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Shareholder primacy in UK corporate law : an exploration of the rationale and evidence

Collison, David and Cross, Stuart and Ferguson, John and Power, David and Stevenson, Lorna (2011) Shareholder primacy in UK corporate law : an exploration of the rationale and evidence. [Report]

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The aim of the research project described in this report was to examine the rationale for the traditional business objective in the UK which is the maximization of shareholder value (MSV). The project included an analysis of relevant aspects of the Company Law Review (CLR) process in the UK which ultimately led to the Companies Act 2006 (CA 2006) and which determined that shareholder primacy would be maintained as a key principle of UK company law. The CLR had raised the central question: ‘in whose interests should companies be run?’ and put forward two alternatives: one based on shareholder primacy, and the other based on balancing the interests of a range of stakeholders. The two alternatives were described as ‘enlightened shareholder value’ and ‘pluralism’. Specific objectives of this research report included a review of the relevant literature; a study of the official documentation issued in connection with the CLR insofar as this related to the question ‘in whose interests should companies be run?’; an examination of contemporaneous views and debate about the CLR process by studying media coverage of the issues; and ascertaining the views of key individuals who carried out the CLR about how the central question of ‘interests’ was considered, and about the evidence that was used as the basis for its recommendations. The main findings of the report are based on interviews held with 15 individuals, most of whom were directly involved in the CLR, as well as evidence from the literature. The CLR was generally seen as a useful tidying up and modernising exercise; it was also widely thought to have been very ably led. But one of the most striking findings from these interviews was the frustration and strength of feeling about the real value of the CLR exercise amongst some of those who were closely involved. Regarding its consideration of the central debate between enlightened shareholder value and pluralism, the CLR was described as a ‘waste of time’ by one Steering Group member who thought that there was never any intention to have a ‘meaningful discussion of the issues’ while another Steering Group member said there was little interest in discussion of principles or ‘the bigger picture’. Other participants took a quite different view: it appeared to the researchers that those who supported the ‘enlightened shareholder value’ outcome were generally content about the quality of the examination which took place, while those who leaned to the ‘pluralist’ view, which was rejected, were very much less so. Having said that, a number of interviewees, even some who were supportive of its outcomes, felt that the breadth of expertise and opinion represented on the Review was rather narrow; and a more critical view was that it was set up to fail. In response to a question about the evidence that was considered as part of the CLR we gathered that the process was ‘less a matter of evidence and more one of debate’ though it was also suggested that the knowledge and experience brought to the Review by the participants meant that evidence was not lacking. However a very specific criticism was the absence of discussion of comparative international evidence. A detailed consideration of differing types of capitalism, including the significance of legal traditions, is a feature of the literature review in this report. A key part of that review is the description of two competing approaches to capitalism which are widely acknowledged. One approach, the Anglo-American, is found in the developed English speaking countries, and is sometimes characterised as ‘stock market capitalism’, in contrast to what may be called ‘social market’ capitalism which can be found, in differing forms, in continental Europe and in Japan. Arguably the central feature which distinguishes these two approaches is the objective which companies pursue. In the Anglo-American countries this is typically MSV, while traditionally in the other group a balance is struck between the interests of different stakeholder groups. Thus the two approaches may be characterised as ‘shareholder value’ and ‘stakeholder’ capitalism respectively, corresponding to the alternatives presented by the CLR. It is also worth noting that, within the literature and in the business media, there have been calls for the ‘shareholder value’ model to be adopted in what have traditionally been ‘stakeholder’ countries; though such arguments have also been strongly challenged. Interviewees were asked about the new wording for directors’ duties introduced by CA 2006. This wording requires directors to ‘promote the success of the company for the benefit of its members’ while having regard to the interests of others. This form of wording is regarded by some as giving more acknowledgment to the interests of stakeholders (other than shareholders) than the wording it replaced. However there is also a view that it does the opposite. Since the old wording referred to ‘the company’ rather than members, the new wording is seen by some as making shareholder primacy more explicit. The wording was summed up as ‘a fudge’ by one of our interviewees. What was made very clear to us was that shareholder primacy was the intended outcome – and this was the unequivocal understanding of all the interviewees. Interviewees were asked whether directors’ duties amounted to a duty to maximise shareholder value and broadly speaking this was agreed. While there were differing views over whether this meant maximising share price in the short term, interviewees from the corporate sector thought that this was exactly what it meant. Some interviewees questioned the importance of the legal wording on directors’ duties and noted that shareholder value rhetoric in the US and UK was a result of pressure from the financial markets rather than legal requirements. But it was also thought that a ‘shareholder primacy legal framework’ readily lent itself to a shareholder value rhetoric whose emphasis on a single financial metric was implicated in the phenomenon of ‘financialisation’, and specifically in high levels of executive remuneration and the financial crisis. In relation to differing forms of capitalism, interviewees did recognise MSV and shareholder primacy as identifying characteristics of Anglo-American capitalism though some interviewees were also quick to point out some differences between the US and UK. Evidence that poorer societal well-being is associated with the Anglo-American model of capitalism was presented to interviewees for their reaction. Such evidence is extensive and shows that a range of health and other “quality of life” indicators are highly correlated with income inequality. Amongst the developed OECD countries higher inequality is associated with countries which have traditionally followed a “shareholder value” rather than a “pluralist” approach to business objectives. In particular, interviewees were asked whether such evidence could be considered relevant to any review of the laws governing corporate conduct. Views varied a great deal; some were skeptical about the evidence and some were not, but most interviewees thought that the evidence merited serious consideration in any future review of the legal framework governing companies.