Shareholder Primacy and Global Business

Re-clothing the EU Corporate Law

Lela Mélon

• Verlag: Routledge
• Jahr: 2019
• ISBN:
  9780429590139
• Auflage: 1
• Thema: Law
• Thema: Corporate Law

In the context of growing public interest in sustainability, Corporate Social Responsibility (CSR) has not brought about the expected improvement in terms of sustainable business. Self-regulation has been unable to provide appropriate answers for unsustainable business frameworks, despite empirical proof that sustainable behaviour is entirely in corporate enlightened self-interest. The lack of success of the soft law approach suggests that hard law regulation may be needed after all. This book discusses these options, alongside the issue of shareholder primacy and its externalities in corporate, social, and natural environment.

To escape the "prisoner's dilemma" European corporations and their global counterparts have found themselves in, help is needed in the form of EU hard law to advocate sustainability through mandatory rules. This book argues that the necessity of these laws is based on the first-mover's advantage of such corporate law approach towards sustainable development. In the current EU law environment, where codification of corporate law is sought for, forming and defining a general EU policy could not only help corporations embrace this self-enlightened behaviour but could also build the necessary "EU corporate citizenship" atmosphere. Considering the developments in the field of CSR as attempts to mitigate negative externalities resulting from inappropriate shareholder primacy use, the book is centred around a discussion of the shareholder primacy paradigm, its legal position and its (un)suitability for modern global business.

Going beyond solely legal analysis, juxtaposing legal principles and argumentation with economic theoretic approaches and, more importantly, real-life examples, this book is accessible to both professionals and academics working within the fields of business, economics, corporate governance and corporate law.

1 Corporations, Shareholders and Society

Where Do We Start?

Globalisation has caused significant economic and legal changes over the past few decades, shaping global markets, increasing consumer choice, but on the other hand also increasing social inequality.¹ The period in the 1990s of financial fever, accompanied by weak corporate governance and a focus on external growth, hopes of massive profits and immediate recourse to debt leverage and an absence of appropriate corporate law limitations, culminated in the financial crises of the 2000s,² guided by the principle of shareholder value primacy which provided the fertile ground for such short-termism. Meanwhile, the findings from natural sciences on non-negotiable planetary boundaries have brought about the rising awareness of the current scarcity of natural and human resources.³ Simultaneously, the market demands for ever-increasing consumption supporting the race for profits revealed the unsustainability of the current global production system,⁴ giving substance to the shareholder primacy paradigm in a manner not envisaged by legislators. Globally, corporate legal frameworks were not revised to offer remedies to the dual social and environmental challenges⁵ and allowed the shareholder primacy paradigm not only to be the most important guide of corporate conduct, but also to shape market transactions and conditions which became increasingly short-term profit oriented. The book critically appraises the shareholder primacy paradigm as a matter of positive law and its empirically verified effects in the light of the need to account for corporate externalities and to ensure sustainable development. It further considers the developments on the field of corporate social responsibility as an attempt to mitigate the negative externalities that the inappropriate use of shareholder primacy can cause. It builds an argument on the necessity of shying away from the current form of shareholder value maximisation towards one built on a more stakeholder-oriented approach⁶ or a renewed enlightened shareholder approach, where maximising shareholder monetary interests would occur only after all the externalities have been accounted for: not only in an environmental but also in the societal sense. The book portrays the necessity of such a shift with the help of game theory models, arguing for the inevitability of such action on a global level. As such a shift would be arguably late if approached through soft-law instruments, a hard law is called for by an international actor from a legislative tradition that allows for such action in a timely manner. The present work argues that the EU is such an actor and that it already possesses tools needed to achieve higher level-playing field by re-conceptualising the shareholder value primacy more in line with the stakeholder-approach to corporate governance.

Law has traditionally rarely been proactive, and it has mainly followed real-life developments,⁷ by either trying to regulate market inefficiencies or reducing social inequality, especially through its redistributive function. But in the case of corporate sustainability, the law seems to be unusually late.⁸ There is ample proof that corporate action is needed for environmental change and societal equality, yet corporate law has done little about it.⁹ The current global corporate law discussions remain predominantly focused on facilitating business, simplifying the administrative procedures, and minimising the regulatory burdens,¹⁰ and corporate obligations and responsibilities are left to soft law instruments or other legal fields.¹¹ The questions of corporate purpose and aim do not often directly inform the development of legislative policy and remain at the level of scholarly debate.¹² Moreover, the global corporate law development of the last two decades seems to be closely following the development of the global financial markets, taking for granted the almost exclusive corporate for-profit orientation.¹³ With listed companies receiving more regulatory attention than their non-listed counterparts,¹⁴ the legislative changes made were the ex-post result of two market collapses of the 2000s, where the environmental and societal consequences of global corporate operations were seen as an unfortunate side-effect of the capitalistic production system.¹⁵ These regulatory changes failed to establish a cause-and-effect relationship between such effects and corporate actions. The cost-externalisation led to a paradoxical result: the society that agreed to give life to corporations through legal rules is now unable to defend itself from corporate costs imposed upon it.¹⁶ Despite the possibility of such helplessness being the consequence of the strict adherence to the legal fiction of separate corporate legal personality, one should not interpret the latter in a manner that disproportionately burdens society and retains the majority of the benefits for the corporations and their shareholders.

In support of the argument that mandatory legal rules are needed for shareholder value maximisation to lead to sustainable business behaviour, the book deals with several interrelated issues. Is shareholder primacy in its current form a legal requirement? If not, could it be adapted in a way to contribute to sustainable development? Moreover, do such attempts already exist in modern corporate laws and were they successful? If not, could they be used as a stepping stone for further developments? If so, would such action be sufficient to prevent irreversible damage to the natural environment? Where does the EU stand on the matter? And finally, would moderate changes and/or individual action from a jurisdiction suffice to prevent such irreversible damage? Chapter 2 shows that the shareholder in general does not represent a legal requirement under modern corporate laws¹⁷ and puts forward the questionability of the existing theoretical and empirical arguments for its use as a guiding principle for modern business-making. Besides the focus on the analysis of the shareholder primacy paradigm in the UK and the US, the EU implementation of shareholder primacy is also discussed in Chapter 2. The importance of corporate law for business development and the importance of corporate influence on sustainable development are discussed in Chapter 3, which further deals with the question of the success of previous attempts of mitigation of shareholder value primacy and suggestions for further action under the assumption of immediate irreversible environmental damage. The book goes on discussing the EU’s competence for becoming the sustainability leader in Chapter 4, where current and future solutions and developments are discussed. Chapter 5 sums up the analysis and argues that EU action in the form of mandatory “sustainable” corporate legal rules is a necessary step for achieving sustainable development, one that is beneficial in the long run for the EU itself.

Through the use of game theory tools the book portrays the necessity of global action to prevent future crises and to overcome the twofold prisoner’s dilemma¹⁸ of corporations by creating a level playing field for sustainable corporate operations which will no longer be punished by markets. Currently the market costs of voluntary sustainable corporate operations are argued to be prohibitive, and regulatory authorities must choose between short term gains by encouraging corporate actors to invest in their jurisdictions and short term losses by avoiding long-term environmental catastrophe. When analysed in the light of the necessity of immediate action under imminent environmental threat, the need for prompt action in the field is argued for in order to resolve both forms of the prisoner’s dilemma.

The present work is not without limitations: while the financial crises relate to money as a non-scarce good, which governments can influence to some extent, the looming unsustainability crisis bears more disastrous consequences. Solutions to financial shocks can be found in re-formatting the economic system and its founding policies, which could minimize future market collapses. Environmental limits, on the other hand, leave little leeway for quick ex-post solutions.¹⁹ The current solutions to these issues are based on soft law instruments and are not in the form of mandatory legal obligations, despite the existence of theoretical and empirical arguments in favour of changes in the positive law.²⁰ While “sustainable business” is in corporate self-interest, as the complete lack of natural resources stops its production, the current economic policies envisage the predominant pursuit of shareholders’ self-interest in the form of corporate profits,²¹ limited by fragmented environmental, consumer and labour law provisions.²² Despite the scholarly warnings about the sustainability- impeding corporate legal frameworks, coupled with punitive capital markets in the case of non-compliance with shareholder value maximisation,²³ the majority of legal academics and legislators prefer the “soft law” approach on the matter,²⁴ despite evidence to its past insufficiency and inefficiency.

The following argument could be made: if all legal systems keep following the shareholder value paradigm in its current form, the inevitable outcome will be the breaking of the planetary boundaries.²⁵ While the claim is not that shareholder primacy alone can or should be held responsible for such an outcome, the overarching economic system, premised on growth and short-term returns, shaped the content of shareholder interests to entail simply profits earned, except in the case of so-called socially responsible investments. Therefore, it is not shareholder primacy in general that represents an issue, but rather its current form, the so-called “radical shareholder primacy”, which focuses solely on short-term financial results, and leaves the well-being of the corporation itself and other stakeholders aside.

It is surprising that under the given circumstances legal scholarship has not been more critical of current corporate law systems. While the reason might lie in the belief that corporate law framework should not be solving such issues and the task should be delegated to other legal areas,²⁶ especially in the field of soft law regulation, the developments in the global market could serve as a call for remedying the lack of market safeguards. The perpetual corporate scandals not in the form of isolated cases created a risky business environment, prone to market fluctuations, which with a lack of regulation and legal safeguards culminate in a financial or economic crisis.²⁷ In the absence of market safeguards, corporate sustainable behaviour is questionable, as the present work seeks to show.

The arguments put forward in this work support the idea that EU corporate law could further the notion of sustainable business as a corporate policy principle, which could provide it with a long-term comparative advantage in global corporate law markets. As the EU represents one of the most significant players in the global economy, its legislative solutions could not be ignored, arguably pushing other global actors to modify their respective legislative approaches. The need for change in the field of corporate governance has been recognised,²⁸ and under the “mutual destruction” scenario, the EU moving first could represent a strong incentive for other players to act similarly. As the existence of our planet’s ecosystem is at stake, the rules of the game change: even if legislators prefer making the legal environment “more attractive” for global corporations by not imposing “sustainabl...

Inhaltsverzeichnis

• Cover
• Half Title
• Series
• Title
• Copyright
• Dedication
• Contents
• Acknowledgements
• 1 Corporations, Shareholders and Society: where Do We Start?
• 2 The Incompleteness of Modern Corporate Laws
• 3 Future Developments: how Can Corporate Law Contribute to Sustainable Development? The Notion of the “Sustainable Company”
• 4 The EU’s Competence for Becoming Global Sustainability Leader
• 5 Conclusions
• Bibliography
• Index