<\/p>\n
\u201c…the company, as an artificial person, can have no interests separate from the interests of those who are associated with it, whether as shareholders, creditors, employers, suppliers, customers or in some other way. So, the crucial question is, when we refer to the company, to the interests of which of those sets of natural persons are we referring? Of course, one could take the view that the beauty of referring to the interests of the company, without any further specification of what is meant, is that the answer to my question is left wholly ambiguous and obscure.” (Professor Paul Davies in the lecture at Melbourne University, 0ctober 2005)<\/p>\n
Amongst the interests of all the players and constituencies of a company, whose interests should the board of directors promote? There are basically two distinguished conventional corporate governance systems dealing with the competing interests. The shareholder theory emphases on profit maximization in the interest of shareholders, whereas the stakeholder model argues that multiple interests of corporate stakeholders such as creditors, employees and customers should be taken into consideration during decision-making process. However, I opine that these two models representing two extreme values are not conclusive. Rather the \u201cenlightened shareholder value” approach provides a more comprehensive analysis on the issue by comprising interests of both shareholder and stakeholder.<\/p>\n
Relying on the three corporate governance approaches, this essay aims to examine whose interests a company serves and to argue that the modern companies should be accountable to both internal and external players, but eventually running for the benefit of the shareholders<\/p>\n
This essay is divided into four parts. Part 1 discusses the \u201ccompany\u2019s interest” in relation to Professor Paul Davies\u2019 statement. Part 2 illustrates the traditional shareholder theory with reference to the common law. Part 3 analyzes different stakeholders interests under the stakeholders model. Part 4 evaluates \u201cenlightened shareholder value” approach.<\/p>\n
Lord Greene in Re Smith & Fawcett\u00a0[1<\/a>]<\/span>\u00a0set out a common law duty that directors must act in the company\u2019s interests in exercising their discretion, but what is \u201ccompany\u2019s interests”? Many argue that although a company is a legal entity generating something akin to a real personality with real interests at law, it is no more than a lifeless entity in reality.\u00a0[2<\/a>]<\/span>\u00a0Nourse LJ in Brady v Brady pointed out that \u201cthe interests of a company, an artificial person, cannot be distinguished from the interests of the persons who are interested in it.”\u00a0[3<\/a>]<\/span>\u00a0Accordingly, the separation of company\u2019s interests and the interests of its human players is a myth, it is suggested, rather than a fact. It is more accurate to argue that \u201ca company” may be viewed as \u201ca collection of individuals whose participation in the corporate entity is most typically for the promotion of their own individual self-interests”\u00a0[4<\/a>]<\/span>\u00a0and the term \u201ccompany\u2019s interests” may be construed as a comprisal of all those individual\u2019s interests.<\/p>\n Regarding Professor Paul Davies\u2019 statement about company\u2019s interests, his observation that the answer to his question \u201c\u2026 to the interests of which of those sets of natural persons are we referring?” is ambiguous somehow mirrors the fact that the interests of company embrace a wide range of interests but not limited to those of the shareholders or the owners. It may be broad enough to include the stakeholders whose livelihood depends on the operation of the corporate entity.<\/p>\n The shareholder theory asserts that the directors of a company, working adhere to the delegated decision-making authority, should manage the company \u201cfor sole purpose of maximizing shareholders\u2019 interests”\u00a0[5<\/a>]<\/span>\u00a0, which simply means promoting the company\u2019s success by maximizing the returns on shareholders\u2019 investments. Therefore, acting in \u201ccompany\u2019s interests” is to conduct the business in the way that promotes shareholder value.\u00a0[6<\/a>]<\/span><\/p>\n One underlying nature of English company law, which has been incorporated into Hong Kong common law, is to govern the agency relationships, in particular between shareholders and directors. It is quite obvious from the precedents of English case law that a company is established for the interests of the shareholders in the sense that the directors are under a fiduciary duty to act in the interests of the company, and the interests of company usually equal to those of the shareholders. In Greenhalgh v Arderne Cinemas Ltd\u00a0[7<\/a>]<\/span>\u00a0, Lord Evershed refers \u201cthe company as a whole” to \u201ccooperators”, by which the shareholders\u2019 interests should be a top priority. The Court of Appeal in Heron International v Lord Grade\u00a0[8<\/a>]<\/span>\u00a0, where directors were responsible for the takeover bidding, suggested that directors had an obligation to secure the best price, i.e. best interest, for the shareholders.<\/p>\n Failure of the shareholder theory<\/p>\n The most obvious shortfall of this traditional model is that it fails to recognize the variation of preferences of the shareholders. A company is to serve shareholders interests does not mean it may serve the interest of every single shareholder. It is more probable to carrying out a balancing exercise in ranking different interests. Megarry J in Gaiman v National Association for Mental Health suggested \u201c\u2026paying due regard to the members of the company\u2026 as a whole”\u00a0[9<\/a>]<\/span>\u00a0, meaning that enhancing overall shareholder interests is the ultimate objective. Unfortunately, the theory is silent on this issue.<\/p>\n Moreover, there are cases proving that the directors in some occasions taking actions to serve the company interests nevertheless contrary to shareholders interests. In Re BSB Holdings Ltd (No.2), Arden J supports the proposition that if the company interests are in conflict with shareholder interests, as a whole or even some of them, the former should be preferred, provided that the shareholders are treated fairly.\u00a0[10<\/a>]<\/span>\u00a0Accordingly, company\u2019s interests seem not refer merely to shareholders interests. Interests of others who are associated with the company should also be considered.<\/p>\n A famous proponent of the stakeholder model Professor Doss once commented that though directors owe a duty to shareholders to obtain an optimal profit, the interests of stakeholders cannot be disregarded\u00a0[11<\/a>]<\/span>\u00a0because all players and the company as a separate entity are interrelated. For instance, in considering employees\u2019 interests, offering attractive remuneration may lead to a higher consumption of company\u2019s products, in contrast strikes may cause huge losses to the company.<\/p>\n There appears no universal definition of \u201cstakeholder”. The author prefers a broader interpretation from Vinten who defined stakeholders as \u201cany individual who may be affected by the activities or affairs of the corporation”\u00a0[12<\/a>]<\/span>\u00a0which includes directors, creditors, employees, customers and even the general public. Then the stakeholder theory asserts that directors as the representatives of all the stakeholders should assure stakeholders interests because all of them are affected directly or indirectly by the achievement of the corporation\u2019s activities and objectives.\u00a0[13<\/a>]<\/span><\/p>\n Creditor\u2019s interests<\/p>\n Creditor\u2019s interests are often put at the bottom of the list. First, directors may not owe a duty to creditors. This traditional view has been discussed in Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd, where Dillon LJ said that:<\/p>\n \u201cThe directors indeed stand in a fiduciary relationship to the company, \u2026 and they owe fiduciary duties to the company though not to the creditors\u2026”\u00a0[14<\/a>]<\/span>\u00a0[emphasis added]<\/p>\n Second, there is no pressing need for a company to pay off debts immediately even though its balance sheet shows a net surplus.<\/p>\n However, in times of insolvency, interests of the creditors are of utmost importance. In West Mercia Safetywear Ltd v Dodd, the Court expressed that creditors are \u201centitled to displace the power of the directors and shareholders to deal with the company\u2019s assets”.\u00a0[15<\/a>]<\/span>\u00a0It was held in Colin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd\u00a0[16<\/a>]<\/span>\u00a0that if the board of directors passed a resolution without considering the interests of creditors properly, such resolution would be open to challenge when the company became insolvent. The modern view is that directors owe a duty to the future shareholders, i.e. the creditors.<\/p>\n If directors\u2019 duty extends to the creditors only when the company is insolvent or nears insolvency, it is doubtful whether a company in fact serves creditors\u2019 interests when making decisions in daily operations. I opine that the duty is more possibly to avoid harm to the creditors in allocating its assets than to promote or to serve their interests.<\/p>\n Employee\u2019s interests<\/p>\n The justification for serving employees\u2019 interests is that employees do risk their human capital while inputting their time and effort on their employment.\u00a0[17<\/a>]<\/span>\u00a0The English Parliament has codified the directors\u2019 duty to promote the success of the company in Companies Act 2006 and s172(1)(b) requires the directors \u201cto have regard to the interests of the company\u2019s employees”.<\/p>\n However, the actual effect of the legislation has been questioned by many scholars on the basis that there is a lack of effective means to enforce such statutory duty.\u00a0[18<\/a>]<\/span>\u00a0Rather the employment law, which puts emphasis on employment relationship of trust and confidence\u00a0[19<\/a>]<\/span>\u00a0, may be a more useful tool in ensuring that the employee’s interest will not being unfairly and improperly exploited.<\/p>\n It is hoped that bringing employees\u2019 interests in line with those of the company may help directors or managerial officers in building a stronger sense of belonging among the internals and hence, the employees are more likely to support the management decisions or even to shoulder some burden in times of economic difficulties.\u00a0[20<\/a>]<\/span><\/p>\n Customer\u2019s interests<\/p>\n Taking a more pragmatic approach, one should notice that businesses could hardly survive without the support of the customers. Corporations tend to set up customer services departments in order to show their concern over the interests of the customers and to maintain long-term business relationships with the customers. However, in responding to customers\u2019 needs, the corporations are indeed expecting a long-term growth of business for the benefit of the company.<\/p>\n Tesco plc, a leading retail chains in the UK, is a good example to illustrate the importance of considering the interests of customers. During the early 1990s, Tesco plc was struggling between its competitor Sainsbury\u2019s and some new European entrants in the market. Its management team conducted an opinion poll with 2,500 customers intending to look for a way out of the crisis. A surprising result showed that the customers were not satisfied with performance of Tesco plc because the company did not give them value. A series of customer services innovations, such as the introduction of online shopping services and loyalty card membership system, were followed by Tesco\u2019s new strategy of placing value on the customers but not merely on the competition, in return making Tesco plc to be the largest retailer in the territory.\u00a0[21<\/a>]<\/span><\/p>\n Social Responsibility<\/p>\n A significant argument is why a private entity should serve the public good. People argue that a company as a legal person has a considerable power to make decision and organize commercial activities which may affect the environment and the community at large. It has a social or moral obligation to be socially responsible.\u00a0[22<\/a>]<\/span>\u00a0However, I opine that the general interests of the society weigh much heavier in the directors\u2019 decisions of the large enterprises only because activities of small businesses would unlikely impact the economy.<\/p>\n There is a close connection between shareholder value and social interests.\u00a0[23<\/a>]<\/span>\u00a0If an approach to company\u2019s interests is to maximize shareholders returns, shareholders would be more willing to invest more. More job opportunities would be created as a result of such investment projects and hence, stimulates local economies. Meanwhile, the company gains reputation and goodwill. One may question the motivation of taking social responsibility: whether the company\u2019s commitment to be socially responsible is in the interest of the society or in the interests of shareholders. If the answer is both, then the enlightened shareholder approach may be more accurate to describe the modern corporate governance system.<\/p>\n The social responsibility concept is ideal but it may be practically difficult. This can be illustrated by the decision of relocation of Burberry Plc factory from Treorchy, South Wales, to Spain and China which caused a loss of approximately 300 domestic job opportunities.\u00a0[24<\/a>]<\/span>\u00a0Obviously, Burberry was attracted by the low cost of production in Spain and China. The Burberry\u2019s management was facing a dilemma over whether to relocate the factory and maximize company\u2019s profit or to retain the relatively high-paid local workers.<\/p>\n Limitation of the stakeholder model<\/p>\n In my opinion, the theory is to a certain extent conceptually limited in the sense that it offers no practical framework for implementing an integrated perspective of corporate governance\u00a0[25<\/a>]<\/span>\u00a0, despite the fact that it urges modern company directors to regard stakeholders interests in the decision-making arena. The issue is how to settle the concerns over the inevitable competitions among the diverse stakeholder groups.<\/p>\n To prioritize the interests of stakeholders seems to be an endless search because different groups of stakeholders would argue from different perspectives which favor their own interests over others\u2019. Instead of providing a priority list, it is more realistic to incorporate abstract regulations into the stakeholder model. s172 of 2006 Act is an instance showing the feasibility of such incorporation. Thus, every group of stakeholders will have a role to play and their interests would be protected.<\/p>\n In examining whose interests a company serves, there may not be a conclusive answer. \u201cCorporation\u2019s interests” should be interpreted broadly but not be confined to the wealth maximization and interests of shareholders. From the reasoning of Brady, one may understand that company\u2019s interests are not absolutely equal to shareholders interests. However, it is unrealistic to conclude that the interest of a particular group of the stakeholders outweigh that of shareholders because a business would never be established initially for the benefit of people other than the owners. Proportional returns for the shareholders\u2019 investment should be ensured. In this connection, shareholders interests and interests of other constituencies are unlikely of equal importance.<\/p>\n The enlightened shareholder value approach may be a new leading corporate governance model to resolve the issue. It emphases that modern companies tend to pursue \u201clong-term investment by value-creating internal and external relationships” and hence to secure the success of the companies.\u00a0[26<\/a>]<\/span>\u00a0However, shareholders interests are probably predominant. Compared to the traditional shareholder model, the most contrasting views are that first, shareholder interests are not equivalent to company interests and the interests of non-shareholder constituencies are part of the company interests. Second, the interests of other constituencies will be protected only in a way that such protection would promote shareholders interests. Thus, if there is a conflict between shareholder interests and the stakeholders interests, the former prevails. It is thought that this shareholder-centred approach may be more acceptable to the shareholders, whereas the sustainability of a company would not be undermined if the interests of stakeholders such as employees and customers are being respected.<\/p>\nPart 2. The shareholder theory<\/h2>\n
Part 3. Stakeholders\u2019 interests under the stakeholder model<\/h2>\n
Part 4. Enlightened shareholder value approach<\/h2>\n