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The Nature of Stakeholder Capitalism and the Role of Corporate Law: A Brief Response to Colin Mayer’s Blog
Authors
In his ECGI blog “The Role of Corporate Law Reconsidered: A Brief Response to Paul Davies’ Blog” (Responsible Capitalism blog series, 19 July 2022), Colin Mayer suggests “much might be gained from modest reforms rather than radical revisions to existing company law”. In this Blog, I suggest that while, on a conventional view of stakeholder capitalism, there is merit to Mayer’s suggestion, radical revisions to company law may be required to reflect radical visions of stakeholder capitalism.
Conventional thinking regards stakeholder capitalism as taking account not only of shareholder value (which is the focus of shareholder primacy[1]), but also of the needs of, for example, employees, customers and the communities in which businesses operate.[2] As Mayer notes, “the determinants of the “success” of the company extend beyond either its shareholders’ and creditors’ wealth or wellbeing, or indeed those of its employees as well as its investors.”
the relationship between corporations and stakeholders should be something more, suggesting the establishment of new legally binding fiduciary obligations throughout the investment chain.
However, respected commentators have argued that the relationship between corporations and stakeholders should be something more, suggesting the establishment of new legally binding fiduciary obligations throughout the investment chain.[3] This would require institutional investors to consider a broader set of beneficiary interests and corporations to operate under obligations to protect the common interests of shareholders and stakeholders.[4]
This proposal, to establish new legally binding fiduciary obligations, implies that investors and corporations would act as trustees to the stakeholders whose interests they would be duty-bound to protect. A trustee is usually understood to be a natural or legal person that holds and administers assets for the benefit of a third party (i.e., the beneficiary) to whom the trustee owes a fiduciary duty to act in their best interests in managing the assets.
This raises the question of whether, in order to be truly effective, the trustee relationship inherent in this conceptualization of stakeholder capitalism necessitates a form of beneficial ownership by stakeholders in privately owned capital. In other words, a form of beneficial social ownership.
the “trustee” model of stakeholder capitalism would incorporate a form of beneficial social ownership: the beneficial interest of all stakeholders in privately owned capital.
The concept of “social ownership” stands in marked contrast to private ownership.[5] The latter involves the disposition of the asset by the owner in his or her own interests while social ownership connotes the disposition of the asset by society in the interests of society.[6] A “trustee” vision (or model) of stakeholder capitalism may challenge such a sharp distinction. In taking account – and more so, in being required to take account – of the needs of, for example, employees, customers and the communities in which businesses operate, the “trustee” model of stakeholder capitalism would incorporate a form of beneficial social ownership: the beneficial interest of all stakeholders in privately owned capital. Under such a model, the legal owners of capital would act as trustees for all stakeholders. Hence, while they would continue to use capital for their own benefit (and so profit from such use), they would manage it for the benefit of all stakeholders.[7]
A “trustee” model of stakeholder capitalism would not be social ownership in its traditional sense, since it would not involve the transfer of capital to collective or State ownership. The private sector ownership would supplant State or any form of collective ownership of capital. Nor would it involve the disposition of capital by society in the interests of society. At the same time, under such a model, private owners of capital would not enjoy unfettered control over the capital of which they have legal ownership. They would have to take account of the interests of all stakeholders, who would enjoy a form of beneficial social ownership in privately owned capital.
a legally binding trust arrangement would underpin and condition the legitimacy of the legal ownership of capital by limiting the exercise of legal rights over capital by the creation of fiduciary duties
I describe the “trustee” model of stakeholder capitalism as a “form” of beneficial social ownership because, bar a change in company law, there would be no legally binding trust arrangement. If implemented, a legally binding trust arrangement would underpin and condition the legitimacy of the legal ownership of capital by limiting the exercise of legal rights over capital by the creation of fiduciary duties owed by the legal owners of capital to the beneficial owners of such capital. I suggest that such an arrangement would require radical revisions to company law.
Mayer’s enlightened interpretation of s. 172 of the UK Companies Act 2006,[8] which “would allow companies to commit to their purposes in ways in which it is not credible for them to do so at present”, or “changes in judicial interpretations of existing statutes” (to which Mayer also alludes) would be inadequate in my view to accommodate a truly effective “trustee” model of stakeholder capitalism.
At the same time, I acknowledge that it would be a challenge to bring about the radical revisions to company law required to give effect to the more radical vision of stakeholder capitalism underpinning the “trustee” model of stakeholder capitalism posited in this Blog. This is especially so considering, among other things, the current heated political debate around the issue of stakeholder capitalism.
In sum, if stakeholder capitalism were to be reconceptualised to reflect a form of beneficial social ownership of capital by stakeholders to whom the private owners of capital owed a fiduciary duty, as suggested in this Blog, I suggest that radical revisions, rather than modest reforms, of company law would likely be required. The nature and scope of such revisions, and whether such revisions would be feasible, are questions for another article.
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The author wishes to thank Professor Robert Eccles for his comments on an earlier draft of this article.
By John Gaffney, Adjunct Professor of Law at UCC Law School, University College Cork.
This article reflects solely the views and opinions of the authors. 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.
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References
[1] See , F. Alexander, H. Ensign-Barstow, and L. Palladino ‘From Shareholder Primacy to Stakeholder Capitalism’, 26 October 2020 (https://corpgov.law.harvard.edu/2020/10/26/from-shareholder-primacy-to-stakeholder-capitalism/); see also ‘Statement on the Purpose of a Corporation’, Business Roundtable, 19 August 2019 (https://purpose.businessroundtable.org/)(declaring that companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate).
[2] Ibid.
[3] F. Alexander, H. Ensign-Barstow, and L. Palladino ‘From Shareholder Primacy to Stakeholder Capitalism’, op. cit.
[4] Ibid. (The authors view this as necessary to ensure that fiduciaries have the tools to impose sustainability guardrails and protect these broad interests, and that their beneficiaries are able to hold them accountable for doing so.)
[5] S. Arnold, “The Philosophy and Economics of Market Socialism: A Critical Study” (1994, OUP).
[6] W. Brus, “The Economics and Politics of Socialism”. Routledge. p. 88.
[7] This is not unlike the proposed definition of corporate purpose in the Future of the Corporation programme, to which Mayer alludes in his Blog, i.e., “producing profitable solutions to the problems of people and planet”, which he suggests “accords with the origins of the word profit in the Latin “proficere” and “profectus”, meaning to advance and progress, namely wealth and welfare creation”, whose significance he notes “is that the purpose of business then aligns private inducements of financial profit with environmental and social benefits of problem solving”).
[8] s.172 of the UK Companies Act 2006, to which Mayer alludes in his Blog, states that “the director of a company must act in the way that he considers, in good faith, most likely to promote the success of the company for the benefit of its members and in so doing, have regard to (amongst other matters) the likely consequence of any decision in the long-term” and the interests of various stakeholders.
