A historical perspective on corporate officer accountability

One of the main modern corporate accountability challenges relates to the representative nature of corporate power (what one of us refers to as its ‘constitutive vicariousness'[1]). Thinking of corporate power through the paradigm of ‘office’ recognises the representative nature of corporate power and the accountability challenge associated with the separation of official action from the individual occupying the ‘office’ at any particular time. This blog outlines the related projects of the authors regarding the historical origins of corporate officeholding and attempts to frame an accountability regime. The authors make two broad points. First, the duties of company directors were developed from a particular conception of the directorial office itself developed in 18^th century cases in the UK courts of Chancery. Second, and related to the first point, the function of ‘corporate office’ works both as a mode of accountability—imposing duties and obligations on the officeholder—at the same time as encouraging a sense of separation or irresponsibility for the actions performed. 

The case of The Charitable Corporation v Sutton (1742) (‘Sutton’) provides an early example of an attempt by the courts to address both constitutive vicariousness and the challenges of accountability resulting from the diffusion of power through corporate office. The plaintiff-company was incorporated by royal charter in 1707 for the purpose of lending money to the poor. The company’s management was vested in a committee (or board of directors) of seven, including prominent English parliamentarian and financier, Sir Robert Sutton. The dispute arose from a ‘fraud’ that five officers (though not directors) had perpetrated on the company. These officers loaned money upon old pledges without calling in prior loans and made loans to themselves upon fictitious pledges. In consequence, the Charitable Corporation suffered an enormous loss. 

At the instigation of the Charitable Corporation’s shareholders, the company brought a civil case, heard before Lord Hardwicke, seeking to hold to account fifty officers of varying ranks, including all seven directors. Lord Hardwicke conceived the directorial office as a ‘mixed office’ - comprising a public and a private aspect. Under Lord Hardwicke’s conception, however, the office’s public aspect was overshadowed by its essentially private aspect. For the Lord Chancellor, the closest and most compelling analogy between this private office was that of trustee of property held on trust for others because like trustees, directors were ‘intrusted’ with property that was to be held and managed for the benefit of others – the representative nature of corporate power. This was despite the fact that, unlike trustees (who have legal title to the beneficiary’s property), directors did not themselves have legal title to shareholder money. However, Lord Hardwicke nonetheless concluded that, in essence, the office of director is in the ‘nature of a private trust for other persons’ – meaning the company’s shareholders. 

The corollary of Lord Hardwicke’s examination was that, whenever those who accepted the directorial office, breached their ‘trust-like’ duties, they too would be ‘responsible to the corporation,’ illustrating an attempt by Lord Hardwicke to address the diffusion of corporate power through the corporate office. Such ‘breaches of trust’ would broadly involve a director executing his office other than ‘with fidelity and diligence’ in which case Chancery would provide relief.

Interestingly, the authority cited in the judgment for the responsibility of directors was the English translation of the French jurist Domat’s summary of Roman civil and public law. Whilst noting that the level of care and diligence of a director is the same as that of an agent, the obligations of directors are categorised not in relation to roles where there is an agreement governing the relationship (such as partnerships and agency relationships) but circumstances where obligations arise from a particular role (or ‘office’)—including that of tutor, guardian or curator. Such would ground the obligations of directors as arising from their particular office, rather than a voluntary agreement with shareholders, which has traditionally been considered the foundation for directorial accountability.

Lord Hardwicke also distinguished between actions that were a breach of trust and actions that constituted neglect. The former related to failures by directors to follow the requirements of the charter and by-laws. The latter, however, were distinguished in that these were actions conducted within the powers of office—including repealing by-laws, appointing certain individuals and putting affairs in their management. These actions were held to be a breach of trust not because they had failed to exercise powers granted to them under their office, but rather because of the exercise of those powers or rather the character of their exercise. As such, a breach of office occurs not only in terms of a failure to perform one’s obligations, but also in terms of the manner of their performance.

Lord Hardwicke’s decision was as an attempt to balance the need to ‘prevent the frauds of dishonest men’ with the idea that corporate office should not be made ‘unsafe or too perilous for honest men to accept offices of trust, by making them liable to losses in the execution of them.’ The decision was of its time – with Lord Hardwicke characterising the corporate relationship through analogy with then available legal mechanisms in an effort to find a remedy for shareholders. This conception of the corporation has had significant ramifications for corporate accountability through to the twenty-first century. Through an exploration of Sutton, and similar cases, our related projects seek to shed light on the early framing of corporate accountability as an exercise of corporate power through office in a manner that questions the private and voluntarist nature of corporate accountability that has come to form the foundation of corporate governance regimes around the world.

[1] The notion of constitutive vicariousness seeks to understand the way in which corporate power is never fully reducible or attributable to the particular actor (or actors) who exercises it. Corporate power is vicarious because the agents exercising corporate power do so on behalf of another and not themselves, and this is constitutive of the corporate form, which is premised on the vicarious exercise of power. See further Timothy D Peters ‘Corporate Office, Corporate Irresponsibility and the Constitutive Vicariousness of Corporate Power’ in Penny Crofts (ed) Evil Corporations: Law, Culpability and Regulation, Routledge (forthcoming, 2024).

………………………………………………………………………………………………….

By Steve Kourabas, Senior Lecturer and Deputy Director, Centre for Commercial Law and Regulatory Studies, Monash Law School, Nick Sinanis, Lecturer and Executive Group Member, Centre for Commercial Law and Regulatory Studies, Monash Law School & Timothy Peters, Associate Professor of Law and Associate Dean (Research), School of Law and Society, University of the Sunshine Coast.

If you would like to read further articles on the history of corporate governance, click here

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.