The Enlightened Shareholder Value Principle and Corporate Social Responsibility

A theoretical and qualitative analysis

Taskin Iqbal

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000401714
• Edition: 1
• Topic: Derecho
• Subtopic: Teoría y práctica del derecho

The Enlightened Shareholder Value principle and Corporate Social Responsibility are areas of increasing academic and research interest. However, discussions on the ESV principle in relation to CSR are very limited. This book provides a critical analysis of the impact of the concept of ESV, embedded in the Companies Act 2006, on CSR and explores the scope for reform. Along with analysing existing empirical research, it presents the findings of an empirical study conducted to determine whether the concept of ESV is capable of promoting or assisting CSR.

The book also examines whether implementing an ESV approach has had any impact on the CSR practices of multinational corporations that originate in the UK and operate in developing nations, as in order to assess whether the ESV principle links to CSR both its domestic and international impact need to be considered. This analysis was undertaken through the lens of a case study on the ready-made garment industry in Bangladesh, with some focus on the Rana Plaza factory disaster. This study also assists in demonstrating the changes that need to be made to improve the current situation. Lastly, the book addresses the need for reform in the area and provides possible suggestions for reform.

This interdisciplinary book will be of great interest to students and scholars of corporate law, corporate governance and business studies in general as well as policymakers, NGOs and government departments in many countries around the world working in the fields of CSR, sustainability and global supply chains.

1 Introduction and background

Background

All companies,¹ regardless of their size or type, have an enormous impact on our lives and play a crucial role in advancing economic growth. Public companies, in particular, possess extensive power in our society, and their actions are of significant importance to all of us. The businesses they carry out generate billions of pounds every year. In fact, the majority of the world’s wealthiest entities are corporations.² A list compiled by Global Justice Now showed that 157 of top 200 economic entities, by revenue, are corporations, not countries.³ However, companies are not only important for economic reasons; they have an influence on all facets of political and social life. They are the owners of major assets and substantial tracts of land, have millions of people working for them and enter into countless transactions. They have the potential to influence and are involved in the procedures of the government that determines what regulations will be implemented. They also play a fundamental part in interpreting and applying government policies in many areas because of their role as an employer. This leads to them having considerable leverage when interacting with the communities in which they function. This leverage can be used to gain concessions and other advantages.

Furthermore, the rate of development of certain areas of business is dependent on whether they choose to invest in those areas. They not only determine what products are produced but also the process through which they are produced, the amount in which they are produced and the times when they are produced. It has been asserted that the legal framework for the growth of resources and expansion of wealth in the private sector is provided by companies. Some companies are also involved in the supply of basic necessities such as water, gas, electricity and telecommunications. They have the capacity to have an impact on typical societal events, which consequently means that their power is social and political as well as economic. Thus, without a doubt, public companies have very strong bargaining positions in our society.⁴

1 The terms ‘company’ and ‘corporation’ will be used interchangeably.

2 B. Chapman, ‘Majority of the world’s richest entities are corporations, not governments, figures show’ (The Independent, 17 October 2018) <https://www.independent.co.uk/news/business/news/companies-bigger-governments-un-human-rights-council-meeting-a8588676.html> accessed 9 November 2019.

3 Global Justice Now, ‘69 of the richest 100 entities on the planet are corporations, not governments, figures show’ (2018) <https://www.globaljustice.org.uk/news/2018/oct/17/69-richest-100-entities-planet-are-corporations-not-governments-figures-show> accessed 9 November 2019.

4 A. Keay, The Corporate Objective (Cheltenham, Edward Elgar Publishing Ltd., 2011) at 3–5.

Moreover, in this exceedingly globalised world the impact of companies also extends well beyond national borders.⁵ For instance, the decisions made by large companies in the UK can affect stakeholders in various countries. When powerful multinational companies (MNCs) operate in developing nations, the governments of the host states might be very reluctant to confront these companies when they misuse their power and influence since their presence might be important for many reasons, such as investment and employment. In addition, since the industry regulations in those countries are sometimes not as strong as they are in a developed country, the stakeholders are left very vulnerable. The Bhopal disaster is probably the most tragic example of this vulnerability. In 1984 a gas leak at a Union Carbide facility in India killed thousands of people. The death toll was estimated to be as high as 25,000.⁶ Campaigners claim that it left more than half a million people injured as well.⁷ In 1987, Union Carbide eventually paid 282 million pounds to the Indian government in compensation, but some of those who were responsible were not brought to justice and a verdict was given many years after the incident. Eight former plant employees, including the chairman of the Indian arm of Union Carbide, the managing director, the vice-president, the works manager, the production manager, the plant superintendent and a production assistant, were sentenced to two years in prison after being convicted of causing death by negligence. They were also ordered to pay fines of around £1,467 apiece. It was claimed by NGOs working with the victims of the incident that the verdict was inadequate, setting a very bad precedent. Campaigners and victims wanted to see Warren Anderson, the former Union Carbide chairman, brought to justice.⁸ The Indian government took almost nineteen years to make a formal request for his extradition, but it was rejected by the US.⁹

5 N. C. Smith, D. Read and S. Lopez-Rodriguez, ‘Consumer Perceptions Of Corporate Social Responsibility: The CSR Halo Effect’ INSEAD The Business School for the World Working Paper 2010/16/ISIC <http://www.insead.edu/facultyresearch/research/doc.cfm?did=43990> accessed 4 April 2015.

6 BBC, ‘Bhopal Trial: Eight Convicted Over India Gas Disaster’ (2010) <http://news.bbc.co.uk/1/hi/world/south_asia/8725140.stm> accessed 1 February 2018.

7 E. Goddard, ‘Bhopal Disaster Victims May Never Get Compensation Following Dow-Dupont Merger, Fears UN Official’ (The Independent, 14 September 2017) <http://www.independent.co.uk/news/business/news/bhopal-disaster-victims-dow-dupont-merger-un-india-official-gas-leak-chemical-industrial-a7946346.html> accessed 1 February 2018.

8 BBC, ‘Bhopal Trial: Eight Convicted Over India Gas Disaster’ (n6)

9 T. Edwards, ‘Bhopal verdict: A most convenient injustice’ (The Guardian, 8 June 2010) <http://www.theguardian.com/commentisfree/libertycentral/2010/jun/08/bhopal-verdict> accessed 1 February 2018.

In a later case, in 2005 Unocal Corporation decided to settle a number of lawsuits filed in California due to its involvement with the Myanmar government in a number of horrific acts committed in association with a natural gas pipeline project. These acts included torture, rape, forced labour and the murder of Myanmar citizens.¹⁰ Another noteworthy example is Royal Dutch Shell plc and its Nigerian subsidiary’s involvement with the military government in torturing and executing Nigerian activists who protested against the destruction of local communities and the environment.¹¹ Lastly, it is worth mentioning the well-known case of Adams v Cape Industries plc,¹² in which the British parent company, Cape Industries plc, escaped all responsibilities for numerous deaths and injuries caused by its subsidiary operating in another country. Its subsidiaries were involved in mining asbestos in South Africa, which was then shipped to another subsidiary in the US. A number of employees of the American subsidiary suffered from injuries and illness caused by exposure to asbestos and sued Cape Industries plc and its subsidiaries. The company disposed of its assets in the US and Cape Industries plc and escaped all liabilities as the courts refused to lift the corporate veil. Such incidents reflect the power of public companies and show the vulnerable position of non-member stakeholders in corporate governance.

The incidents above reflect the extent of the impact of the decisions made by the individuals who are bestowed with the power to manage these companies. In today’s world, generally the management powers regarding a company’s affairs will be vested in its board of directors.¹³ These boards make private decisions, which have public results. There is a need for them to be able to justify their actions as the capacity to make these decisions stems from this possession of immense power, which is the foundation for the argument that companies should be obliged to act in the public interest.¹⁴ Large companies are eager to maintain their reputation as good corporate citizens by being perceived as considerate employers, contributing to the communities in which they function and caring about the environment. Whether this is done to maintain good public relations or not, directors have to make decisions that involve ethical and social-policy concerns. The justifications for the arguments that directors need to justify their actions and companies should act in the public interest will be discussed in detail later.

10 ‘Unocal Lawsuit (Re Myanmar)’ (Business-humanrights.org) <https://business-humanrights.org/en/unocal-lawsuit-re-myanmar> accessed 1 February 2018.

11 See E. Pilkington, ‘Shell Agrees To Pay Compensation For Execution Of Saro-Wiwa And Ogoni Protesters’ (The Guardian, 9 June 2009) <https://www.theguardian.com/world/2009/jun/08/nigeria-usa> accessed 1 February 2018.

12 Adams v Cape Industries plc [1990] Ch. 433.

13 For a discussion on the functions of the board, see B. Tricker, Corporate Governance: Principles, Policies and Practices (4th edn, Oxford, Oxford University Press, 2019) at 179–204.

14 J. E. Parkinson, Corporate Power and Responsibility: Issues in the Theory of Company Law (Oxford, Oxford University Press, 1995) at 10.

The objective of a company needs to be decided first, in order to correctly identify in whose interests the company should be managed. This means that before deciding in whose interests directors should run a company, the purpose of the company needs to be decided. Whether directors of public companies should make decisions based purely on considerations of profit, or whether they should take wider interests into account, has been debated for years. It is often believed that this debate regarding corporate objective commenced in the early 1930s with Adolph Berle and E. Merrick Dodd, two professors of law in the US.¹⁵ Since that time the debate has become even more intense. Supporters of the two main theories of corporate governance, the shareholder value, or shareholder primacy, theory and stakeholder theory, often refer to the positions taken by one of these two professors.¹⁶ Simply, Berle believed that the managers of the company should prioritise the interests of the shareholders and act accordingly to maximise shareholder wealth.¹⁷ Dodd, on the other hand, held the view that managers are trustees for the company and should take broader interests into consideration.¹⁸

Even though Berle, like Dodd, actually favoured an approach similar to modern stakeholder theory, he did not perceive it as being workable. He believed that emphasis on shareholder wealth maximisation could not be discarded unless a clear and reasonably enforceable set of responsibilities could be offered to someone else. For him, the second-best solution to tackle the opportunism in which managers might engage was shareholder primacy. According to him, stakeholder theory was simply not practical,¹⁹ although in the 1950s he actually admitted that Dodd had won the debate.²⁰ However, there has been ...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• Acknowledgements
• Abbreviations
• 1. Introduction and background
• 2. Theories of corporate governance and corporate social responsibility
• 3. The enlightened shareholder value principle
• 4. The impact of ESV on CSR: Theoretical and empirical analysis
• 5. The ESV principle, CSR and multinational corporations: A case study
• 6. The scope for reform
• Bibliography
• Annex
• Index