Shareholder primacy — going beyond the shareholder

The debate between those who advocate that the purpose of the company is to only to make profits for shareholders (shareholder primacy), and those who consider that a company should take into account a broader range of interests has a venerable history. We have seen advocates for both sides of the debate active in the last few weeks. We have also seen discussions about whether Australian law should change to include provisions which specifically permit directors to consider non-shareholder interests as has been done in parts of the US and the UK.     

Considering the wider community

Two Australian inquiries (the Parliamentary Joint Committee on Corporations and Financial Services Corporate Responsibility: Managing Risk and Creating Value, 2006 and the Corporations and Markets Advisory Committee The Social Responsibility of Corporations, 2006) found there was no compelling need to change the law to allow directors to take into account interests other than shareholders. Both Reports concluded that the current law allows directors to consider the impacts of their decisions, including changes in societal expectations, provided it is in the interests of the shareholders.

The concept of taking into account the wider community is also captured in the ASX Corporate Governance Principles and Recommendations. In Principle 3 ‘Promote ethical and responsible decision-making’ (second edition issued in 2007) the commentary observes that ‘companies should not only comply with their legal obligations, but should also consider the reasonable expectations of their stakeholders’. Principle 3 was re-cast in the third edition (issued in 2014) as ‘Act ethically and responsibly’. The expanded third edition Commentary points out that acting ethically and responsibly goes beyond compliance with legal obligations and involves ‘acting with honesty, integrity and in a manner that is consistent with the reasonable expectations of investors and the broader community’. It will be interesting to see how this is captured in the forthcoming fourth edition.

Shareholder primacy: is there a need for change?

Governance Institute explored the issue of shareholder primacy with its members and other stakeholders in 2014 and produced 'Shareholder primacy: is there a need for change? The discussion paper explored the means by which societal expectations in relation to moderating the influence of corporate activity on the community and environment can best be met. It also examined the misalignment that is often experienced between societal expectation and the impact of corporate

The Paper posed four questions including:

  • whether there is a need to change the law to include an equivalent to the permissive clause in the UK legislation
  • whether there should be a change to the law to expand directors’ duties so they must take into account the interests of stakeholders other than shareholders.

Various stakeholders provided submissions and almost all respondents answered no to both of these questions.

We have seen many examples recently relating to conduct that was already agreed to be in breach of the law. This does not relate to issues of shareholder primacy. Companies must comply with their legal obligations, not because they owe duties to stakeholders, but because legal compliance is a minimum standard, no matter which side of the shareholder primacy debate you are on 

Shareholder Primacy in changing times

Jason Harris has recently revisited the issue in his paper Shareholder Primacy, in Changing Times. Writing in the context of recent events, he has produced a comprehensive summary of both the history of the debate and the chain of legal authorities. He concludes ‘When board members make decisions they include a variety of considerations. They do so not simply because the law directs them to, but because of the commercial benefit in doing so. Shareholder primacy is not seriously under threat by these changing times, because it has only been one part of the story'. I tend to agree with him.

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