will have more detailed consideration and be published later. However the
radical hypothesis that I suggest has within it a plan which could revolutionise
democracy. We are used to a settled idea of democracy which takes a passive voting
based situation to allow governments to define and run the economy, a company
structure that actively tells companies how we want goods and services to work would
be a fundamental change.
Tilly says that democracy is a process, rather than a thing, a dynamic
happening.71 Unfortunately although many theorists understand that it would be an
excellent democratic ideal, very few have imagined how this might pan out in the real
world. This section will attempt to fill up some of this skeleton.
The Company Law Act 200672
65
Christine Parker, The Open Corporation, Effective Self-Regulation and Democracy, CUP 2002, page,
see also M Blair and L Stout, A production theory of corporate law, Journal of Corporation Law 751805.
66
J. Dine The Governance of Corporate Groups Cambridge University Press, 2000, page 26
67
P. Ireland “Property and Contract in contemporary corporate theory” [2004] Legal Studies 453 at
506, Christine Parker, The Open Corporation, Effective Self-Regulation and Democracy, CUP 2002,
Simon Deakin, Squaring the Circle? Shareholder Value and Corporate Responsibility, 70 GEO
WASHL. Rev.976. 977, (2002). Paddy Ireland, Company Law and the Myth of Shareholder
Ownership,. 62 Mad L Rev.1 (1999) J. Hill, Visions and Revisions of the Shareholder, 48 AN.J. COM.
L39 (2000)
68
I am indebted to Michael Blecher for this insight.
69
Report of the Special Representive of the Secretary General on the issue of Human Rights and
transnational corporations and other businesses enterprises. “Business and Human Rights: Towards
operationizing the a “protect, respect and remedy” Framework, UN A/HRC/11/12, 22 nd April 2009.
70
Id
71
C. Tilly, Democracy, CUP, 2007, see also J. Dine Democratization: the contribution of Fairtrade
and Ethical Trading Movements, 2008, Vol 10 Indiana Journal of Global Legal Studies 1-35
72
P. Ireland, „Corporate Governance, Stakeholding, and the Company: Towards a Less
Degenerate Capitalism?‟ (1996) 23 Journal of Law and Society 287 at 287. Ireland said , “by the time
of Blair‟s grand pronouncements, „stakeholding‟ in this
narrower corporate sense, had already been widely embraced in Britain, with both the
Trade Union Congress and the Labor Party enthusiastically backing the „modernizing
16
How can companies be reformed in a democratic way? One possibility for a
breakthrough could be the new UK Companies Law Act 2006 which has an
interesting definition of director‟s duties, but we do not know yet what the definition
actually means, there are not yet any cases about directors‟ duties. Section 172 of the
Companies Law Act 2006 says that directors have a duty to the company to act in a
way, “in good faith, to promote the success of the company for the benefit of its
members as a whole.” To do this the director is told that they are to have „regard‟ to a
range of other matters; “the consequences of any decisions in the long term; the
company‟ employees; the need to foster the company‟s business relationship with
suppliers, customers; and others, the impact of the company‟s operation of the
community and the environment; the desirability of the company‟s maintaining a
reputation for high standards of business conduct; and the need to act fairly between
members of the company”. It looks wonderful, but, the rub is in Subsection (1) and
(2) where the other interests are clearly shown to be minimal, the paramount interest
is focused on the shareholders. We don‟t know whether the judges will change the
traditional focus of shareholder interests73 by changing the importance of the other
stakeholders. The Human Rights fraternity uses a rubric for encapsulate the crucial
rights. They use a slogan which reads; “protect, respect, fulfill”. I think that this
human rights idea is stronger that the concept in the directors‟ duty in the Company
Law Act 2006. „Respect‟ is stronger than „regard‟ I think that the judges might not
understand that the Act has supposed to be a radical shake up of old concepts. The
dual concession idea, as a bottom-up concession theory, is a strong version of
stakeholder theory and rests on a similar premise. Stakeholder theorists believe that
there are two categories of stakeholder, a primary stakeholder whose interest is more
crucial because the stakeholders‟ participation could threaten the company, that is, the
company could not survive their involvement.74 Normally they are the shareholders,
employees, customers and suppliers. Some theorists include “public stakeholder
group: the governments and communities that provide infrastructures and markets,
whose laws and regulations must be obeyed, and to whom taxes and other obligations
may be due”75. Other academics exclude this category. Secondary stakeholders are
then the media, special interests groups and perhaps competitors. The differences in
the theories are in the way that the stakeholders are to be allowed to be part of the
company. Stakeholder theory says that the company is the fount of the enterprise,
instead the stakeholders the dual concession says that society i.e stakeholders are the
company. The traditional stakeholder theory has the focus on the company and, in a
way, the stakeholders in that theory, are allowed to be a part of the company, a sort of
theory‟ of the stakeholding company. Considerable support had also already been
expressed by some in industry, with the final report of the Tomorrow‟s Company inquiry,
organized by the Royal Society of Arts and supported by companies such as Cadbury
Schweppes, Guinness, Thorn EMI, and Whitbread, wholeheartedly endorsing the merits of
an „inclusive‟ conception of the company” (at 288).
73
See Stephen Copp Corporate Social Responsibility and the Company Act 2006 Volume 29 No 4
Institute of Economic Affairs 2009, Marshall, Shelley D. and Ramsay, Ian, Stakeholders and Directors'
Duties: Law, Theory and Evidence. U of Melbourne Legal Studies Research Paper No. 411. Available
at SSRN: http://ssrn.com/abstract=1402143Top of Form.
74
M. Clarkson, „A Stakeholder Framework for Analyzing and
Evaluating Corporate Social Performance‟ (1995) 20 Academy of Management Review 92
at 106-7.
7575
Marshall, Shelley D. and Ramsay, Ian, Stakeholders and Directors' Duties: Law, Theory and
Evidence. U of Melbourne Legal Studies Research Paper No. 411. Available at SSRN:
http://ssrn.com/abstract=1402143Top of Form, page 7.
17
a charitable concept, where directors are the top-cats, allowing the interests to be
shared. On the other hand some scholars believe that the stakeholders are so important
that their interests should be an end rather than a means76, i.e. the company would be
subsumed by the stakeholders. This is a radical idea, but it might mean that it would
get rid of capitalism, a rather startling idea. It seems that the profit motive would be
completely lost, since each stakeholder interest would be and end in itself. That would
mean, for example, would employees‟s interests be paramount? Would their wages
be an end itself? How would the balance be struck? This is the intractable problem. I
think that this theory is not practical.
However, there is another interesting approach which rests on a new economic
theory which has been coined because neo-liberalism has been discredited.
Neoliberalism assumes all people (rational actors) want more and more money and
goods. We now know what fuelled the consumer boom and lent to the world-wide
financial crisis. The new theory is named behavioural economics. In fact, the concept
is not as simple as the Kantian idea in the issues in this paragraph, the balances of the
interests are managed by proportionality. The management will have implicit and
explicit limits and if any stakeholder‟s interest is legitimate, and if the managers
denigrate any legitimate stakeholder interest this should lead to sanctions77. However
this also leaves problems, because there are significant wiggle rooms in these
concepts, indeed, a number of words in this theory is implicit on these;
“proportionality; implicit and explicit limits; legitimate interests; etc”. I believe that
this theory and the dual concession theory of companies are very similar but it would
be excellent to unpack these weasel words, to really understand which risk each
stakeholders might lose. I know that the financial crisis has rocked the credibility of
78
the FSA (Financial Services Authority)`
, but there was a simple equation which
the FSA used which might still be credible. Of course, assessment of risk is a complex
business even if it be accepted that it can be achieved with any degree of objectivity79.
The technical perception of risk as objective and measurable is loosing ground: "the
view that a separation can be maintained between 'objective' risk and 'subjective' and
perceived risk has come under increasing attack, to the extent that it is no longer a
mainstream position . . . Assessments of risk, whether they are based upon individual
attitudes, the wider beliefs within a culture, or on the models of mathematical risk
assessment, necessarily depend on human judgment."80, these points to the necessity
for directors to exercise their skill and judgment in assessing the exposure of their
particular concerns. The FSA created a „Risk Assessment‟ approach to regulation.81
76
E. Freeman and W. Evans „Corporate
Governance: A Stakeholder Interpretation‟ (1990) 19 Journal of Behavioural Economics Page 337.
77
E. Freeman and W. Evans „Corporate
Governance: A Stakeholder Interpretation‟ (1990) 19 Journal of Behavioural Economics
337.
78
Indeed it is going to be abolished!
Jenny Steele, Risks and Legal Theory, Hart Publishing, 2004, H.Luhmann, Riak Sociology (New
York), de Gruyter, 1993, U. Beck, M Ritter, Risk Society London, Sage, 1992, P. Berstein, Agress the
Gods, the Remarkable Story of Risk, )New York, Jpn Wiley and Sons 1996
80
See Royal Society Risk: Analysis, Perception and Management, Royal Society, 1992, p90. See also Julia
Black “Perspectives on Derivatives Regulation” in Modern Financial Techniques, Derivatives and Law A.
Hudson (ed), Kluwer, London 2000, R. Baldwin “Introduction – Risk: The Legal Contribution” in Law and
Uncertainty: Risks and the Legal Processes (R. Baldwin (ed), Kluwer, Berlin, 1997.
81
Drawing (inter alia) on the work of the Basle Committee on Banking Supervision. See, for example
Risk Management Guidelines for Derivatives, bank for International Settlements, basle, July 1994
79
18
The risk posed by a firm to the FSA's objectives82 will be assessed by „scoring‟
probability and impact factors. Probability factors take account of the likelihood of
the risk happening and impact factors assess the „scale and significance‟ of the harm
should the risk occur. The FSA expresses it as:
Priority = impact x probability83.
What I would like to see is to use all of the interests of the director‟s duties mentioned
by the legislation (Company Law Act 2006) turned into a risk assessment of each
interest. For example, what does it mean to analyse the company‟s risk vis a vis
employees? Of course, remuneration would be a significant focus, but many theorists
have realized that the community where workers live is at least as important as a hike
of wages. Similarly employees have families and this is an important facet for thriving
companies.
Legal Risk Allocation84
It is vital that when designing company law, there must be an attempt to arrive at
an abstract evaluation of the interests at stake so that the regulatory systems could be
understood as a framework which held the balance between the competing interests.
At the heart of making suitable choices for regulation is a series of options concerning
the risks undertaken by participants in reorganisation of corporations. This does not
make choices simple as is evident in the light of the complexity and uncertainty
surrounding the issue of risk, especially in the regulation of market economies.85 Black86
contrasts "technical perceptions" of risk with psychological or social accounts of risk.
Technical perceptions "tend to the view that risks are ultimately measurable and
controllable" whereas psychological or social accounts of risk "emphasise that risk is a
multi-dimensional concept that cannot be reduced to mere products of probability and
consequences".87 Psychological perception of risk may vary according to the ability of
those at risk to undertake it voluntarily rather than have it imposed upon them and the
"extent to which they are perceived to pose a threat to valued social and institutional
arrangements".88 It is clear that in seeking to regulate risk addressing some extremely
complex questions with significant political and cultural roots is necessary.89
82
Sections 2-6 of the FSMA sets out four objectives; to maintain confidence in the financial
system, to promote public understanding of that system, to secure “the appropriate degree of protection
for consumers and to reduce the extent to which it is possible for a financial services business to be
used for a purpose connected with financial crime.
83
Building the New Regulator (Financial Services Authority, 2000)
84
The following part of the text was written by Janet Dine and Frederique Dahan and first appeared in
“Transplantation for Transition – discussion on a concept around Russian reform of the law on
reorganisation (2003) Legal Studies 284-310. We are grateful for permission to reproduce it here.
85
See R. Baldwin "Introduction-Risk: The Legal Contribution" in R. Baldwin (ed) Law and
Uncertainty:Risks and the Legal Processes, Kluwer, Berlin, 1997; Julia Black "Perspectives on
Derivatives Regulation" in A. Hudson (ed) Modern Financial Techniques, Derivatives and Law, Kluwer,
London, 2000.
86
op. cit., n 5.
87
op. cit., p 178.
88
op. cit., p 180.
89
The technical perception of risk as objective and measurable is loosing ground: "the view that a
separation can be maintained between 'objective' risk and 'subjective' and perceived risk has come
under increasing attack, to the extent that it is no longer a mainstream position . . . Assessments of
risk, whether they are based upon individual attitudes, the wider beliefs within a culture, or on the
models of mathematical risk assessment, necessarily depend on human judgment." See Royal
Society, Risk: Analysis, Perception and Management, Royal Society, 1992, p90.
19
A series of questions must be asked:
1) Who is at risk?
2) What is their moral claim to protection?
3) The degree and nature of the risk?
4) What are the mechanisms and institutions available to manage the risk?
1.
Who?
In a market economy there are risks inherent in all commercial transactions; a
simple sale of a car may end with the customer dissatisfied with the performance of
the vehicle and the seller dissatisfied with the payment. The role of the law is to
provide some mechanism for balancing the competing claims against each other. The
management of corporations is no exception to this rule, indeed by introducing a legal
person into the equation the management of risk becomes more complex, not least
because the participating groups in corporations may not be a single interest group but
may contain competing elements. Thus, for example, shareholders do not necessarily
share exactly the same interests, a group of ordinary voting shareholders may have
interests diametrically opposed to those of non-voting preference shareholders.
Similarly a minority shareholder may be in peril of being outvoted and disadvantaged
by those in the majority. Creditors have competing priority claims and employees
may have different interests depending on their geographical place of work and their
position in the company. In seeking to protect a particular interest group it is therefore
vital to identify with precision the interest group or individual that is at risk when any
change takes place.
2.
The Moral Claim to Protection
Companies in a market economy exist to encourage risk-taking behaviour by
spreading the risk amongst a number of participants who may only invest a small
amount, and protecting them by allowing some companies to operate with limited
liability. If we take shareholders as a homogenous group we can see already that their
moral claim to protection as shareholders depends on a complex evaluation of the
degree to which entrepreneurial behaviour is to be encouraged in a particular society
and the extent to which they are already protected by such mechanisms as limited
liability. In assessing the answer to this question two levels must therefore be
identified; the fundamental purpose of corporations in particular economies and the
extent to which the law has already "rigged the market" in favour or against a
particular interest group. For example, while shareholders enjoy some protection by
reason of the limited liability of companies, creditors undertake greater risks in
contracting with limited liability corporations. Thus the very existence of limited
liability corporate organisations has already interfered with the distribution of risk
inherent in individual commercial contracts. Much has been written on the role which
corporations do and should serve within society90, suffice it to say here that there is a
90
See, for a small sample J. Dine The Governance of Corporate Groups Cambridge University Press,
2000, S. Bottomley, "Taking Corporations Seriously: Some Considerations for Corporate Regulation"
[1990] 19 Federal law Review 203; K. Greenfield "from Rights to Regulation" in F. Patfield (ed)
20
fundamental tension between a goal of making as much money as possible and
serving other goals91, for example providing employment, serving a local economy
and protecting the environment.
The balance between these differing goals can be fundamentally affected by the
way in which the law allocates risk between the various participants in companies.
While US corporations have tended to espouse profit maximisation as a paramount
goal,92 thus minimising shareholder risk at the expense of other participants in the
commercial venture, the countries of the European Union have, in general, espoused
the view that a more balanced approach to the allocation of risk within commercial
enterprises is proper and has therefore followed a more protective approach to
creditors and employees.
Article 5093 of the EC Treaty requires "co-ordination to the necessary extent [of]
the safeguards which, for the protection of the interests of members and others, are
required by Member States of companies or firms." The important words in this
context are "members and others". As Edwards points out the wording gives rise to
"obvious scope for debate as to what is necessary and why: the spectrum ranges from
the view that only a minimum level throughout the Community is necessary to the
view that all members, creditors and employees of companies established throughout
the Community should benefit from uniform rights."94 As Gower points out the
reference to "others" "has historically been taken to include at least creditors and
employees."95 This has also tended to have the effect of protecting local communities
as the protective measures militate against complete mobility of corporations. This is
in contrast with, for example the Neoliberalism model where corporations were seen
to serve the shareholders‟ interests exclusively. These considerations raise
fundamental questions of how to strike the balance between permitting and
encouraging entrepreneurial behaviour aimed at profit maximisation and the
protection of vulnerable participants.96
Perspectives on Company Law I, Kluwer 1997; J. Parkinson Corporate Power and Responsibility,
Clarendon, Oxford 1995; D. Sugarman and G. Rubin Law, Economy and Society, Professional Books,
Abingdon, 1984; M. Stokes "Company Law and Legal Theory" in W. Twining (ed) Legal Theory and
Common Law, Blackwell, Oxford, 1986; R. Posner Economic Analysis of Law, 4th ed, Little Brown,
Boston 1992.
91
D. Korten When Corporations Rule the World, Kumarian Press, Connecticut 1995; M. Chossudovsky
The Globalisation of Poverty, Pluto Press, Halifax, 1998; P. Harrison Inside the Third World, 3rd ed,
Penguin, 1993; J. Karliner The Corporate Planet, Sierra Club, San Francisco, 1997.
92
See sources cited in footnote 49.
93
Previously Article 44(2)(g) of the EC Treaty.
94
V. Edwards EC Company Law, Oxford University Press, Oxford 1999, p 8. For an inclusive view of EC
company law including creditor and employee protection see J. Dine and P. Hughes EC Company Law,
Jordans, Bristol, looseleaf. See also B. Bercusson European Labour Law, Butterworths, London, 1996.
95
P. Davies Gower's Principles of Modern Company Law, 6th ed, Sweet and Maxwell, London 1997, pp
55.
96
For a wider perspective on this debate see S. Bottomley, op. cit. 204, R. M Dworkin "Is Wealth a
Value?" (1980) 9 Journal of Legal Studies 191, D. Campbell "Ayres versus Coase: An Attempt to
Recover the Issue of Equality in Law and Economics" (1994) 21 Journal of Law and Society 434, R.
Cooter "Law and Unified Social Theory" (1995) 22 Journal of Law and Society 50. As well as the
issues of psychological and cultural perception of risk a further question relates to the issue of
differential bargaining power. The extreme US model is based on the fiction that creditors and
employees are in an equal bargaining position to even the biggest corporation, the European Union
has rejected that fiction and enacted substantial legislation to protect employees and creditors. See B.
Cheffins, Company Law, Theory, Structure and Operation, Clarendon, Oxford 1997; A. Ogus,
Regulation, legal Form and Economic Theory, Clarendon, Oxford, 1994.
21
3. The Degree of Risk and its Nature
Again side stepping the complexities of perceived risk it is necessary to have
some understanding of what it is that each interest group has at risk. The risks differ
even amongst particular interest groups. For example, it is important to understand
that shareholders are not an homogenous group; they may have different interests
according to the rights attached to their shares. An ordinary shareholder whose
dividend rights are subject to surplus being available after the payment of a set
amount to a preference shareholder clearly has interests differing substantially from
that preference shareholder. Similarly, a shareholder may be less interested in the
economic risks of a reorganisation and more interested in the risk of loss of control
over a particular enterprise. Creditors will have different interests dependent on how
their debt is secured, what priority they can claim over others with a stake in the
assets of the company. The categories of participants at risk must therefore be
scrutinised with some subtlety. The nature of the risk is also an important
consideration. Laws often take a very stringent view on protecting citizens from
damage to their physical safety. The degree of protection which is given to financial
risk may be much less. Similarly, some balance has to be struck between protecting
employees against the risk of losing their livelihood and with it possibly their
community and psychological well-being and protecting shareholders from the risk of
less gain or perhaps even loss of a financial nature.
4.
What Mechanisms and Institutions Are Available to Regulate?
The final part of the calculation is the way in which the allocation of risk may be
regulated. Central here is the tension between "public" law regulation by law or
decree and "private" regulation which seeks to use agreement between the parties as a
foundation for control. Most jurisdictions adopt a mixture of the two approaches 97 but
the balance may be different depending on different cultural approaches. The
calculation of regulatory mechanisms needs to take account of the institutional
framework available in the host country. In an international context the FairTrade
movement is interesting since the regulations are private and contractual based not
public and governmental.
Nice People?
.
We know which interests are in the forefront in our questioning, because our
template is the directors‟ duties in the Company Law 2006. The other questions in this
paragraph are a subject of more research, In this part of the article, the second
question is highlighted and particularly consumers and shareholders as stakeholders,
and the possibility that the risk of each stakeholder should be reassessed in a radical
way. This might change their vulnerable status as the moral claim to protection might
diminish i.e if consumers and shareholders are altruistic they would become more risk
97
Thus avoiding the extremes of the pure neo-classical approaches to the regulation of markets; see R.
Posner Economic Analysis of Law, 4th ed, Little Brown, Boston, 1992; F. Easterbrook and D. Fischel
The Economic Structure of Corporate Law. Harvard University Press, Cambridge, Mass, 1991.
22
averse since other people will become more important than they are. Similarly if the
company wants to regard the environment as a stakeholder, shareholders and
consumers will themselves have to regard the environment. As we know, two of the
foundations of the principles of the Chicago economists‟ theory are competition and
efficiency. The key of these is market forces but the ideology is unfortunately flawed
because other crucial principles are left behind. The concept of altruism and
community vanished. Much research of the behavioural economists has showed that
people do not necessarily want to maximise their possessions. Other ethical and
spiritual values are also important. This is different from the neo-classical Chicago
University idea: “Neo-Classical economic Theory has a dim view on humanityindividuals singularly purse their economic self-interest.”98 Essentially the concept
means each individual is motivated by their material wealth i.e. things. The
behavioural economists no not believe that is the only motivation of people. The
research of experiments have been clear, there is another side of people, particularly
their altruistic side; “substantial fractions of most populations adhere to rules,
willingly give to others, and punish those who offend standards of appropriate
behaviour, even at a coat to themselves and with no expectation of material reward.”99
The empirical experiments are fascinating, just two are in the Ultimatum
Game where “one person is given some money, and must offer another person some
portion thereof. If the other person accepts the offer, both get to keep the money. If
the other person rejects the offered amount, neither gets any money.
Contrary to neo-classical economic theory, which assumes one predicted
response (the offer of the nominal amount), most receivers in those games forego
wealth to punish unfair offers, and offerors generally offer more than the nominal
profit-maximizing amount.”100 Another experiment looked into cooperation and really
tried to understood how people‟s behaviour is working, “ In one Prisoner‟s Dilemma
game, for example, test subject A and B each possess £10, which they can either keep
or transfer to the person. Upon transfer, the recipient gets triple the amount. So if A
and B decide to keep their money, each earns £10: if both decide to transfer, each
earns £30.
98
Maurice. E Stucke Associate Professor, University of Tennessee Collage of Law “Money, Is That
Want I Want? Competition Policy And The Rose Of Behavioural Economics”, p18.
99
Adam Smith, The Theory of Moral Sentiments, 1759, published by Anthony Finley, Philadelphia
1817.
100
Maurice. E Stucke Associate Professor, University of Tennessee Collage of Law “Money, Is That
What I Want? Competition Policy And The Rose Of Behavioural Economics”, citing actual studies in
more than twenty countries. P22.
23
If one transfer her money, but the other does not, then the sharer losses out.
She gets nothing, while the recipient gets £20. Neo-classical economist theory
predicts that both playing pursuing their economic self-interest should not cooperate;
they instead will keep their £10. Instead many test subjects cooperate in such
situation.”
The idea that people are not always self-interested has significant
consequences for corporate social responsibility; “Neoclassical economic theory
predicts that financial incentives should motive and penalties should deter behaviour.
But the behavioural economics literature shows that individual may act from an
intrinsic motivation, independent of any financial reward or penalty. At tomes
financial incentives may have the opposite effect.”101
These concepts could be merged in a risk analysis to show how society could
view companies, using a sophisticated risk analysis.
The UK Company Law Act 2006 could be a vehicle for showing how
companies could be structurally changed. This Act might show that more stakeholders
than shareholders are impacted by companies and society. The most intractable
problem for stakeholder theory is to find a way to parcel up the interests equitably.
The priorities are complex and difficult. The behavioural economists have shown that
all of us are altruistic actors in a community. However trying to find a balance
between all of the interests in companies will need more than words, what will be
needed is proportionality and equity. Risk and analysis might be the key.
If the radical proposals in this part, are too fundamental, simultaneously
another way of changing companies‟ structure is to use a different power base to
leverage the state to enact essential model legislation preventing corporate violations.
This might rest on Ruggie‟s concepts of social licence. Ruggie‟s report rests on three
pillars: the duty of states protect against Human Rights abuses, particularly via
effective regulation, more respect of Human Rights, via Corporate Social
Responsibility, meaning not infringing on other‟s rights, and by more and greater
impact for effective remedies for victims. The pillars complement each other102.
Ruggie‟s report concludes103 that the best entities for remedying abuse of
corporate Human Rights violations are Governments, but I am not sure that it is true.
One problem is the difficulty of showing that often governments and companies have
a symbiotic arrangement, a sort of a cosy relation. Unfortunately, government need
companies because the government‟s finance is not only crucial but all-important for
the state and companies make money, in fact the GNP of countries are heavily
indebted to companies. Therefore government are in a conflict of interest situation,
this is one of the formidable tasks that corporate Human Rights and ethical
campaigners activists are set.
If the UK Company Act 2006 could be a template for European or
international company reform, research should be focused on the risk run by
stakeholders. It should be possible to devise a project which centred on each stake
101
Maurice. E Stucke Associate Professor, University of Tennessee Collage of Law “Money, Is That
Want I Want? Competition Policy And The Rose Of Behavioural Economics p25 citing Samuel Bowle,
“Policies Designed for Self-Interested Citizens My Undermine, the Moral Sentiment; Evidence From
Experiment” Science, June 20, 2008. at 1605-6.
102
Report of the Special Representative of the Secretary General on the issue of Human Rights and
transnational corporations and other businesses enterprises. “Business and Human Rights: Towards
operationizing the a “protect, respect and remedy” Framework, UN A/HRC/11/12, 22 nd April 2009/
para 2.
103
Ruggie Report Paragraph 44.
24
holder‟s concern individually, but this will be a huge undertaking, perhaps one
powerful coalition of stakeholders which could quickly make companies more
responsive to ordinary people is an alliance of shareholders and consumers.
It seems though, that another agency will be necessary to cut the Gordian knot,
what could this be? I suggest, what is necessary is a new power base to challenge the
traditional power bases, i.e corporations and governments and their mastery. We
know that government will be weak in promoting ethical principles and this is one of
the difficulties of having the Westphalian system, which is particularly acute in the
Human Right system. However there are other power bases which are not dependent
of states and governments, and which are international. Two of them are social
movements104 and consumers, and particularly ethical customers. Both of these
movements are interlinked and, although they are nebulous in their aims, they are
roughly inline with anti-corporate greed. The aims of both of the movements are
completely global, which gets rid of the corporate veil problems and the crucial issues
of extraterritoriality in jurisdictions. The Ruggie report indicated that the „social
licence‟ which allows companies to operate is international, there are a huge activism
in the internet using blogs, twitters, NGOs publications, this means that company
violations of Human Rights are quickly noted, but this is not enough to build a power
base. All of them might be right minded, (and this is not necessarily true) but the
outrage is unfocussed. The social movements are wider than the ethical buying
campaign, and perhaps it should be fine-tuned to make the negotiations more
powerful. One of the best social movement‟s well defined parts is the ethical
consumer movement and the FairTrade system which is becoming quite powerful.
The Special Representative (Ruggie) talks about the possibility of due diligence in
preventing Human Rights abuses, and suggests a risk assessment system, since
companies use risk analysis often. The difficulty is in the implementation of the
normal business of profiteering and which organ would be powerful enough to stop
violations during profit seeking? Ruggie says that this should be left to four elements;
“The four core elements of human rights due diligence were outlined in his 2008
report: having a human rights policy, assessing human rights impacts of company
activities, integrating those values and findings into corporate cultures and
management systems, and tracking as well as reporting performance.”105
This is rather pious hope. However, one possibility that might change the
tectonic plates enough to insert a different power base, could be consumers. We are
always talking about a consumer led society, perhaps this could be an advantage in
helping preventing violations and abuses of human rights. The ideas of the
behavioural economists have showed that humans are not one hundred per cent
selfish, people have an altruistic bent. This is clear in the way that the FairTrade
movement has flowered and prospered106. How can this help in confining abuses of
companies, particularly violations of human rights? If we indeed area a consuming
led society this could be usefully focud on the structure of companies, realising that
the ugly truth of profit maximisation is the well spring of the Anglo-American model
104
Tom Mertes (ed), A Movement of Movements, Verso, London, 2004
Ruggie Paragraph 49
106
Laura T. Raynolds and Michael A. Long “Fair Alternative Historical and empirical dimensions” in
Fair Trade, the Challemges ofTtransforming Globalisation. (eds) Laura T. Raynolds and Michael A.
Long, page 16, Anja Osterhaus, World Trade Contradictions and the Fair Trade Response, in Business
Unusual :Success and Challengers of Fair Trade (2006).
105
25
of companies. Then , consumers as stakeholders might become a very powerful new
source for structuring the world. Consumers are world wide, they no not understand
international barriers, and so artificial barriers like legal jurisdictions are extremely
useful in the global fight to prevent company abuses. But, how can this fight be
operationalzed, as Ruggie wants? I believe that a movement is beginning to appear
which could and should change the structure of the traditional power bases. If
consumers understand the structure of companies as a tool to replace the traditional
power bases in a subtle way, using the new economics this would be a fascinating
study. There are a number of movements in activists circles which use shareholders
meetings to bring human rights and environment issues to shareholders meetings and
some resolutions are published in the media. So far the resolutions have been defeated
but if the ethical shoppers could be interested in shareholders resolutions this could
change107. The activists will have to buy some shares, but if enough of them do that
this could be a tipping point for changing companies into ethical organisations.
Conclusion
107
Oil giant BP shrugged off a shareholder resolution requiring it to review its Sunrise tar sands
project in Alberta at its annual general meeting yesterday – although not without a significant voter
swing against its controversial tar sands policy.
Prior to the meeting, the company said that 94 per cent of shareholders voting in advance had rejected
the resolution, which was bought by a group of ethical shareholders including the California Public
Employees' Retirement System, and Co-operative Investments.
The resolution, filed in January, questioned the financial viability of the project, which involves an
carbon and energy-intensive oil extraction process using the bitumen retrieved from tar sands in the
Canadian province of Alberta. BP, which also published its Sustainability Review yesterday, has a 50
per cent stake in the Sunrise project, which could produce 200,000 barrels of tar sands oil each day by
2012.
"Financial concerns include questions about whether future oil prices will be high enough to outweigh
the high costs of producing tar sands, installing carbon capture and storage and expected carbon
emissions costs," said FairPensions, a responsible investment campaign that backed the resolution.
"Investors working with FairPensions think that BP and Shell's financial assumptions may be too
optimistic," it added.
However, the final outcome after the meeting showed that fewer shareholders had been against the
resolution than BP had thought. In total, 622,272,418 voted for the resolution, 9,497,638,714 voted
against, and 1,020,301,075 abstained.
"The fact that 15 per cent of the shareholders refused to back the company's position is significant,"
said Greenpeace climate and energy campaigner Melina Laboucan-Massimo.
"There will be continued pressure on BP for making the decision to get involved in the tar sands, given
that it said it was going to be 'beyond petroleum'," she continued, referring to the company's muchcriticised branding strategy.
Greenpeace and other environmental groups have organised a concerted protest against BP's tar sands
involvement over the past two weeks, culminating in activity taking place in Calgary, Alberta's capital,
yesterday. Similar protests occurred in London outside BP's annual general meeting.
Last week, the Duncan First Nation and Horse Lake First Nation Native American communities in
Alberta successfully applied to the Supreme Court of Canada to address tar sands activity, claiming
that it violates treaties signed with the Canadian government.
Reports that BP had delayed the controversial project in spite of the shareholder vote were erroneous,
according to spokespeople at the company's Alberta office.
Activists will now be looking forward to the annual general meeting of Royal Dutch Shell, to be held
on May 18. A similar shareholder resolution has been filed for discussion at that event.
http://www.businessgreen.com/business/news/2261445/bp-shrugs-anti-tar-sands, accessed on
2/4/2010
26
If people have an altruistic inclination and the theories of the neo-classical
economists are flawed, this has huge consequences for communities and in
particularly the companies‟ structures, here we have highlighted consumers and
shareholders but each stakeholders should be researched using the risk assessment
model. Altruistic principles are clearly showed by FairTrade and ethical consumers, it
would be fascinating to know if shareholders would change in a significant way if
different „ethical‟ models of company structure were used. It is clear that a great
amount of research is needed. I hope that many will help to construct a fairer trading
system grounded in new company structures. I am sure that this will happen108 but we
need to be researching quickly since the rape of the environment is imminent.
108
B. Sjåfjell, Towards a Sustainable European Company Law. A Normative Analysis of the Objectives
of EU Law, with the Takeover Directive as a Test Case (Alphen aan den Rijn, Kluwer Law
International, 2009), Chap. 10.
27