The Constitutional Corporation

Rethinking Corporate Governance

Stephen Bottomley

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317037385
• Edition: 1
• Topic: Jura
• Subtopic: Rechtswissenschaft

Corporate laws are based on the idea that the interests of shareholders should be the primary concern of company directors. However, some argue that the proper role for shareholders is to sit back and let the corporation's managers do their job, or that the pursuit of shareholders' interests detracts from the concerns of employees or victims of corporate wrongdoing or other stakeholders. Stephen Bottomley argues that instead of consigning shareholders to this passive role, they should be given opportunities to be active members of corporations. Corporations are constitutional arrangements rather than mere contractual agreements. They are decision-making organizations in which questions of process and structure are important. Thus, instead of using economic criteria such as efficiency as the sole measure for deciding what constitutes 'good' corporate governance, this book examines whether ideas of accountability, deliberation and contestability provide a valuable framework for assessing corporate structures and process and for encouraging greater shareholder participation.

Chapter 1

Corporations and Shareholders

It’s a Corporate World

The renowned English legal scholar William Twining demonstrates the pervasiveness of law to his first year students by asking them to read a daily newspaper and to mark all the passages that they think are ‘law-related’.1 He finds that students frequently have difficulty deciding what to leave out. I suspect that the exercise would be only marginally less difficult if the assignment was to mark all the passages that relate to corporations.

We live in a corporate world.2 Corporations are so much a part of our lives that their role is usually taken for granted, going unnoticed until the occurrence of some dramatic event brings it to our attention (all too often, that event is a corporation’s seemingly unheralded descent into insolvency).3 Principally it is corporations that supply or control our access to goods and services, work and leisure, knowledge and information. Indeed, most of what we know about the corporate world is communicated to us through media that are controlled by corporations. The activities of corporations shape or influence national economies, they affect the quality of the environment, and they influence the actions of nation states.4 Corporations are increasingly called upon to contribute to the provision of social welfare and national development, either in partnership with or by taking over from the work of governments.5 Corporations, especially transnational corporations, have a major impact on, and thus are called upon to accept responsibility for the protection of, human rights.6 Corporations work behind the scenes (and increasingly on centre-stage) to influence many aspects of national government policy and legislative action. Corporate donations are a major source of funding for political parties.7 It is large corporations that determine the formulation of a wide array of regulatory standards on issues ranging from air safety to pharmaceutical products and telecommunications.8

This corporate influence is not always the product of deliberate lobbying or planned political pressure. More often it is simply the product of ordinary commercial activity. A corporation’s decision to ‘downsize’, relocate, or expand its operations can have a significant impact on local and national economies and on social policy. Consequently, the mere threat of a major corporate restructuring can often produce governmental responses that individual citizens are unable to achieve.9

The significance of corporations in modern society is not confined to the private business sector. Corporate forms of organisation are now commonplace in the non-business and non-profit sectors, including social groups and religious organisations, sports and recreational clubs, educational institutions, professional firms, and welfare organisations.10 There are many reasons behind this spread of the corporate form, including the perceived attractions of limited legal liability, perceptions (accurate or otherwise) about the efficiency of corporate styles of management, and the risk-assessments of lenders and grant-giving bodies about what constitutes an acceptable organisational structure. Governments have also been attracted to corporate forms of management, not only modelling their departmental structures along corporate lines (‘corporatisation’) but, increasingly, creating government-owned corporations to do the work of government.11 Failing that, governments around the globe have demonstrated a fascination for ‘outsourcing’ areas of public administration to private sector corporations, or simply ‘privatising’ whole aspects of governmental operations. The range of activities that has been given over to private sector corporations includes power and water supplies, telecommunications, banking, roads, transport and shipping, and prisons.

In summary, corporations now feature in all aspects of social, political and economic life — private and public, business and non-business, large and small enterprise.

Related to this spread of the corporate form is the rise and spread of share ownership in the general population of many countries as a form of investment, savings, and retirement planning. This is particularly noticeable in Australia where since the late 1990s share ownership has become a significant feature of economic and political life. This trend has been driven by factors such as the compulsory superannuation requirement which has operated in Australia since 1992,12 the full or partial privatization of large government-owned businesses such as Telstra and the Commonwealth Bank,13 and the demutualisation of some corporations that have had ‘icon’ status (for example, the Australian Mutual Provident Society and the National Roads and Motorists Association). According to the Australian Stock Exchange (the ASX), Australia has one of the highest levels of direct and indirect share ownership in the world.14 Data published by the ASX shows that the proportion of the Australian adult population holding shares either directly or indirectly (eg through managed investment schemes) rose from 34 per cent in 1997 to 55 per cent in 2004; 44 per cent of adults held shares directly. Similar figures are found in other countries. In New Zealand, for example, 39 per cent of adult investors had some form of share ownership in 2005, although only 23 per cent had direct shareholdings.15 In the United States 49.5 per cent of households owned equities as at January 2002.16 In 2003 shares had become the second most popular form of personal investment in Australia, ranking only behind superannuation. The value of individual share portfolios has also increased, from an average of $29,000 in 2000, to $41,400 in 2004. In that year 38 per cent of investors had less than $10,000 invested directly in shares, while 35 per cent had more than $50,000 invested.17

Of course, high levels of share ownership do not necessarily mean high levels of direct investor participation in the corporate economy or in the processes of corporate governance. Despite the high level of share ownership in Australia, many investors are relatively passive in their direct share holdings — this is one of the concerns of this book. The 2004 ASX survey found that about half of all direct share owners had not traded in the twelve months prior to the survey. Looking at another aspect of shareholder passivity, a survey of 217 Australian listed corporations in 2002 found that in 98 per cent of annual general meetings shareholders attending in person or by proxy represented no more than 20 per cent of all shareholders in the corporation. In the same group of corporations none of the 203 extraordinary general meetings held between 2001 and 2003 were called by shareholders.18

At the same time, the connection between citizens and their national and global communities is increasingly mediated through the financial and securities markets and, therefore, through the activities of corporations. A nation’s state of well-being is judged as much by stock-market indices and corporate profit announcements as by non-economic factors. Perhaps this is why so much of the nightly television news bulletin is taken up with information about share price movements, shifts in various market performance indexes, currency fluctuations, and corporate reporting. When governments announce new policies or abandon old ones, when major national and international events take place, we are as likely to find that expert commentary is sought from an economist or a financial analyst as from a political or a social commentator.

This book takes this corporate world (for better or for worse) as its starting point. The book does not yearn for a return to some bygone era — if it ever existed — in which corporations knew their place, and when the word ‘share’ was as likely to make one think of cooperative or altruistic behaviour as of a device for individual wealth accumulation. The purpose of this book is, however, to challenge some of the assumptions and practices that have come to define this corporate world. In particular, the book challenges the idea that the only, or the best, way in which shareholders should relate to corporations is as investors. It challenges the idea that the only, or the best, way in which corporations can relate to shareholders is through a short or medium term focus on profits and dividend returns. It challenges the idea that the only, or the best, criteria for assessing the relationship between shareholders and corporations are efficiency and wealth-maximisation. And, lastly, it challenges the sometimes explicit, but mostly implicit claim of economics to be the pre-eminent discipline for making real sense of these developments, and the capacity of economics to provide an over-arching metatheory for all things corporate.19

Focusing on Shareholders

As the previous paragraph indicates, the argument in this book is concerned with the relationship between a corporation’s shareholders and its board of directors. This follows the standard legal model of the corporation that underpins corporate law regimes in many Western legal systems, whereby directors’ actions must be oriented towards the best interests of the corporation’s shareholders.20 This book adopts this legal model, not because the model presents an organisational ideal to which corporations should necessarily aspire, and certainly not because the model is an accurate description of the way in which all corporations actually operate. Instead, the formal legal model is used because, regardless of the diversity in corporate structures, it does provide a common and resilient reference point and language for all corporations that operate in corporate law systems such as those found in Australia, the United Kingdom, and North America.

In the context of the literature on corporate governance, much of which urges a shift away from a shareholder primacy model of the corporation, this might be thought to be a narrow and legalistic focus, and so it requires further explanation. Many writers urge a much wider view than this. For example:

Corporate governance is more than simply the relationship between the firm and its capital providers. Corporate governance also implicates how the various constituencies that define the business enterprise serve, and are served by, the corporation. Implicit and explicit relationships between the corporation and its employees, creditors, suppliers, customers, host communities – and relationships among these constituencies themselves – fall within the ambit of a relevant definition of corporate governance.21

Some writers argue quite strongly that the shareholder primacy model has no compelling moral basis, that shareholders warrant no greater attention ...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Cases
• List of Statutes
• Preface
• Acknowledgements
• 1 Corporations and Shareholders
• 2 From Contract to Constitution
• 3 Corporate Constitutionalism
• 4 Corporate Accountability
• 5 Corporate Decisions and Deliberation
• 6 Contesting Corporate Decisions
• 7 The Prospects for Corporate Constitutionalism
• Index