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By Colin Mayer. The issue is not about shareholder versus stakeholder interests but what is meant by the success of the company, be it restricted to benefits of shareholders in terms of their wealth or welfare or more broadly construed to include those of, for example, employees. 

In his ECGI blog “The role of corporate law in corporate purpose: the British Academy Report” (Responsible Capitalism blog series, 5 July 2022), Paul Davies contends that the case for corporate reform put forward in my 2018 book Prosperity and the 2021 British Academy report on the Future of the Corporation is misconceived.   He suggests that the argument for reform is based on a misconception that the duty of directors under corporate law is directed towards shareholder interests when it is in fact to the success of the company for the benefit of shareholders under UK Company Law and simply to the success of the company in some other jurisdictions.  Directors therefore have considerable latitude in terms of how they formulate their corporate purposes and “only policies which would confer no substantial benefit on the shareholders over any reasonable time-frame are ruled out”. 

Davies sees the mistake of both my book and the British Academy report as deriving from an incorrect attribution of directors’ duties to shareholder interests when in fact they are to corporate success.  He therefore believes that the argument rests on a false presumption of the law constraining corporate purposes to those promoting shareholder interests.

That, however, is not the case at all. The argument for reform that the British Academy and I have put forward applies equally to corporate laws which are framed in terms of the success of the company without any reference to shareholders.  The issue is not about shareholder versus stakeholder interests but what is meant by the success of the company, be it restricted to benefits of shareholders in terms of their wealth or welfare or more broadly construed to include those of, for example, employees. 

At present, corporate law does not impose any limitation on the notion of corporate success.   A company must operate in the confines of private and public laws, and it is subject to the pressures of the markets within which it operates but so long as “it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”, as Milton Friedman’s Doctrine (1970) states, it is at liberty to promote whatever forms of success it wishes. 

The difficulty with this is that what a company sees as success, others, who are affected by or dependent on the firm, may not.  They may be the individuals, local or global communities who suffer the environmental or social consequences of its activities.  These “externalities” are viewed in conventional terms as falling outside the domain of director duties in so far as they do not pertain to a notion of the success of the company narrowly defined.

That is precisely the issue that is the concern of both my book and the British Academy programme.  What are the appropriate boundaries of the firm?  The conventional view would have it that the boundaries of the firm are defined by the property owned by the firm and its contractual claims and liabilities resulting from public and private law in the form of, for example, regulation and contracts.  However, the effects of the firm are felt well beyond those boundaries and are determined by the changes that it brings about and the effects that it has on the wellbeing and flourishing of individuals, communities, and the natural world.   In this regard, 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.   

This notion of success is captured in the proposed definition of corporate purpose in the Future of the Corporation programme as “producing profitable solutions to the problems of people and planet, not profiting from producing problems for either”.  The significance of this is not only in extending the boundaries of the firm to the impact it has on others but in determining what is meant by success, namely where benefits accrue for some, and detriments are inflicted on none.  That accords with the origins of the word profit in the Latin “proficere” and “profectus”, meaning to advance and progress, namely wealth and welfare creation not wealth or welfare diversion or transfer. 

The significance of this is that the purpose of business then aligns private inducements of financial profit with environmental and social benefits of problem solving without problem creation.  Without that, the influence of the law is moot in so far as its good intentions will be overrun by the reality of capital and product markets in driving individuals and organizations to promote outcomes that are detrimental as well as beneficial for others. 

Why should a firm be concerned about such matters and, still more pertinently for these purposes, why should corporate law?  Is it feasible and practical?   Is it measurable?  Who should determine the parties affected and impacted by the firm?  To whom is the firm accountable for this?  Does this lie beyond the legitimate sphere of influence of directors and managers of firms who are not appointed by publicly democratic processes of election?

I will not attempt to answer these or other related questions in a short blog, but instead I will close on just one specific concern that Davies raises in his blog and that is that change is far from “embarrassingly simple”.   In fact, it may not be nearly as complex to achieve as may be imagined and might not require new legislation.  Instead, it may be effected by changes in judicial interpretations of existing statutes.  

Take, for example, the case of s.172 of the UK Companies Act 2006 which 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 other stakeholders (and it then lists several stakeholders, including customers and employees).” 

While the statement “and in so doing, have regard to …….”  is conventionally viewed as a right conferred on directors in promoting the success of the company for the benefit of its members, it could equally be interpreted as a requirement.  Namely, it could imply that in promoting the success of the company, a director must, not just may, uphold the interests of other parties in the long-term.   That in turn would suggest that the success of the company should not derive from inflicting detriments on others.[1]  Protection of their interests is intrinsic and the success of the firm derivative of it, not extrinsic in depending on its contribution to the success of the firm.  The definition of a corporate purpose in the British Academy programme of producing profitable solutions without profitable problems would then have a natural interpretation within existing company law. 

Would this give more bite to corporate purpose than the meaningless statements that came to be associated with the object clauses and ultra vires conditions that were introduced around the time of freedom of incorporation in the 19th century?  The answer is quite possibly in so far as such a revision would allow companies to commit to their purposes in ways in which it is not credible for them to do so at present.  It would thereby create a level playing field between companies, and it would correct the current competitive market incentives to run to the bottom rather than the top in the pursuit of corporate success.

In sum, much might be gained from modest reforms rather than radical revisions to existing company law. 


Colin Mayer CBE FBA

Emeritus Professor of Management Studies

Blavatnik School of Government and Said Business School

University of Oxford

Fellow of the British Academy and the European Corporate Governance Institute

11 July 2022


- For a more extensive discussion of the points made in this blog, please see Colin Mayer (2022), “What is Wrong with Corporate Law?  The Purpose of Law and the Law of Purpose”, Annual Review of Law and Social Science forthcoming, DOI:10.1146/annurev-lawsocsci-050520-102251 and available as ECGI Working Paper No. 649/2022.

[1] In its recent reconsideration of the objective of the corporation in the context of US law, the American Law Institute explicitly rules out this interpretation.  It says that in “common-law” (i.e., non-constituency statue) states of the US “the objective of a corporation is to enhance the economic value of the corporation, within the boundaries of the law.  In doing so, a corporation may consider: (a) the interests of the corporation’s employees; (b) the desirability of fostering the corporation’s business relationships with suppliers, customers, and others; (c) the impact of the corporation’s operations on the community and the environment; and (d) ethical considerations related to the responsible conduct of business” (italics added).  It therefore rules out an obligatory interpretation. 



This article features in the ECGI blog collection Responsible Capitalism

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