True shareholderism is stakeholderist

True shareholderism is ‘stakeholderist’ Mathilde Pavis January 2014 2014 Interleges Award In the memory of Stephen Rayner 1 The company law and co...
3 downloads 0 Views 1MB Size
True shareholderism is ‘stakeholderist’ Mathilde Pavis January 2014

2014 Interleges Award In the memory of Stephen Rayner

1

The company law and corporate governance frameworks available to undertakings, investors and employees must be adapted to the needs of society and the changing economic environment.

True shareholderism is ‘stakeholderist’

I.

Introduction……………………………………………..…………………………………………………………………………………………3

II.

A criticised model.…………………………………………………………………………………………………………….……………….5 A. Shareholder primacy and the « Berle-Dodd » debate………………………………………………………..………….5 B. Challenging economic conditions as foster of new doctrines……………………………………………………….6 C. A model based on mistaken beliefs………………………………………………………………………………………………7 1. The shareholders as owners argument…………………………………………………………………………..………8 2. Shareholders as sole risk-bearer…………………………………………………………………………………….………9 a) Sole residual claimants as residual risk bearers……………………………………………….………………9 i. Sole residual claimant argument………………………………………..……….………9 ii. Residual risk bearer argument……………………………………………………….….10 b) A “naked assumption” both theoretically and empirically incorrect.………………….…………10

III.

An irreplaceable model in theory …………………………………………………………………………………………………….13 A. Stakeholders, an unclear categories of interests…………………………………………………………………………13 B. The lack of viable alternative models………………………………………………………………….………………………15 1. The team production model……………………………………………………………………..…………………………14 2. Quiquennial theories…………………………………………………………………………………………………………..15 3. No viable solutions…………………………………………………………………………………………….………………..16 C. Explaining the ex-ante confidence of investors……………………………………………………..….………………..16 D. Corporate governance is shareholder-oriented……………………………………………..…………….……….…..17

IV.

A model widely enforced in practice………………………………………………………………………………………….…….18 A. The backbone of the model: fiduciary duties………………………………………………………………………………18 1. Company’s directors as the shareholders’ servants……………………………………………………..………19 a) Owing fiduciary duties…………………………………………………………….……………………………..19 b) Suing for breach of fiduciary duties…………………………………….………………………………….19 2. Servants of too many masters.…………………………………………………………………………………………….21 B. Employees’ stock option mechanism: how to turn stakeholders into shareholders……………..……..23 1. A confessed failure to re-orientate the model towards stakeholders……………………………..……23 2. Revealing the true face of shareholderism…………………………………………………………………………..24

V.

Conclusion……………………………………………………………………………………………………………………….….…..……….24

Bibliography…………………………………………………………………………………………………………………………………….…….……….27 Appendix – (TABLE) The enforcement of corporate governance models by domestic company laws (Delaware, United Kingdom, France, Germany, Japan)……………………………………………………………………………………….….………….32 Applicant’s statement…………………….………………………………………………………………………………………………………………35

2

True shareholderism is ‘stakeholderist’

I.

Introduction

‘Whom the corporation should serve’1 is a debate dating back to several decades before the financial crises agitating the beginning of the twenty first century.2 Since the early 1930’s, the legal frameworks of corporate governance defining investors as the only group of interests the company should serve have been strongly criticised.3 The recent financial crises4 have highlighted the fact that corporations impact a wider spectrum of interests than just shareholders. Corporations can affect the commercial, social and ecological environments in which they operate. More broadly, corporations can be seen as also affecting the society of which they are a part.5 Consumers, employees, business partners, and governments rely on the products and economic activity produced by companies. For these reasons, it has been argued that the company should take into consideration other groups of interests than simply that of shareholders during the running of its business. This reasoning submits that the society’s diverse interests and needs should have a place in the management of the company. Such interests are often referred to as the company’s stakeholders. Running the company mindful of stakeholders’ interests is an argument which goes hand in hand with the idea that corporations should be ethical and socially responsible6 to limit the negative impact of their business on society or the environment, especially in case of crises. Such ethical responsibility is traditionally considered as playing against shareholderism7 since the company could 1

The question refers to the starting question asked by Dodd in article entitled For whom are corporate managers trustees?, which triggered the Berle-Dodd debate. Adolf A. Berle Jr ‘For whom corporate managers are trustees: a note’ (1931-1932) 45 Harvard Law Review, 1365 ; A.A. Sommer Jr ‘Whom should the corporation serve? The Berle-Dodd debate revisited sixty years later’ (1991)16 Del. J. Corp. L. 33 2 The debate regarding whom the company should serve, shareholders only or shareholders and stakeholders, started between Berle and Dodd in the 1930’s. Part II Section A retraces the discussion between the two scholars in more detail. See Sommer (1991) supra note 1 3 From the start of the debate, scholars like Dodd positioned themselves as pro-stakeholders. Later on, scholars like Professors Blair and Stout, Mitchell, Lipton and Rosemblum, to only name a few, criticised the model as well. Part III Section B discusses this point further. 4 The crises referred to here are the economic and social crises following the golden age of frenetic takeovers in the 1990’s and more recently the 2008 financial crisis. 5 This position views the company as an influential institution rather than a nexus of contracts. The debate on the nature of the company is closely tied in with the shareholder-stakeholder debate and the notion of corporate social responsibility. When the company is only thought of as a network of contracts, not an institution, no responsibility is or can be reasonably expected from it. However, as soon as the company is conceived as influential institution, the corporation is seen as owing ethical duties to the society in which it is implanted and responsible towards the society’s various interests. 6 th On the emergence of the notion of corporate social responsibility and evolution of the notion in the 20 and st 21 century see Elisabeth Garriga Domenec Mele ‘Corporate Social Responsibility Theories: Mapping the Territory’ (2004) 53 Journal of Business Ethics 51. 7 Shareholderism is another expression referring to the theory of shareholder supremacy or shareholder primacy according to which shareholders should be the sole interests served by the company. Shareholderist or shareholder-centred models are models of corporate governance deriving from this theory.

3

no longer be run for the sole purpose of maximising investors’ profits.8 This change in philosophy in the field of corporate governance is described as the shift from shareholder primacy9 to stakeholderoriented theories. While shareholder primacy, or shareholder supremacy, advocates the enforcement of shareholder-oriented models by company laws, the new stakeholder theories argue the company should be re-directed towards the protection of constituency interests. These models have influenced the way legislators designed their domestic company laws impacting the day-to-day management of corporations. Arguing that “company law and corporate governance frameworks available to undertakings, investors and employee must be adapted to the need of society and changing economic environment” is a debate standing on political grounds. To make sure the discussion remains based on legal considerations, the question has to be re-formulated. It should ask whether or not company law is accommodating the society’s interests, and if not, whether company law could accommodate such needs as it currently stands. Advocating for the accommodation of society’s needs as well as the changing economic environment in company law pleads for the implementation of stakeholder theories and stakeholder-oriented models of corporate governance. This essay will, therefore, survey the company laws of the United States10, the United Kingdom, France, Germany and Japan looking for evidence of the enforcement of shareholder or stakeholder oriented dispositions11 to assess the extent to which the law is currently implementing one model of corporate governance or the other.12 In doing so, this essay will make the traditional debate move on from “whom the corporation should serve”, which is a political consideration, to “whom is the corporation serving” and “whom can the corporation serve”, from a legal perspective. (See Table in Appendix)

8

Whilst pro-shareholder theorists like Adolf Berle defend the view that the company should have the sole aim of maximising the wealth of its shareholders (see hereafter Part II Section A), stakeholder theorists like Pr. Blair and Stout strongly argue against this idea (see hereafter Part III Section B Paragraph A). 9 The shareholder primacy or shareholder supremacy model will be defined in Part II A 10 The United States dodoes not regulate company laws at a federal level, at least not sufficiently for this essay to only rely on federal laws. For this reason, the essay will base its argumentation on the company law enforced in the state of Delaware when referring to the United States because this jurisdiction enforces rules favourable to investments and is commonly described as representative of the American system. 11 This essay will support its analysis on the dispositions in relation to public companies in the various above mentioned jurisdictions. When referring to “companies” or “corporations” the essay targets UK and American public companies, the French Société par Action, the German Aktiengesellschaft and the Japanese Kabushiki geisha (株式会社). 12 Traditionally, common law jurisdictions have shown their preference for the classic shareholder-centred model while continental or civil-law influenced countries are described as more “stakeholder-friendly”. For these reasons, and in order to draw its arguments on a balanced and fair representations of the different corporate models, the essay will build its reasoning relying on the jurisdictions of the United States and the United Kingdom – for a representation of common law jurisdictions, Germany and France – for a representation of continental civil-law based countries, and Japan – for a representation of jurisdiction of a legal system under both influences. Japanese commercial and corporate law was the result of two successive legal transplants. First, the German Commercial Code was transplanted into Japanese Law in 1898 and later specific sets of rules taken from the American system were implanted. See Hideki Kanda and Curtis J. Milhaupt ‘Re-Examining Legal Transplants: The Director's Fiduciary Duty in Japanese Corporate Law’ (autumn 2003) 51 The American Journal of Comparative Law 2, 4.

4

A few comments on terminology must be made here. In this discussion, corporate governance is not synonymous to company law. They are two separate fields. Corporate governance could be described as the philosophy of corporate models which company law chooses or not to follow and enforce. Company Law is the set of rules regulating corporations and their relationship inside and outside the company. If the frameworks implemented by company law often coincide with the frameworks designed by corporate governance13, they remain two different levels of theorisation around corporations, shareholders and stakeholders. After retracing the history of shareholder primacy and the evolution of the shareholder versus stakeholder debate in the legal literature (II), this essay will argue that a ‘shareholderist’ model14 is the only reasonably enforceable corporate governance model, as it currently stands. It is submitted that enforcing a shareholder-centred model remains the only way currently for company law to protect stakeholders’ interests (III). The subsequent section will present evidence for this thesis and reinforce the fact that, even though the model is strongly criticised, it remains the most widely enforced (IV). This essay will conclude by offering recommendations as to the next steps to take by way of reforms to company law in order to directly and effectively re-orientate the model towards stakeholders (V).

II.

A criticised model

This section provides an overview of the shareholder-stakeholder debate, underlining the fact that the discussion dates back to the very start of the conception of shareholder supremacy theory and was not solely the result of changes in the economic and financial landscape (A). However, the recent economic crises did foster the growth and spread of criticisms of shareholder supremacy in the literature and in practice (B). In parallel, the critique of the shareholder-centred model points out the errors made by pro-shareholderists in defending the legitimacy of their model (C). A. Shareholder supremacy and the “Berle-Dodd” debate The theory of ‘shareholder supremacy’ was articulated in the early 1930’s by Adolf Berle Jr., often cited as the “grandfather” of the theory for his work.15 Berle claimed that shareholder-centred models are the best way to ensure the economic success of the country. He wrote16 : [The law cannot abandon] the view that business corporations exist for the sole purpose of making profits for their shareholders until such time as [the law is] prepared to offer a clear and reasonably enforceable scheme of

13

So will be demonstrated in this essay To be understood as a shareholder-oriented model – i.e. enforcing provisions protective of shareholders primarily, as well as putting shareholders at the centre of the corporation and for whom the latter should be run. 15 Fanner Stewart Jr. ‘Berle’s Conception of Shareholder Primacy: A Forgotten Perspective for Reconsideration during the Rise of Finance’ (2010-2011) 34 Seattle University Law Review 1457, 1458 16 BerleJr (1932) 1935 supra note 1; Sommer Jr. (1991) supra note 1 14

5

responsibilities for someone else.17 This statement defines this theory of corporate governance commonly labelled as ‘shareholder supremacy’ or ‘shareholder primacy’. Running the company for the sole purpose of shareholders’ profits and arguing that the law could not abandon such view is an inherent and key feature of the shareholder supremacy theory. Interestingly, the shareholder-stakeholder debate started at the same time shareholder primacy emerged. E. Merrick Dodd, one of Berle’s peers, strongly criticised his theory in the 1930’s. Dodd defended the idea that the company should be run with more groups of interests in mind that just shareholders. Even though many would argue that the debate between Berle and Dodd18, which occurred eighty years ago, is different from the discussion currently agitating the literature,19 the burning question seems to remain the same: whom the company should serve? Should the corporation serve interests beyond that of its investors? Should the corporation protect interests beyond that of shareholders? This decades-old, yet still contemporary, question is at the core of inquiring as to whether or not the law must accommodate the needs of society and the changing economic environment. B. Challenging economic conditions as foster changes in doctrines If society’s needs have not drastically changed since the beginning of the debate, western markets have certainly experienced radical economic changes. Waves of criticisms of shareholder-centred models were triggered first by the golden age of frenetic takeovers20 in the 1990s and then again by the 2008 financial crisis. This poor financial and economic climate led western legislators to strengthen liability mechanisms and sanctions for malpractice, and to legally remind corporations of their social responsibility.21 This 17

In the context of the debate the citation was: “You cannot abandon emphasis on the view that business corporation exist for the sole purpose of making profits for their shareholders until such time as you are prepared to offer a clear and reasonably enforceable scheme of responsibilities for someone else”. See A. Berle Jr. (1932) 1365 supra note 1 18

See the following references for further development on the Berle-Dodd debate: Berle Jr. (1932) and Sommer Jr. (1991) supra note 1 19 Sommer Jr. (1991)supra note 1 20 On the impact of the takeover bid period over corporate governance see: Mark J. Loewenstein ‘What can we learn from foreign systems? Stakeholder protection in Germany and Japan’ (2002) 76 Tulane Law Review 1673. See Andrew G.T. Moore II ‘Shareholders rights still alive and well in Delaware: the derivative suit : a death greatly exaggerated’ (1993-1994) 38 St Louis University Law Journal 947, 952 21 Constituency-oriented reforms blossomed in western jurisdictions. As far as the British jurisdiction is concerned, the reform of section 172 of the Companies Act 2006 related to the directors’ duties is considered as the mark of such trends and concerns of their legislature. In Delaware, the Delaware Public Benefit Corporation Statute was passed in 2013 and constituency dispositions can be found under Subchapter XV of Title 8 of the Delaware General Corporation Law. In France, the protection of stakeholders was reinforced by the 2008 New Economic Regulation Act. The notion of constituency interest has however always been present under the French and German system as the structure of the company and the description of some basic mechanisms include the notion of “social interest” the company should be guided by and directors must respect. The social interest is here an umbrella concept encompassing the interest of stakeholders such as minority shareholders, creditors, employees. It is

6

period coincided with the blossoming of many new C-words in business and legal narratives such as corporate social responsibility, corporate ethics, codes of conducts and so forth. The reforms introduced following the takeover boom in the 1990’s complicated the role and purpose of fiduciary duties. Shareholder primacy or shareholder-oriented models became more and more described as “inadequate paradigm[s] for the modern corporation”22 in the literature23 and in public opinion. A consensus rose around the idea that decision-making within the company should also take into account stakeholders’ interests since the company is more an influential institution than a “mere aggregate of profit-seeking shareholders”.24 This philosophical change generated a series of constituency statutes25 and changes in case-law, so much so that directors are now encouraged or required to make decisions in line with stakeholders’ interests.26 The definition of stakeholders and the scope of their duties developed in these statutes varies from one statute to another, but all share the idea that shareholders as the sole beneficiaries of the company’s profits is not a viable scheme anymore. These reforms seem to have flipped the mechanism of fiduciary duties from being the traditional legal weapon of shareholders to now being at the service of stakeholders.27 This observation suggests that, in theory at least, modern company law has moved away from shareholder primacy and acknowledged the need for the law to accommodate stakeholders’ interests, the society’s needs and the changing economic environment. C. A model wrongly justified Shareholders are placed at the centre of corporate governance for two main reasons. First they are seen as owners of the company, so much so that it seems fair and reasonable for the company to be explicitly mentioned under the dispositions of the French Civil Code Article L 1833. On the notion of social interest, see Christiane Alcouffe ‘Judges and CEOs: French Aspects of Corporate Governance’ (2000) European Journal of Law and Economics 9:2, 127-44. However, in Japan an opposite phenomenon occurred. In the 1990’s, Japanese company law moved away from its traditionally stakeholder-oriented scheme. For instance, in 2002, the law was reformed to abandon the two-tier board requirement for public companies which was originally transplanted from the German system. This anti- constituency trend is reinforced by the 2005 Company Act. See Takashi Araki Chapter 8 ‘Changes in Japan’s practice-dependent stakeholder model and employee-centred corporate governance’ D. Hugh Whittaker,Simon Deakin (eds) in Corporate Governance and Managerial Reform in Japan (Oxford University Press, edition online 2009) 22 Rima Fawal Hartman ‘Specific Fiduciary Duties for corporate directors: enforceable obligations or toothless ideals?’ (1993) 50 Washington and Lee Law Review 1761, 1774. Lawrence E. Mitchell ‘A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes’ (1992) 70 Texas Law Review 579,582-83 23 Norman P. Barry, Controversy: Do corporations have any responsibility beyond making profit? (Spring 2000) 3 Journal of Markets and Morality 100, 100-07 See also Hartman (1993) and Mitchell (1992) at 579,582-83, supra note 22 24 See Hartman (1993) 1775 supra note 22. See also, Lyman Johnson ‘The Delaware Judiciary and the Meaning of Corporate Life and Corporate Law’ (1990)68 Texas Law Review 865, 934 25 i.e. stakeholder statutes. On this see FEric W Orts ‘ Beyond Shareholders: Interpreting Corporate Constituency Statutes’(1992-1993) 61 Geo. Wash. L. Rev. 20 ; Andrew Keay The Enlightened Shareholder Value Principle and Corporate Governance (Routledge 2012) 187 26 supra note 20 27 Part IV A discusses further the reform of fiduciary duties

7

run in their best interests (A). Second, shareholders are commonly depicted as being the risk-bearer of the company, investing their money without guarantee of profit or protection against losses (B). This section will demonstrate that both these common justifications of the shareholder-centred models are theoretically and empirically erroneous. In this respect, critics of shareholder supremacy are right in arguing that the model has been wrongly justified. 1. Shareholders as owners argument “The principle that shareholders own the companies in which they invest – and are the ultimate bosses of those running them – is central to modern capitalism”.28 This statement could not be more wrong from a legal perspective. Shareholders do not own the company but only the shares of the company. What seems a semantic detail actually embodies the gap between the Law and Economics, between the legal understanding of a practice and the economic approach to it. If shareholders can be considered owners of their company economically speaking, legally speaking they cannot. The ownership of the company must not be confused with the ownership of the company’s shares. Rare are the jurists that would put that argument into question.29 As a result, it seems problematic to justify a legal construction or model of corporate governance on an erroneous legal assumption, whether such an assumption is true from an economic perspective or not. The law can no longer rely on the argument according to which shareholders are owners of the company to enforce a shareholder-centred model of corporate governance. The “shareholder-as-owner” argument is representative of the current literature’s tendency to dismiss models of corporate governance or disapprove of legal dispositions by relying on economic arguments.30 This approach is problematic and mistaken on many grounds. First, it relies on the illusion that economic theories of corporate governance are empirical fact. This position forgets that both the legal and economic theories are interpretations of practice, and as such are artificial models of everyday business operation. For this reason, neither approach is superior to the other. They serve different academic and practical purposes and must not be confused. An economic argument shall not pass for an empirical or evidence-based argument per se, so no legal models, provisions or mechanisms should be dismissed or removed on the sole basis of an economic approach to the matter. Debates in corporate governance, especially regarding the shareholder-versus-stakeholder debate, are polluted by this confusion between the fields of economics and company law.

28

Milton Friedman, ‘The Social responsibility of Business is to increase its Profits’ New York times Magazine (11.13.1970) < http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html> accessed 16/01/2014. Also in, Arthur Levitt Jr ‘How to boost shareholder democracy’ Wall Street Journal (online edition 01.072008) < http://online.wsj.com/news/articles/SB121486793221017559> accessed 16/01/2014 29 Some scholars, however, may dissent. For an example, see Julian Velasco ‘Shareholder ownership and primacy’ (2010)3 University of Illinois Law Review 897, 897-956 30 The work of Julian Velasco is a good example of legal analysis juggling with legal and economic arguments without acknowledgment or distinction. See Velasco (2010) supra note 29

8

This observation does not suggest there is nothing valuable in analysing or assessing the law from an economic perspective. However, juggling the two fields can become problematic when it is done without realizing it and ignoring the actual parallelism which exists between the disciplines.

2. Shareholders as sole risk-bearers Alongside the argument of shareholders as owners of the company, the ‘sole residual claimant’ is the other common justification for corporate governance or company law to protect shareholders above other categories of interests (1). The following section will bring empirical evidence of the fact that shareholders are rarely in this situation (2). a) Sole residual claimants as residual risk bearers i.

Sole residual claimant argument

One of the reasons cited for why company law ‘must’ protect shareholders above all other groups of interests is that unlike stakeholders, shareholders are not protected by other contracts.31 According to this rationale, shareholders are the sole residual claimants of the company since they are not protected by any other written agreement that would ensure them a reward, or fixed compensation, for their investment.32 Indeed, shareholders are only entitled to what remains available to be collected once every other claim has been satisfied by the company.33 The starting point of this argument is to conceive of the company as a nexus of contracts34, a complex network of contractual obligations between various protagonists: shareholders, directors, employees, customers, clients, business partners, creditors and so forth. In this context, shareholders are depicted as the only category of interests at risk because they are not protected by an explicit contract.35 As a result, so the argument goes, company law has to bridge this gap by enforcing dispositions protective of shareholders to re-balance the situation and ensure the main investors of the company are protected. Such measures take the form of financial returns which function as a reward compensating shareholders for the lack of protection of their investments. Thus, because shareholders are the residual claimants and residual risk bearers of the company, only

31

The argument of the sole residual claimant and its derivative argument of the sole risk bearer have been coined by Frank Easterbrook and Daniel R. Fischel in Frank Easterbrook and Daniel R. Fischel, The Economic Structure Of Corporate Law, (Harvard University Press 1991) 36-39. Some scholars do dissent with this approach. See, for instance, Julian Velasco see Velasco (2010) supra note 29 32 For example, creditors find their fixed compensation in rates, damages they can seek. Employees will find theirs in receiving wages or other advantages included in their contract. 33 See Easterbrook and Fischel (1991) at 36-37 supra note 31; See also Lynn A. Stout ‘Bad and Not-so-Bad Arguments for Shareholder Primacy’ (2002) 75 Southern California Law review 1189, 1192-93 34 As opposed to an influential institution. As mentioned previously, the shareholder versus stakeholder debate is underpinned by the theoretical conception of the company. 35 Economically, it can be argued that all parties are always at risk when contracting, but legally speaking the risk does not exist for the parties as it is always assumed that transactions are performed by the parties. If not their compensations will cover the damage caused and restore the statu quo ante. Obviously, in practice nonperformance of the contract cannot always be perfectly compensated by damages, but the law always assume the contrary.

9

they are entitled to receive the company’s profits and the company must be run so that such profits are maximised. ii.

Residual risk-bearer argument

The sole ‘residual claimant theory’ works in unison with the ‘residual risk bearer’ argument36 in also justifying protection of shareholders’ interests by company law. Their position as residual claimants leads them to be residual risk bearers, since they are the only protagonists legally at risk in the company. The shareholders’ contribution to the capital is as much their entitlement to the benefits of the company as it is their liability for losses in case of business misfortune. According to this argument, in addition to not being protected by any formal contract in the way employees or creditors would be, shareholders are the only group of interests bearing the risk of entering into business and forming the company. Consequently, their disadvantage must be compensated by the assurance that their interest is at the company’s heart. A shareholder-oriented model seems the only way to accommodate, cover and reward shareholders’ risks. b) A ‘naked assumption’37 both theoretically and empirically incorrect The first objection cited above is merely terminological. Shareholders are said to take part in the company’s business on implicit terms but do not. The distinction between beneficiaries of explicit contracts – the stakeholders - and the beneficiaries of implicit contracts – the shareholders –can easily be dismissed by an empirical survey among the above mentioned jurisdictions. Indeed, contributing to losses and receiving profits in exchange for capital contribution is far from being the terms of an implicit contract. First, this is the definition of a shareholder in terms of their shareholdership. Second, the ‘contract’ containing the ‘terms and conditions’ of shareholdership is found in every company’s charter or constitution, since companies cannot be legally registered without such documents in any of the mentioned jurisdictions.38 Thus, it can be validly argued and proven that the obligations of shareholders are always explicit in the company’s constitution. Moreover, in civil law countries such as France, the idea of shareholdership and the contribution to company capital is entirely conceived as a contract between shareholders. The shareholders’ agreement to share profits and losses is considered a contract by which they jointly and unanimously decided to abide. In fact, charters for French companies are named “corporation contracts”.39 In light of such evidence, it would be empirically wrong to describe shareholders as

36

See Easterbrook and Fischel (1991) supra note 31 The expression of “naked assumptions” is used by Blair and Stout in reference to pro-shareholder arguments in M. Blair and Lynn A. Stout ‘A Team Production Theory of Corporate Law’ (1999) 85 Virginia Law Review, 247, 248 38 On the obligation to produce articles of association and memorandum of association to be produced in order for the company to be incorporated see: for Delaware the dispositions under section 723 of the Delaware Code, for the United Kingdom section 17 to 38 of the Companies Act 2006, article 1834 of the Civil Code for France, and the notion of Einnfuhringtext under Section 28 of the Aktiengesetz for Germany. The concepts of articles of association and memorandum of association have their Japanese counterpart under the name of Teikan, also required by the Japanese Commercial Code for a company to be incorporated. See table in Appendix 39 Corporation Contract being the translation of the concept of “contrat de société” that can be found under Article 1830 of the French Civil Code. Not only does the charter have the name of “contract” but most of the 37

10

residual claimants whenever residual claimants are understood as the beneficiaries of implicit contracts with the company. The second mistake made by the implicit/explicit distinction between shareholders and other stakeholders assumes that explicit contracts can entirely capture their parties’ interests. The agreements that bind employees, creditors and business partners often go beyond the scope of their contracts.40 Even in the hypothesis where the contract is fully performed by the company, constituencies can still hold claims to be satisfied as some of their interests may be uncovered by the contract, despite its explicitness. Thus stakeholders are or can be in the position of being residual claimants too. The position is not exclusive to shareholders. Using this argument as a justification to run the company for the sole benefit of shareholders is, therefore, questionable. Furthermore, when shareholders suffer losses, such losses will also impact the constituencies of the company. Finally and most importantly, the biggest issue with the residual risk bearer argument is that shareholders are rarely facing any risk in practice. The only hypothesis where shareholders are actual risk bearers is when the company files for bankruptcy. Therefore, the vision of shareholders as risk bearer is rather exceptional from a legal perspective.41 Here again, in case of bankruptcy it can be argued that shareholders are not the only group of interests suffering from losses and therefore at risk. 42

French contractual law in terms of form and consent is applicable to it as any other common contract. The French Company law adds a specific regime in addition to the basic contractual rules. See table in Appendix 40 Employees, for example, may spend time, effort and resources in developing skills that are so specific to the company or its business that they might not find another market to make such personal investment profitable in case their contract is terminated earlier than expected. Such interests are not protected by their contract and puts them in the situation of being residual claimant just like shareholders. On the development of the argument see Grant Hayden, Matthew T. Bodie ‘Shareholder democracy and the curious turn toward board primacy’ (2010) 51 William and Mary Law Review 2071,2084 41 Lynn A Stout (2002) 1193 supra note 33. However, from an economic perspective, it could also be counterargued that shareholders are always at risk, even in prosperous times, because their investment can be devalued any time the stock value drops on the market. 42 Interestingly, insolvency law is an example where the law explicitly takes into consideration the interests of stakeholders and shareholders of the company and tries to balance the two. Unfortunately, the discussion is outside the scope and purpose of the present debate so only a few observations will be made here. The way corporate insolvency legislations are designed reveals a legislative awareness of the fact that the company serves many interests other than just that of the shareholders. The aim of insolvency law is to ensure that the company fulfils its obligations towards its direct constituencies even in times of financial difficulties, times where shareholders would be better off taking their investment back, or what is left of it. Although these consistencies are all grouped under the label “creditors” they can be composed of employees, clients, business partners and any other protagonists involved in the company’s business that may have a debt to claim. Their presence and protection in Law is evidence that the legislators acknowledge the presence of stakeholders within the company and that there is a need to protect them in extreme situations, like bankruptcy, even at the costs of shareholders. It also proves that stakeholders are also at risk in times of bankruptcy. However, shareholders remain in the most critical situation. Indeed, they enjoy the weakest protection considering that the only assets they would be entitled to claim at the end of the procedure are those left when the all creditors have been repaid, which is, most of the time, a negative bill. For the various legal dispositions on the ranking of creditors in case of corporate insolvency refer to the dispositions under Delaware code 8§291 and following; the dispositions of the Insolvency Act of 2000 for the United Kingdom; Article L 622-17-11 of the commercial code, the ordonnance of 18 December 2008 and the

11

Extending on the errors made by the sole residual claimant theory, it should also be noted that in practice, shareholders are rarely in the position of claiming anything, residually or not. Even in the hypothesis of the company being prosperous, the decision to distribute the profits made by the company is not the shareholders’ to make. Technically, the company’s directors are the ones allowed to decide on the use of the company’s profits. In practice, claiming and distributing dividends goes through a two-step process. First, the directors must declare the dividends so they can appear on the company’s sheets. Only then can the general assembly of shareholders decide to distribute the declared dividends. Further, nothing prevents the directors from constantly reinvesting the profits into the company’s finances.43 As a result, shareholders are more residual actors than residual claimants as they cannot even claim their dividends themselves. This observation does not plead in favour of removing shareholder-oriented models from company laws but it does underline another theoretical flaw of the residual claimant argument. It also highlights the key role played by directors, which will be further discussed in the sections to come.

LME Act of 2008 No 2008-776 for France; and finally, sections 39,50,51,54,166,170,771 of the Insolvency Code for Germany. See table in Appendix The German Insolvency Law is an interesting, and here again paradoxical, example where a civil law influenced system actually enforces a better protection for its shareholder than a common law oriented one. Indeed, prior to the 2012 reform, the German Insolvency Code used to allow shareholders to vote on the insolvency plan when their position was to be harm by it. They notably had to give their consent to the right of debt-toequity swaps creditors are entitled to ask for in case of insolvency. The code used to empower shareholders with a real veto when their situation was jeopardised by such swaps and plans, which is a common situation in practise. As such power was leading to a practical inability for insolvency administrators to enforce their plans, use the debt-to-equity swaps efficiently and restructure German companies, this veto vote has been removed bringing continental insolvency law closer to the Anglo-Saxon style. This last comment is rather paradoxical if one follows the Manichean view that categorises common law systems as shareholder-friendly and civil law system stakeholder-friendly. Indeed the conclusion claims that by being less shareholder-friendly the German system is getting closer to the Common-Law systems. The paradox disappears if the idea is that common-law systems are not necessarily shareholder-friendly and hostile to stakeholders, and vice et versa for the civil law oriented ones. 43

Shareholders could limit such practice by relying on removal mechanisms. Not all jurisdictions enforce similar removal prerogatives for shareholders. Surprisingly, there is no civil law versus common law style divide when it comes to removal mechanisms. While the United Kingdom, Japan and especially France are implementing strong removal rights for shareholders, the jurisdictions of Delaware and Germany have enacted rather weak dispositions. The situation is more surprising for Delaware than Germany. Indeed, the dual structure of German boards of director prevents shareholders from removing the managing board themselves. The managing board can only be removed by the supervisory, which itself can be removed by shareholders. However, one could have expected more from the American jurisdiction, being traditionally very protective of shareholders. This was accounting for the fact that Delaware law is board-centric, so much so that the right to remove directors has been limited under §141(k) to the extent that shareholders can only remove directors in ordinary sessions and may never call a special meeting for this purpose unless the company’s charter states otherwise. See table in Appendix. For legal dispositions see : for Delaware, Delaware code §141(k) §211(b) 211(d) ; for UK : Companies Act 2006 ; France: L 225-18 and L 225-105 commercial code ; for Germany: §§ 103 I AktG (§ 89 AktG); for Japan: Article 339(1) Companies Act. See Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry B. Hansmann, Gérard Hertig, Klaus J. Hopt, The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford University Press, 2009) 61

12

The previous section laid out the theoretical grounds of the shareholder-versus-stakeholder debate. The stance of shareholder primacy was challenged by economic contexts but was also largely weakened in the literature and in practice by the fact that it has been wrongly justified. (II) However, these are not the sole justifications for the implementation of shareholder-centred model; they are only the most common. The next sections argue that the shareholder model remains irreplaceable mainly because it still is the only model able to protect both shareholders’ and stakeholders’ interests efficiently. (III)

III.

A model irreplaceable in theory

Constituency statutes have failed to reform shareholderist models because they cannot be replaced in theory or in practice.44 Because stakeholders remain an unclear category of interests (A), there are no other viable alternative models ready to be enforced (B) and only shareholder supremacy is able to support the investors’ ex-ante confidence (C). Finally and most importantly, the model cannot be replaced because of the erroneous belief it is unfit to serve stakeholders’ interests. The latter part of this section will prove that shareholder primacy is actually at the service of constituencies just as much as it is at the service of shareholders (D). A. Stakeholders, an unclear category of interests The notion of ‘stakeholder’ is broad enough to encompass any independent party with an interest or a concern in the company.45 In the field of corporate governance, stakeholders traditionally refer to employees, creditors, business partners, government and consumers, but can also include the population in the physical and commercial zone of impact of the company, the environment and society as a whole.46 In other words, the notion of ‘stakeholder’ is so wide that it becomes too vague to be efficiently used for legal purposes. Similarly, the category of creditors itself is wide enough to encompass any commercial or noncommercial protagonist who has a claim against the company. Thus the category of creditors technically overlaps the whole category of ‘stakeholders’ itself, which ultimately highlights the flaw of this “umbrella” term. Technically, ’stakeholder’ is even broad enough to include shareholders, which would either complicate or annihilate the shareholder versus stakeholder debate.47 Moreover, the concept of “stakeholders” comprises both physical individuals and immaterial groups of interests. If there is no difficulty in imagining an individual as a right holder, the idea of having such nebulous concepts as the environment or the society as claimants is a challenge when 44

Part IV Section A Paragraph 2 illustrates how such a wide definition is problematic in practice. Definition from Oxford Dictionaries (online edition) accessed 14/01/2014 46 On the difficulty of defining the word, Ronald K. Mitchell, Bradley R. Agle, Donna J. Wood ‘Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts’ (1997) 22 The Academy of Management Review 853, 856-7 47 On the enlisting of shareholders as stakeholders, more nuances to this specific point could be given by distinguishing between majority and minority shareholders. Minority shareholders are sometimes described as stakeholders because of their lack of power over the company’s business caused by their lack of voting weight. 45

13

considering legal proceedings. These groups are in essence immaterial. They are easy to conceptualise, and it might be intellectually legitimate for them to be taken into consideration, but they can hardly be physically identified. The question remains who will legally represent them, who will lodge their claims and who will negotiate with the company’s directors for them. It is practically impossible to designate legal representatives for every stakeholder of every registered company. The company itself struggles with this notion of immateriality. Gifted with legal personality, the company still relies on physical individuals to represent its interests. The section below48 dedicated to the right to sue on the basis of breach of fiduciary duties reveals how problematic and counterproductive such situations can be. The vagueness of the stakeholder category makes it limitless. The lack of boundaries around the definition of who/what is or is not a stakeholder brings in diversity. In addition to being a large group of actors, stakeholders are a heterogeneous group of interests with potentially contradictory claims.49 Diversity inevitably leads to conflict. The more diverse the group of stakeholders the greater is the likelihood of conflict. Berle predicted this situation when he wrote: “[The law cannot abandon] the view that business corporations exist for the sole purpose of making profits for their shareholders until such time as [the law is] prepared to offer a clear and reasonably enforceable scheme of responsibilities for someone else.”50 He believed the day may come when the framework is mature enough that the law could conceive of the corporations as serving “someone else’s” (read stakeholders’) interests. With the enactment of constituency statutes, policy makers did try to re-orientate the framework towards such a “someone else” perspective and may have believed the framework to have matured enough. However, they should have taken the time and the care of defining the direction to which the law should take before changing it. In other words, before reforming the law in favour of stakeholders, policy-makers should have carefully considered defining the very notion of stakeholders for it to be a workable legal concept which satisfies demanding standards of accuracy and solves any representation issues. 51

B. The lack of viable alternatives Over the past decades, many theories were crafted with the ambition to bridge the gaps left by shareholder-oriented models. These theories aimed at addressing different shortcomings of the models but they all came to the same conclusion: implementing a director-oriented scheme. A director-centred model seems to be the solution to all the evils of the ‘shareholderist’ model, as well as the best way to work around the fact that ‘stakeholders’ are not yet in a category of interests

48

Part IV Section A Paragraph 2 This feeds and enhances the issue of having directors being the servants of too many masters. See here after Part IV Section A Paragraph 2 50 Berle (1932) supra note 1 - emphasis added 51 The reform of fiduciary duties is a good illustration of the practical problem and counter-efficiency vague categories of right holders can lead to. See hereafter Part IV Section A 49

14

directly part of the company’s management. According to these theorists,52 the director supremacy approach is the only sustainable model able to bring stakeholders’ interests into the decision making of the company. In other words, to be stakeholder-focused, corporate governance has to be director-oriented. This section will describe some of the dominant theories in the field. 1. The team production model The team production model coined in the late 1990's by Professors Blair and Stout53 questions the idea that maximising shareholders' wealth should be the sole purpose of the company and disagree that the company should be run solely in the shareholders’ interests. Their stakeholder-oriented theory relies on the idea that directors should be seen as the “mediators” of the company since the company is a nexus of contracts. These theorists go back to seeing the company as a network of contractual obligations rather than an influential institution. In the team-production model, directormediators should be given full independence and discretion in order to reach the proper balance among the various interests involved.54 According to the team production model, only a corporate governance model built on a ‘director supremacy principle’ will manage to protect all stakeholders’ interests. In this theorisation, shareholders should not receive any special or particular treatment since their condition does not justify it anymore.55 The flaw of the team-production theory is the heavy reliance on directors without taking into consideration that the category of stakeholders has not matured enough to offer workable standards. This model aims at making directors accountable to more groups of interests but ultimately erases any accountability by lining up too many masters to which directors must be obedient.56 If the team production model avoids the issue of having stakeholders at the management level, the problem is only deferred to later down the line by still having stakeholders as a category of interests to serve. The team production model does not solve the stakeholder issue, but only postpones it. 2. Quinquennial theories In parallel, other theorists put the stress on another specific disadvantage of shareholder-centred models: ‘shortermism’. Mitchell, Lipton and Rosemblum57 are the proponents of the “selfperpetrating” or “quinquennial” theories and argue that the shareholder-centred model irreparably tends toward short-term-oriented decisions. Shortermism is caused by the fact that directors are thought to be fully accountable to shareholders and dedicated to maximizing their wealth, duties 52

For instance, see the work of Professors Blair, Stout, Mitchell, Rosemblum, Lipton see Part III Section B paragraphs 1 and 2. 53 See Blair and Stout ‘Team production in Business organisations: an introduction’ (1998-1999) 24 Journal of Corporate Law, 743. On the same theory, see also Blair and Stout (1999) 263 supra note 37. 54 In such a model, shareholders disappear so as to fall into the category of stakeholders. Shareholders are then a group of interests among others, a group of interests part of the larger stakeholders category. They are no longer defined in opposition the rest of the stakeholders. 55 See above, the erosion of arguments in favour of the shareholder primacy under Part II, Section C. 56 This argument is developed further under Part IV Section A Paragraph 2. 57 Martin Lipton, Steven A. Rosenblum ’A New System of Corporate Governance: The Quinquennial Election of Directors’ (1991) 58 U. CHI. L. REV. 187, 205-14. See also Mitchell (1992) 1263-72 supra note 22.

15

that have a great risk of seeking short-term rewards, or that have no interest in waiting for longterm profits when satisfactory short-term ones are available. Like the team production model, the solution found best suited to erase that flaw is gifting the company with fully independent directors and abolishing any kind of accountability mechanisms so they are freed from the pressure of making short-term profits and able to make the best decision for the corporation. The accountability of the board thought as “self-perpetrating” would be ensured by its election by the assembly or stakeholders, or even the Society. Here, the company is no longer thought of as a private business or a simple complex nexus of contracts, but as an influential institution. Thus, not only should society have an eye on the company’s management, but it should also have a word to say about it. Here again, envisaging the participation of the society in the direct management of all registered public companies seems rather utopian. 3. No viable solutions Challenging theories have been valuable in pointing out the shortcomings of shareholder-centred models but none of them have been able to offer real alternatives or measures readily-enforceable by the law. As a result, little echo of this literature can be found in the company laws of the United States, the United Kingdom, France, Germany or Japan.58 This may be attributable to the fact that such theories were built in reaction to or against shareholder-oriented models so that they were more focused on bridging its gaps instead of paying attention to its qualities. A scapegoat for the financial crises and the “ruthless” trend of economic activities placing investors’ interests above others had to be designated. As a result, shareholder-centred, legal corporate models were put on death row without further investigation or deeper analysis. Unfortunately, anti-shareholder theorists missed out on the fact that there are other justifications for the model to place shareholders in this central position. The following sections will attempt to uncover these reasons rarely discussed.

C.

Explaining and creating the ex-ante confidence of investors

In his study, René Reich-Grease59 modelled each major corporate governance theory. Interestingly, in these new models, it seems that even theories claiming the company should be run with constituencies’ interests at heart, do not manage to produce a rational model where shareholders are not the dominant and major, if not the sole, group of interests for which the company is run. 60 This can be explained by the fact that somehow we have to rationalise the reason why individuals invest in companies. Shareholder-centred models and the fact that even director-focused schemes cannot replace shareholders as the dominant group the company should serve can be interpreted as explaining the 58

See the table in Appendix for a representation of the impact of stakeholder-oriented theories on the company laws of these various jurisdictions. 59 Rene Reich-Graefe ‘De-constructing corporate governance: absolute director primacy’ (2011) 5 Brook. J. Corp. Fin. Com. L. 341 60 See for further developments and empirical analysis on that specific point: Reich-Graefe (2011) 341 supra note 59

16

reason why shareholders have confidence in the legal framework before their investments. Why would anyone invest in a company if he/she could gain just as much as a stakeholder? Rare would be the individuals willing to risk investing while they could gain the same profits being stakeholders, such as employees. This is all the more true in a scenario where stakeholder theories are fully enforced. If stakeholders become fully equals to shareholders, why would anyone be a shareholder? The majority of individuals would have no incentives to access shareholdership if stakeholdership brought the same power and profit. The population of shareholders would decrease. This would be highly problematic as the system still heavily relies on shareholders to invest so the majority of stakeholders can then exist – e.g. employees, consumers, business partners, the community. In other words, the category of shareholders is essential for the company to exist. Further, the existence of shareholders is also essential to the existence of most of the stakeholders involved in this discussion. There would be no employees, consumers, business relationships or a large part of Society if it was not for the existence of shareholders and their investments. Stakeholders depend on the ex-ante confidence of shareholders. As a result, the system must ensure that shareholders have enough confidence ex-ante, as well as incentives, for them to invest in the company, and by extension for them to invest in the Society. It is claimed that this has been done via the enforcement of shareholder-centred models, so far.

D. The true face of corporate governance is shareholder-centred The starting point of the shareholder-stakeholder debate in corporate governance relies on the idea that running the company in the best interests of shareholders is a key feature of the shareholder primacy theory and of the shareholder primacy theory only. Without noticing, director-oriented models seem to have challenged this argument. As underlined by Reich-Grease, despite their ‘stakeholder agenda’, director theories failed to replace shareholders from their central position as interests to be served by the corporation. This suggests that this particular feature of shareholder centred models might not be exclusive to them, but may be a key feature of corporate governance in general.61 It could be argued that there are no other interests for whom the company is run because there cannot be any other group of interests that would efficiently drive the company’s management. Corporate governance and company law are bound to privilege shareholders for all the reasons stated above, based on legal constructions and empirical arguments. There is nothing political in the argument. This position does not claim that stakeholders’ interests can never be taken into consideration. The only suggestion is that stakeholders’ interests should never be protected to the extent of either removing the shareholder from their central position in the 61

Stephen Bainbridge expressed the idea that the shareholder model is not irremediably bound to run the company for the sole purpose of maximising shareholders’ wealth. Bainbridge believed that a directororiented scheme could be enforced without removing the shareholder primacy. This would mean that there is no indefeasible link between the concept of shareholder primacy and the idea that the company should be run with the sole purpose of maximising shareholders’ investments. See Stephen M. Bainbridge, ‘Competing Concepts of the Corporation (A.K.A Just Say No?)’ (2005) 2 Berkeley Business Law Journal 77, 80. See also See also, William A. Klein, ‘Criteria for Good Laws of Business Associations’ (2005)2 Berkeley Business Law Journal 13, 15; Reich-Graefe (2011) 485 and 523-4 supra note 59 ; Hayden and Bodie (2010) supra note 40.

17

company or making the two groups equal in power and profits. The previous sections demonstrated that shareholder-centered models could not be removed from current company law because there is no model mature enough to replace them or even bridge the gaps left by the shareholder primacy model. It has been argued that enforcing stakeholder-oriented measures are actually worsening the situation of constituency. The following section will demonstrate that the jurisdictions still enforce strong shareholder-centered models despite the recent constituency reforms. It can be argued that such a position confirms the argument according to which shareholder-oriented models are the only models by which the law can enforce a scheme protective of both shareholders and stakeholders.

IV.

A model widely enforced in practice

Despite the criticisms previously mentioned, and the ambient hostility towards shareholder oriented schemes following the recent financial crises, this model of corporate governance remains the most widely enforced by company law. This essay bases its argumentation on the presence of two mechanisms in company law serving shareholder supremacy: fiduciary duties (A) and employee’s stock options (B).

A. Fiduciary duties: the backbone of shareholder-centred models Cornerstones of company law62, fiduciary duties are often described as a traditional feature of company law in common law countries63 as well as the backbone of shareholder-centred models (1). Following this observation, this section underlines the fact that fiduciary duties can be found in every jurisdiction, even the ones under the influence of civil law or considered as “stakeholderfriendly”.64 Despite the policy-makers’ attempt to redirect fiduciary duties towards the benefit of 62

Indeed many books in various editions present the concept as a key note and dedicate chapters on the matter. See for example, Andrew Hicks, S.H. Goo, Case and Materials in Company Law, (Oxford University Press 2008) Chapter 12, 356 ; L.S. Sealy, Sarah Worthington, Cases And Materials In Company Law, (Oxford nd University Press 2007), Chapter 6, 273 ;Ben Pettet, Company Law, (Pearson Education Ltd, 2 Edition 2005) Chapter 9, 160. 63 Rutheford B. Campbell, Jr. ‘Normative Justifications for Lax (or No) Corporate Fiduciary Duties: A Tale of Problematic Principles, Imagined Facts and Inefficient Outcomes’ (2010) 99 Kentucky Law Journal 231 ; See also, David Collison, Stuart Cross, John Ferguson, David Power & Lorna Stevenson, Shareholder Primacy in UK Corporate Law: An Exploration of the Rationale and Evidence, 21 (2011) available at http://strathprints.strath.ac.uk/32336/ (last visited 27/06/2013). See also, David Collison, Stuart Cross, John Ferguson, David Power & Lorna Stevenson, ‘Shareholder Primacy in UK Corporate Law: An Exploration of the Rationale and Evidence’ (2011) 21 accessed 27/06/2013. 64 Even if fiduciary duties are often described as one of the key fixtures of the shareholderist model, the model allegedly favoured by common law jurisdictions, such duties can be found in all jurisdictions under different labels such as “duty of care”, “duty of loyalty”, “care and responsibility” or “duty of care of a good manager”. See on the table under Appendix . Indeed, fiduciary duties are often described as being born in equity law with the case The Charitable Corporation v Sutton (1742) 26 ER 642, where directors are considered the trustees of shareholders, jurisprudence still relevant in Delaware (See the case Guth v. Loft, SA 21503 Del 1939). On that see William. M. Lafferty, Lisa A. Schmidt, and Donald J. Wolfe, Jr ‘A Brief Introduction to the Fiduciary Duties of Directors

18

stakeholders (2), it is submitted that such reform will only lead to greater prejudice for constituencies (3). 1. Company’s directors as shareholders’ servants a) Owing fiduciary duties Classic views on company law suggest corporate directors must run the day-to-day affairs of the company guided by the sole interest of shareholders. This constitutes the baseline of shareholderoriented models and a clear contradiction with theories concerned with the situation of stakeholders. Company law can be seen as having followed this philosophy, especially in CommonLaw jurisdictions where directors are traditionally depicted as owing fiduciary duties to shareholders. On the contrary, civil-law countries, like France or Germany, are seen as less favourable to shareholders and more stakeholder-friendly because directors owe their duties to the company and not its shareholders.65 The following sections mitigate the civil versus common law divide with respect to the enforcement of fiduciary duties. b) Suing for breach of fiduciary duties The presence of fiduciary duties is not enough in arguing whether or not the company law of a jurisdiction is enforcing a ‘shareholderist’ model or not. Even though fiduciary duties are often depicted as a common-law tradition, every jurisdiction under study here enforces similar directors’ duties under different labels. Neither is it enough to evaluate the model as shareholder- or stakeholder-centred on the basis of to whom directors owe their duties. The investigation has to go further and identify who is entitled to sue on the basis of breach of fiduciary duties in order for fiduciary duties to be classified as favourable to one or the other group.

Under Delaware Law’ (2012) Pennsylvania State Law Review Vol. 837, 841. On the development of the directors’ duties at common and equity laws, see Ben Pettet (2005) 159 supra note 62. Under English law, directors’ duties have been relatively recently listed and reinforced under the reformed statutory provisions of Section 172 of the Companies Act 2006. On that see Roberta S. Karmel ‘The Duty of Directors to NonShareholder Constituencies in Control transaction – a comparison of US and UK Law’ (1990) 25 Wake Forest Law Review 61, 62. The French and German jurisdictions implement similar directors’ duties with a wording closer to the notion of “care” and “loyalty” whose content is defined a contrario by relying on internal and external civil liability mechanisms as the following dispositions suggest it : Article 1850 of the French Civil Code as well as 225-25, 225-18, 242-6-4 of the French Commercial Code, the 2008 NRE Act under article 241-1 to 241-8, 243, 248 ; Section 117(2) of the Aktiengesetz , German Company Code. As far as the Japanese jurisdiction is concerned, fiduciary duties can be found in the standard of care of a good manager directors are asked to abide by according to the dispositions under the article 254-3 of the Civil Code (Minpo). See Brian R. Cheffins, Bernard S. Black ‘Outside Director Liability Across Countries, European Corporate Governance’ (2005) 84 Texas Law Review 1385, 1457-58 65 Regarding the German and French disposition see supra note 64. Interestingly, even in Japan where fiduciary duties have been directly transplanted from the American model in the 1950’s, directors are the servants of the corporation and not the shareholders. On that see Kanda and Milhaupt (2003) 2 supra note 12. However, the Japanese legislature had for a second time reformed its company law to accommodate taken from the German company law traditionally stakeholder-oriented. For instance, Japan did enforce until a recent reform, two-tier boards for public companies. See also Mark J. Loewenstein, (2002) 1684 supra note 20.

19

Fiduciary duties will remain paper tigers if their bondholders are not in the position of using them in practice as often as they would like to. Interestingly, the answer to this question challenges the Manichean view according to which civil law countries are expected to provide shareholders with limited rights to sue directors while common-law countries would grant stronger prerogatives. Indeed, in the United Kingdom, where the common-law tradition should command directors to serve their shareholders, statutes and case-law recognise the company as sole legal claimant entitled to bring an action against them.66 Even if shareholders are depicted as the theoretical recipients of fiduciary duties, they do not possess any right to sue on these grounds.67 In parallel, the French legislature has gifted shareholders with a collective action shaped on the pattern of the American class action mechanism.68 As a consequence, even though fiduciary duties are clearly stated to be owed to the company de jure, they are also owed to the shareholders de facto. Entitling the company to sue its own directors will always be problematic as well as counterproductive. Although the company has been granted the legal personality needed to be able to sue individuals, it still lacks physical existence to do so itself, in practice. Consequently, the company has to rely on its legal representatives to take such proceedings: namely the directors. This system requires directors to sue themselves or each other for breach of fiduciary duties. Between the natural reluctance69 to sue oneself or a peer and the tendency toward reciprocal back-scratching,70 66

Even if fiduciary duties of directors have been designed in the UK to protect the shareholders interest, the jurisprudence has slowly oriented such duties towards the company. Indeed, in the case Percival v Wright [1902] 1 Ch. 421, the British judges held that fiduciary duties were due to the company and not to the shareholders. This case confirmed the earlier decision of the Court in Foss v Harbottle (1843) 2 Hare 461. In this respect, it can therefore be concluded that the American model, by allowing shareholders to take class actions, is more protective of their interest and stays closer to a shareholderist model than the British company law. 67 See for example, Ben Pettet (2005) at 159-60 supra note 62. 68 Indeed, alongside the possibility for shareholders to remove their directors ad nutum without prior notification and any justification, they have also been provided with a collective derivative action against them under the dispositions of Article 225 to 252 of the French Commercial Code (action ut singuli). See: Veronique Magnier ‘L’opportunité d’une class action en droit des sociétiés’ (26.02.2004) Point de Vue 554 ; Yves Picod ‘Le Charme de la class action’ (10.03.2005) 10 Tribune 10, 657. The jurisdiction of Delaware, Germany and Japan offer derivative action against directors under the following dispositions: section 3816 and 327 of the Delaware Code, see the various liability mechanism for internal and external liability in Germany under Section 117(2) as well as Article 254-3 of the Japanese Civil Code. The reform and development of the Japanese derivative action is actually a representative illustration of how procedural roles have a strong impact on practise and the functioning of the model as a whole in terms of protection of interest. If the fiduciary duties of directors were present, the derivative action available for the shareholders has been introduced in 1950 and was a direct transplant from the American model. Despite its introduction, the action was left unused until the 1990’s when a second reform of the code occurred and introduced an administrative fee prior to filing a lawsuit preventing or limiting opportunistic monetary claims. Cheffins and Black (2006) 1458-60 supra note 65. The Japanese model, despite its common association to a civil law influenced corporate governance, actually implements a system where the ultimate legal control of directors is placed in the shareholders’ hands, see Hideki Kanda ‘Japan’ in Arthur R. Pinto and Gustavo Visentini (eds) In The Legal Basis Of Corporate Governance In Publicly Held Corporations: A Comparative Approach (Kluwer Law International 1998) 111-15. See also, on the modern Japanese corporate governance being moulded on a German patter, see Loewenstein (2002) 1684 supra note 20. 69 On the impact of the procedural rules and the importance of designating the adequate right holder to sue, see Cheffins and Black (2006) 1458 and following supra note 65. The various reforms on this particular point

20

fiduciary duties are bound to be paper tigers. This situation defeats the purpose of implementing fiduciary duties as accountability mechanisms. The only scenarios in which such liability mechanisms are used by directors is in turnover periods, where the new board of directors sues the former; situations which remain fairly limited.71 This brief overview on the enforcement of fiduciary duties reveals a paradoxical situation where the jurisdictions generally perceived as the least indoctrinated by shareholderist theories are enforcing stronger mechanisms in their favour than the jurisdiction traditionally structured around them. It has also been demonstrated how protective to shareholders the company law of civil-law jurisdictions like France, could be. To summarise, it can be concluded that the presence or absence of fiduciary duties, on its own, is not reliable enough as evidence to judge of the degree of protection shareholders and stakeholders receive in a given jurisdiction. The real evidence can only be found in identifying the protagonists allowed to sue on the basis of breach of such duties and the conditions of such legal proceedings.

2. Servants of too many masters As explained in Part II, economic crises triggered the introduction of constituency statutes which in turn reformed fiduciary duties in to better protect stakeholders. Unfortunately, the legal switch from the shareholder primacy to a stakeholder-oriented theory is not as easy to implement in practice as it is in theory. The reform of fiduciary duties via the enactment of constituency statutes has not had the intended effects. Even though the attempt of legislators to accommodate stakeholders’ interests in company law was driven by good intentions, it has worsened the situation of both shareholders and stakeholders by granting directors with a standardless discretion. Left with a broad definition of whom stakeholders are, directors are in the situation of being the servants of “too many masters”.72 As a result, they are able to de facto to use the business judgement rule73 to its full extent by justifying their decisions upon the interests of one group of stakeholders or another as long as those interests contradict each other. If the interests of the of corporate law are a reflective example of how procedural rules impact the practise and meaning of the directors’ duties. 70 See on the description of such phenomena regarding the directors’ reluctance to sue each other and tendency to cover for each other in the case of self-dealing: Encyclopedia Of International Comparative Law, vol XIII Chapter 4 (Tübingen, (1984), pages 31-49 71 As a matter of illustration, although the right to sue directors by the company under French Law denominated “social action ut universi” can be brought by any of the directors at any time, in practise it has only been used by the incoming board of directors against the leaving board in practise. See dispositions of the French Commercial Code under Article L 225-120,225-52 and following. See table in Appendix 72 Jonathan R. Macey ‘Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties’ (1991-1992).23 Stetson L. Rev. 31 73 The business judgement rule is the legal principle according to which directors are not liable for the losses incurred by the company and caused by their decisions as long as they are acting in good faith. Now that directors have the contradictory interests of shareholders and stakeholders, the limitation that the condition of “good faith” put on the liability exemption vanishes. No matter what type of decisions directors may take, there will always be a group of stakeholders justifying such actions, even in case of self-dealing.

21

various groups of stakeholders do not clash, directors can still rely on the clash between stakeholders and shareholders. In practice, such clashes are even more likely to occur since the definition of stakeholders is vague and can encompass any types of individuals, groups or interests related to the company’s business. This broad definition of “stakeholders” ultimately turns the category into a limitless group of interests. As a consequence of the constituency statutes, the accountability of directors is a fiction. This situation automatically increases the agency costs.74 Thus, the indirect reform of fiduciary duties by constituency statutes happens to be far more detrimental to stakeholders than the shareholdercentred model itself. Under the ‘shareholderist’ model, directors were more easily monitored since their work was gauged according to a defined standard: the shareholders’ interests.75 Therefore, it can be legitimately argued that the shareholder-oriented model where directors owe their fiduciary duties to their shareholders is a good way, probably the best so far, to have directors accountable. Accountability is key here. When reforming fiduciary duties, the main reason why policy-makers missed their target is they misunderstood what their target was. The rationale behind the constituency statutes was to tame directors, who are supposedly acting on the behalf of shareholders, by making them more accountable - avoiding reckless decision-making. The real cause of the lack of accountability is not the shareholder-centred model itself but the passivity of shareholders in controlling their directors. As a result of this misunderstanding, the new doctrines have pulled away from shareholders mechanisms to hold directors accountable before them and have introduced more masters to the equation. Consequently, directors’ accountability was widened but not strengthened, which in turn, rather ironically, weakened it. In a nutshell, a shareholder-centred system appears to be the ‘lesser evil’ of all the corporate models currently available.76 Legislators and policy-makers are aware of the model’s flaws and their attempts to accommodate the legal framework are evidence of such awareness. However, in practice, stakeholders’ interests seem to be better protected when not directly taken into consideration, as was demonstrated in the above section.

74

The “agency costs” theory is the economic theory modelling the counter efficiency of “having to serve too many masters”. The theory refers to the costs that arise from the use of intermediaries in transactions where the agent has conflicting interests with the individual he serves. In this context and in the situation of public companies, directors are the agent of the shareholders or of the corporation, depending on the view adopted by the model enforced. The agency costs in public companies are caused by the fact that directors have to reconcile many contradicting interests involved in the corporation itself or caused by the day to day running of businesses. The more interests directors are expected to serve, the higher the costs because the likelihood of interests to be left unsatisfied increases. This situation becomes all the more problematic when the interests directors should serve are limitless, which is the case when “stakeholders” become part of them. See Stout (2002) 1999 supra note 33 75 It has to be noted that the shareholders’ interests are not always that easy to identify. It can be the case where shareholders desire short term profit while long-term profits are more fruitful. However, shareholders’ interests remain better defined and more easily achievable because they are more concrete and homogeneous than stakeholders’. 76 Shareholder primacy is the best model in terms of implementing directors’ accountability. See Mark J. Roe ‘The Shareholder Wealth Maximization Norm and Industrial Organization’ (2001) 149 University of Pennsylvania Law Review 2063, at 2063-65.

22

B. Employees’ stock option mechanisms: how to turn stakeholders into shareholders The previous paragraphs exposed how legislators failed to reform the framework in order for it to benefit stakeholders and have demonstrated how stakeholders were actually better protected when not directly targeted by the law as such. This section goes further in arguing that legislators have realised that the model could not be reformed and that the best way to accommodate the framework to stakeholders’ needs is by accommodating their needs to the framework. To do so, legislators have turned stakeholders into shareholders so the model of corporate governance could serve the two groups of interests simultaneously. This is illustrated by the widely enforced employees’ stock option mechanism (1). This mechanism seems to be in direct line with the expectations of shareholder supremacy’s grandfather (2). 1. A confessed failure to re-orientate the model towards stakeholders Besides being useful for human resources and financial management purposes77, employee stockoption mechanisms can be seen as another legal attempt to bridge the gap shareholder-oriented models have left in the protection of stakeholders. Employees’ stock-option mechanisms, also called employee stock-option plans or employee stock-option schemes, can be defined as the contract between a company and its employees which gives employees the right to buy a specified number of the company’s shares at a fixed price within a certain period of time.78 Such mechanisms are designed to compensate, retain and attract employees. Legal provisions introducing and regulating such mechanisms can be found in each jurisdiction under study in this essay.79 Since legislators failed to accommodate the shareholderist model to stakeholders’ needs, they have adapted the stakeholders’ needs to the model. Via employee stock-option measures, the company law of each jurisdiction has turned stakeholders into shareholders80 so that the shareholder-centred model indirectly becomes stakeholder-oriented. In this context, the interests of both groups line up, the conflict of interests end, the tug-of-war between the two decreases, agency costs are reduced and the day-to-day running of the company is eased. These mechanisms can be interpreted as a failure of the legal framework to accommodate stakeholders’ interests, or at least as a fall-back option. 77

Thierry Poulain-Rehm ‘ Stock-options, decisions financières des dirigeants et création de valeur de l'entreprise: le cas français’( 5 septembre 2003) Finance Contrôle et Stratégie 79, 79-116 ; Paul Oyer, Scott Schaefer ‘Why Do Some Firms Give Stock Options To All Employees?: An Empirical Examination of Alternative Theories’ (December 2002) Research Paper accessed 27/06/2013) 78 Definition and description of the mechanism and its function published by the American Securities and Exchange Commission on the 29 March 2009, available at: http://www.sec.gov/answers/empopt.htm (last visited 27/06/2013). 79 Whether such mechanisms are labelled ‘Employee stock option plans’ or Employee stock option scheme’ they are enforced in all jurisdictions under scrutiny here. For the American dispositions see the provisions 26 USC§422, for the United Kingdom see provisions under Section 1166 of the Companies Act 2006, for France refer to articles L225-177 to L225-186 of the French Commercial Code, for Germany see section 192(2) No 3, Section 71(1) No 8 and 221 of the Aktiengesetz and finally as for the Japanese jurisdiction see Article 210-2 of the Commercial Code, the Commercial Act of 1997 reformed to introduce such schemes. See also, Oyer and Schaefer (2002) supra note 77 80 Indeed, thanks to the stock options the legislator turns the larger group of stakeholders, employees, into shareholders.

23

2. Revealing the true face of shareholderism If employee stock option schemes can be seen as a fall-back option from a stakeholder perspective, they should not be regarding the shareholderist theory. On the contrary, these mechanisms are in complete harmony with the shareholder primacy theory and the work of early theorists. The presence of stakeholders (employees) as shareholders only reveals the true face of shareholdercentred models of corporate governance. Berle believed that such a model would democratise the social class of shareholders, so much so that shareholders would be middle-class-everyday businessmen and workers. His theory had no aim of maximising the wealth of “exploiter-gambler shareholders”.81 On the contrary, Berle conceived the shareholder supremacy as a way to reward the deserving “staff of the plant”.82 Berle feared that the concentration of wealth and power in elites’ hands would create a plutocracy in the United States as it did in Europe. The author of shareholder supremacy advocated, in his early writings, how the company could efficiently boost the American economy as well as avoid such a plutocratic situation as long as the majority of shareholders are of the working middle class. Berle and his shareholder supremacy theory were far less conservative and capitalist than his opponents accused them of being. His ambition was to be an “American Karl Marx – a social prophet”83 through the dissemination of his shareholder-centred views on company law and corporate governance. In this respect, employee stock-option mechanisms seem to accomplish such wishes and enforces shareholder primacy to its full extent whilst revealing its true face.

V - Conclusion To conclude, despite attempts by policy makers to adapt company laws of the United States, United Kingdom, France, Germany and Japan to the interests of stakeholders, the law remains strongly shareholder-oriented. To the question “are company laws accommodating stakeholders’ interests?” the answer is no, not directly. To the question “should company law accommodate such interests?”, the answer again is no, at least not in the way it has been done so far. It has been demonstrated that more harm is done to stakeholders when the law directly targets them. It is also believed that if the law is not accommodating stakeholders’ needs and cannot do so without harming such interests at the same time it is because it should not do so directly. It is believed that the law can indirectly protect stakeholders’ interests. A perfect illustration of this can be found in the provisions for employee stock-options mechanisms. Directly protecting stakeholders’ interests only leads to fundamental and practical dysfunctions because the core notion of the corporation relies, inter alia, on the ex-ante confidence of investors. It is believed that corporate governance should remain shareholder-oriented because shareholder primacy is the model which better protects both 81

Adolf A. Berle, Jr. ‘How Labor Could Control’ (1921) 28 New Republic Journal 37, 38 ; see also Stewart, Jr. (2011) 1461-62 supra note 14 82 Idem 83 Adolf A. Berle, Jr. ‘Participating Preferred Stock’ (1926) 26 Columbia Law Review 303, 303-05, 317; on the comparison of Berle to an American Marxist Stewart (2011) 1465 see supra note 14. See also Jordan A Schwarz, Liberal: Adolf A Berle and the Vision of an American Era, (New York: The Free Press 1987) 62.

24

shareholders’ and stakeholders’ interests. In this respect, the theory should be renamed the shareholder-stakeholder supremacy model, as in the end, both groups are best served by this theory. Placing shareholders at the centre of the corporation does not mean the model itself does not serve both groups of interests. If the company should not be run for the “sole purpose” of serving shareholders’ interests, it should at least be run for the direct purpose of shareholders’ interests. This rewording does not challenge the legitimacy of the model; it only underlines its true nature. On the basis of such concluding remarks, a few recommendations to policy-makers looking to better protect stakeholders can be made briefly. First of all, it stems from this argumentation that removing shareholder-centred models, if even possible, is the last thing policy-makers should attempt to do when trying to accommodate constituencies’ needs. Policy-makers must focus on revealing the true nature of shareholder primacy, not dismissing a model because the social and political context of the time needs a scapegoat for financial crises. Policy-makers will be able to successfully reform the system and reaffirm shareholderist models by: 1) Not removing measures protective of shareholders: It has been explained how crucial to stakeholders is the ex-ante confidence of shareholders to invest in the company. Corporations, as the legal vehicle of companies, should secure such confidence. 2) Clearly identifying and defining the stakeholders’ or constituencies’ interests they aim at protecting: This lack of definition of what a stakeholder is and how, in practice, such stakeholders can make use of their rights is the reason why constituency statutes failed to reform the system and only worsened the situation. The attempted reform of directors’ duties is representative of the negative effect of poorly defined categories of interests. 3) Increasing mechanisms or opportunities where stakeholders can become shareholders: The implementation of employee stock option plans was in direct line with the real intent of shareholder primacy, serving both shareholders and stakeholders. Policy-makers should rely on and deploy more mechanisms of the kind to improve the situation of constituencies without worsening the condition of shareholders. 4) Enforcing mechanisms which would encourage shareholders to be more active in the monitoring of directors in order to tackle the issue of having passive shareholders. The two-tier board system enforced in Germany is one possible solution to this problem since one board is dedicated to the supervision of the managing board of directors, lifting this weight off the shareholders’ shoulders. 5) Learning from other legal fields: Company is not the only discipline of law where legislators have to juggle between antagonistic interests. For instance, insolvency laws are specifically designed to solve critical situations where interests have to be balanced and compromise reached. Policy-makers may well learn from this field in terms of balancing interests and identifying which constituency are taken into account alongside shareholders and how such representation is organised. 6) Not reforming the law on the basis of theoretical economic argument only: Economic arguments are just as theoretical and artificial as legal constructions and should not be taken for equivalents of the “truth” or empirical data. If anything, this essay hopes to have highlighted the potential danger in confusing the two disciplines.

25

If future reforms of company law comply with these recommendations, shareholderism might finally become stakeholderist, as it should be and was designed by his “grandfather”.

26

Bibliography

Table of cases Delaware (United States) Guth v. Loft, SA 21503 Del 1939 Revlon, Inc. v. MacAndrews and Forbes Holding, Inc., 506 A.2d 173 (Del. 1986)

United Kingdom The Charitable Corporation v Sutton (1742) 26 ER 642 Percival v Wright [1902] 1 Ch. 421 Foss v Harbottle (1843) 2 Hare 461

Table of legislation Delaware (United States) Delaware Code (online edition < http://delcode.delaware.gov/> accessed 16/01/2014) Subchapter XV of Title 8 of the Delaware General Corporation Law Delaware Public Benefit Corporation Statute 2013 United Kingdom- England and Wales Companies Act 2006 Insolvency Act 2010 France French Civil Code (Dalloz 2014) French Commercial Code (Dalloz 2014) 2008 New Economic Regulation Act (Loi sur les Nouvelles regulations economiques NRE 2008) Ordonnance 18/12/2008 Germany German civil code (Bürgerliches Gesetzbuch – “BGB”) (English translation by the German Federal Ministry of Justice 2009) < http://www.fd.ul.pt/LinkClick.aspx?fileticket=KrjHyaFOKmw%3D&tabid=505> German Stock Corporation Act (Aktiengesetz “AktG”) (English translation by Norton Rose Fullbright September 18, 2013) < http://www.nortonrosefulbright.com/files/german-stock-corporation-act109100.pdf> accessed 14/01/2014 27

German Insolvency Code (Insolvenzphanverfahren as amended in 2012)(Partial English translation by Schultze and Braun 2012) < www.insol-europe.org/download/file_/7235> Japan Japanese Civil Code (Minpo) (English translation by Japanese Law translation 2009) < http://www.japaneselawtranslation.go.jp/law/detail/?ft=2&yo=%E5%8B%95%E7%94%A3%E5%8F% 8A%E3%81%B3%E5%82%B5%E6%A8%A9&ky=&page=1&re=02> 16/01/2014 Companies Act 2005 1997 Commercial Act Corporate reorganization law 2002 New Business Promotion Act

Secondary sources Books David Collison, Stuart Cross, John Ferguson, David Power & Lorna Stevenson, Shareholder Primacy in UK Corporate Law: An Exploration of the Rationale and Evidence (2011) available at http://strathprints.strath.ac.uk/32336/ (last visited 27/06/2013) Daniel H. Foote, Law in Japan: A Turning Point (University of Washington Press 2008) Carl F. Goodman, The Rule of Law in Japan: A Comparative Analysis (Kluwer Law International 2008) Andrew Hicks, S.H. Goo, Case and Materials in Company Law, (Oxford University Press 2008) Andrew Keay The Enlightened Shareholder Value Principle and Corporate Governance (Routledge 2012) Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry B. Hansmann, Gérard Hertig, Klaus J. Hopt, The Anatomy of Corporate Law: A Comparative and Functional Approach (Oxford University Press, 2009) L. S. Sealy, Sarah Worthington, Cases And Materials In Company Law, (Oxford University Press 2007) Ben Pettet, Company Law, (Pearson Education Ltd, 2nd Edition 2005) Chapter 9, 160. Frank Easterbrook and Daniel R. Fischel, The Economic Structure Of Corporate Law, (Harvard University Press 1991) Oxford Dictionaries (online edition)

Contribution to edited books Takashi Araki Chapter 8 ‘Changes in Japan’s practice-dependent stakeholder model and employeecentered corporate governance’ D. Hugh Whittaker,Simon Deakin (eds) in Corporate Governance and Managerial Reform in Japan (Oxford University Press, edition online 2009)

28

Encyclopedia Encyclopedia Of International Comparative Law, vol XIII Chapter 4 (Tübingen, (1984) 31-49

Articles Christiane Alcouffe ‘Judges and CEOs: French Aspects of Corporate Governance’ (2000) European Journal of Law and Economics 9:2 127 Stephen M. Bainbridge, ‘Competing Concepts of the Corporation (A.K.A Just Say No?)’ (2005) 2 Berkeley Business Law Journal 77 Norman P. Barry, Controversy: Do corporations have any responsibility beyond making profit? (Spring 2000) 3 Journal of Markets and Morality 100 Adolf A. Berle Jr ‘For whom corporate managers are trustees: a note’ (1931-1932) 45 Harvard Law Review 1365 Adolf A. Berle, Jr. ‘How Labor Could Control’ (1921) 28 New Republic Journal 37 Adolf A. Berle, Jr. ‘Participating Preferred Stock’ (1926) 26 Columbia Law Review 303 Rutheford B. Campbell, Jr. ‘Normative Justifications for Lax (or No) Corporate Fiduciary Duties: A Tale of Problematic Principles, Imagined Facts and Inefficient Outcomes’ (2010) 99 Kentucky Law Journal 231 Brian R. Cheffins, Bernard S. Black ‘Outside Director Liability Across Countries, European Corporate Governance’ (2005) 84 Texas Law Review 1385 John W. Cioffi ‘Corporate Governance Reform, Regulatory Politics, and the Foundations of Finance Capitalism in the United States and Germany’ (2006) 7 German Law Journal 6 Rima Fawal Hartman ‘Specific Fiduciary Duties for corporate directors: enforceable obligations or toothless ideals?’ (1993) 50 Washington and Lee Law Review 1761, 1774. Lawrence E. Mitchell ‘A Theoretical and Practical Framework for Enforcing Corporate Constituency Statutes’ (1992) 70 Texas Law Review 579 Elisabeth Garriga Domenec Mele ‘Corporate Social Responsibility Theories: Mapping the Territory’ (2004) 53 Journal of Business Ethics 51 Alejandro Hazera ‘A Comparison of Japanese and U.S.Corporate Financial Accountability and Its Impact on the Responsibilities of Corporate Managers’ (1995) Business Ethics Quarterly 479 Grant Hayden, Matthew T. Bodie ‘Shareholder democracy and the curious turn toward board primacy’ (2010) 51 William and Mary Law Review 2071 Hideki Kanda ‘Japan’ in Arthur R. Pinto and Gustavo Visentini (eds) In The Legal Basis Of Corporate Governance In Publicly Held Corporations: A Comparative Approach (Kluwer Law International 1998) 111-15 Hideki Kanda and Curtis J. Milhaupt ‘Re-Examining Legal Transplants: The Director's Fiduciary Duty in Japanese Corporate Law’ (autumn 2003) 51 The American Journal of Comparative Law 2

29

Roberta S. Karmel ‘The Duty of Directors to Non-Shareholder Constituencies in Control transaction – a comparison of US and UK Law’ (1990) 25 Wake Forest Law Review 61 William A. Klein, ‘Criteria for Good Laws of Business Associations’ (2005)2 Berkeley Business Law Journal 13 William A. Klein, ‘Criteria for Good Laws of Business Associations’ (2005)2 Berkeley Business Law Journal 13, 15; Reich-Graefe (2011) 485 William. M. Lafferty, Lisa A. Schmidt, and Donald J. Wolfe, Jr ‘A Brief Introduction to the Fiduciary Duties of Directors Under Delaware Law’ (2012) Pennsylvania State Law Review 837 Jonathan R. Macey ‘Economic Analysis of the Various Rationales for Making Shareholders the Exclusive Beneficiaries of Corporate Fiduciary Duties’ (1991-1992) 23 Stetson L. Rev. 31 Veronique Magnier ‘L’opportunité d’une class action en droit des sociétiés’ (26.02.2004) Point de Vue 554 Yves Picod ‘Le Charme de la class action’ (10.03.2005) 10 Tribune 657 Don Berger ‘Shareholder Rights Under the German Stock Corporation Law of 1965’ (1970) 38 Fordham Law Review 687 Ronald K. Mitchell, Bradley R. Agle, Donna J. Wood ‘Toward a theory of stakeholder identification and salience: defining the principle of who and what really counts’ (1997) 22 The Academy of Management Review 853 Andrew G.T. Moore II ‘Shareholders rights still alive and well in Deleware: the derivative suit : a death greatly exaggerated’ (1993-1994) 38 St Louis University Law Journal 947, 952 Eric W. Orts ‘ Beyond Shareholders: Interpreting Corporate Constituency Statutes’(1992-1993) 61 Geo. Wash. L. Rev. 20 Thierry Poulain-Rehm ‘ Stock-options, decisions financières des dirigeants et création de valeur de l'entreprise: le cas français’( 5 septembre 2003) Finance Contrôle et Stratégie 79 Rene Reich-Graefe ‘De-constructing corporate governance: absolute director primacy’ (2011) 5 Brook. J. Corp. Fin. Com. L. 341 Mark J. Roe ‘The Shareholder Wealth Maximization Norm and Industrial Organization’ (2001) 149 University of Pennsylvania Law Review 2063 Jordan A Schwarz, Liberal: Adolf A Berle and the Vision of an American Era, (New York: The Free Press 1987) A. A. Sommer Jr ‘Whom should the corporation serve? The Berle-Dodd debate revisited sixty years later’ (1991)16 Del. J. Corp. L. 33 Martin Lipton, Steven A. Rosenblum ’A New System of Corporate Governance: The Quinquennial Election of Directors’ (1991) 58 U. CHI. L. REV. 187 Fanner Stewart Jr. ‘Berle’s Conception of Shareholder Primacy: A Forgotten Perspective for Reconsideration during the Rise of Finance’ (2010-2011) 34 Seattle University Law Review 1457 Julian Velasco ‘Shareholder ownership and primacy’ (2010)3 University of Illinois Law Review 897

30

Gary Von Stange, Corporate Social Responsibility through Constituency Statutes: Legend or Lie? (1994)11 Hofstra Labor and Employment Law Journal 461 Steven M. H. Wallman ‘The Proper Interpretation of Corporate Constituency Statutes and Formulation of Director Duties’ (1991-1992) 21 Stetson L. Rev. 163

Online journals Milton Friedman, ‘The Social responsibility of Business is to increase its Profits’ New York times Magazine (11.13.1970) < http://www.colorado.edu/studentgroups/libertarians/issues/friedmansoc-resp-business.html> accessed 16/01/2014.

Arthur Levitt Jr. ‘How to boost shareholder democracy’ Wall Street Journal (online edition 01.072008) < http://online.wsj.com/news/articles/SB121486793221017559> accessed 16/01/2014

Working Papers Paul Oyer, Scott Schaefer ‘Why Do Some Firms Give Stock Options To All Employees?: An Empirical Examination of Alternative Theories’ (December 2002) Research Paper accessed 27/06/2013

31

Appendix TABLE - The enforcement of corporate governance models by domestic company laws (Delaware, United Kingdom, France, Germany, Japan) Traditional divide Jurisdiction Directors’ duties 

denomination



Legal provision

Traditionally depicted as shareholder-oriented US (Delaware) UK Fiduciary duties



Owed to

Fiduciary duties

Guth v. Loft, Inc. SA 2nd 503 (Del 1939) enforcing: The Charitable Corporation Sutton (1742) 26 ER 642

France

v

The shareholders Guth v. Loft, SA 21503 Del 1939 Revlon, Inc. v. MacAndrews and Forbes Holding, Inc., 506 A.2d 173 (Del. 1986)

The Charitable Corporation Sutton (1742) 26 ER 642 Section 172 Companies Act 2006

v

The company Foss v Harbottle (1843) 2 Hare 461 ; confirmed later in Percival v Wright [1902] 1 Ch. 421

Traditionally described as stakeholder-oriented Germany

Duty of care and loyalty*

Duty of care and responsibility*

internal and external civil liability mechanisms as the following dispositions suggest it : Art. 1850 Civil Code as well as 225-25, 225-18, 242-6-4 Commercial Code, the 2008 New Economic Regulation Act under article 241-1 to 241-8, 243, 248

§93(1) Aktiengesetz (AktG)

The company

The company §93 AktG

Art. 1850 Civil Code as well as L. 225-25, L. 225-18, L. 242-6-4 Commercial Code

* duties defined a contrario via implementation of internal and external liability mechanisms

Japan

Standard of care of a good manager article 254-3 (Minpo)

Civil

Code

The company Art. 254-3 Civil Code

* Such duties derive from the duty of good faith provided under § 242civil code and §93(1) AktG. The latter states: ‘executive members have to exercise the care of an ordinary and conscientious business leader’.

Right to sue directors for breach of duties: 

Right holders

Shareholders

The company only (until 2006) and shareholders (since the 2006 reform )

The company (represented by its directors, action ut singuli) and Shareholders (collective derivative action, or action ut singuli )

The company (represented by its directors) and the shareholders (only to address loss suffered by the company via external liability mechanism)

The company (represented by its directors) and the shareholders (derivative action)

32

[Right to sue directors for breach of duties]



Legal provisions

[Delaware]

[UK]

[France]

(Derivative actions) Delaware code: S. 3816 and § 327

Foss v. Harbottle (1843) 2 Hare 461 Section 206(5) Companies Act 2006

action ut universi : art. L 242-64° and L225, L. 225-1 of the Commercial Code ; 1843-5 and 1850 of the Civil Code ut singuli : L. 225 to L. 252 of the Commercial Code)

[Germany]

§117(2) AktG

[Japan] 254-3 Civil code Article 847 and following New Company Act 2005 (Shareholders have to hand in a notice to the company for it to sue one of its directors before being allowed to sue the director themselves sixty days after such notice was delivered.) NB: The derivative action was transplanted from US law in 1953 under the same article but was never used until the 1990’s

Right to remove directors  Right holder

Shareholders

Shareholders

Shareholders



Conditions

In ordinary session only, upon majority

Removal of directors at any time and without cause by the majority of shareholders

Removal ‘ad nutum’ (literally: removal upon nodding) Removal of directors at any time without cause or notice by majority of shareholders



Legal provisions

Delaware code §141(k) §211(b) 211(d)

Section 168 and S 303 Companies Act 2006

Art. L. 225-18 and L. 225-105 commercial code

Section 172 Companies Act 2006

2008 New Economic Regulation Act (Loi sur les Nouvelles regulations economiques NRE2008)

Constituency statutes or measures explicitly protective of stakeholders

NB: Removal of directors is limited in Delaware, notably by the fact that shareholders cannot call for a special meeting to remove directors, their removal has to take place at an ordinary session unless otherwise stated in the Charter = board-centric system

Delaware Public Benefit Corporation Statute 2013 Subchapter XV of Title 8 of the Delaware General Corporation Law

Supervisory Board (and shareholders indirectly) The shareholders cannot remove the managing directors directly. They can remove the supervisory board. The Managing board can only be removed by the supervisory board (majority of the three fourth which can be modified by the articles) §§ 103 I AktG (§ 89 AktG)

German Company Law bears traces of constituency oriented provisions dating back to 1884 when dual board or co-determination was already enforced.

Shareholders Directors removable without cause at anytime

Art. 339(1) Companies Act 2005

Whilst in western markets, constituency statutes were blossoming around the 1990’s, Japan experienced a reversal trend. Under the influence of American investments, the law

33

[Constituency statutes or measures explicitly protective of stakeholders]

[Delaware]

Regulation of employee stockoption schemes

26 USC §422: incentive stock options

Section 1166 of the Companies Act 2006

Art. L 225-177 to L 225-186 Commercial Code

§ 192(2) AktG §71(1) n°8 AktG § 221 AktG

Since enforcement of the 1997 Commercial Act codified under art 210-2 Commercial Code

8 Delaware code § 154

Sections 829 to 853 Companies Act 2006 See also the Model Articles and Table A provided by the Act.

Art L. 232 commercial code

The board has a right to retain profits : §254II AktG

Art. 454 Companies Act 2006

8 Delaware code 1953 §291 and following

Insolvency Act 2000

L 622-17-11 commercial code Ordonnance 18/12/2008

German Insolvency Code : (Insolvenzphanverfahren) Reform coming into force : 1/03/2012

Corporate reorganization law 2002

Company’s charter : Articles of association and memorandum of association

Company’s charter : Articles of association and memorandum of association

Corporation Contract (Contrat de société)

Company’s charter (Einführungtext)

Company’s constitution or company’s charter

Delaware code §723

Sections 17 to 38 and Sections 132 (1) (9) Companies Act 2006

Art. 1832 civil code

§28 AktG

Reform of art 8 New Business Promotion Act

Procedure to collect dividends :



Legal requirement

[France]

[Germany]

The enforcement of a twotier board of directors is a strong mechanism protective of constituencies. The dual board became a requirement of the Aktiengesetz in 1937 : §76 (on the role of the managing board Vorstand) §111 (on the role of the supervisory board Aufsichtrat)

Dividends are declared and distributed by the board of directors

Brankruptcy Laws and provisions regarding the paiement order Company’s constitution  Name

[UK]

Dispositions protective of shareholders consistent with a shareholder-centred model or indicating its enforcement by the law Dispositions enforcing a weak protection for shareholders, consistent with a shareholder-centred model but indicating a weak enforcement of the theory Dispositions protective of stakeholers consistent with stakeholder-centred theories or indicating the application by the law of stakeholder theories

[Japan] was reformed to move away from its stakeholder tradition and enforce a more shareholderoriented system, at least on paper. For instance the two-tier board model transplanted from German law was abandoned by the 2002 revision of the Commercial code. In the same way, the 2005 Company Act could be described as an anticonstituency statute.

Dispositions protective of both shareholders and stakeholders Irrelevant

34

35

Suggest Documents