Stakeholder Awareness: a New Look at Corporate Responsibility in the Caribbean Context

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Question (3)

“Stakeholder awareness, which poses a distinct challenge to a one dimensional shareholder-centric management approach, is gradually taking a hold in the jurisdictions of the Commonwealth Caribbean, especially in light of the status being accorded to corporate customers”

Critically discuss this statement.

Title:

Stakeholder Awareness: A New Look at Corporate Responsibility in the Caribbean Context

Submitted to: Mrs. Leslie Walcott

Class: LA 31B – Law of Corporate Management

Introduction

The traditional Contractual paradigm of the corporation as purely private, profit oriented, and individualistic has come under fire as being out of pace with modern realities. The corporation is arguably the most dominant organization of the twentieth century.[1]“By making ordinary business decisions, managers now have more power than most sovereign governments to determine where people live, what work people do, what they eat, drink, and wear, and what kind of society their children will inherit.”[2] The argument is that with such a pervasive role in determining social norms and public policy, companies must redefine their approach to adopt a more pluralist view[3]in decision-making. In short, if the decisions of companiesnow affect the entire society, then society should play a greater part in corporate governance.

Thetraditional one-dimensional shareholder-centric style of management, where the company is obligated only to members, must therefore give way to an approach where the company considers a wider range of interests, including those of all stakeholders. This is the stakeholder approach. A stakeholder, according to Farrar, is anyone who has a legitimate interest “or stake” in the company.[4] This may include shareholders, employees, creditors, suppliers, customers, and the public at large. The stakeholder approach requiresthat companies consider the interests of this wider group when making decisions. The result is conferring on corporations something of a social conscience. Thus, the possibility will exist, horrifying Contractualists, that the interests of stakeholders may trump that of shareholders.

Originally the law frowned on an expanded obligation to this larger group. In Hutton v West Cork Railway Company the court held that “charity has no business to sit at boards of directors.”[5]In Parke v The Daily Newsthe court struck out as ultra viresan action bydirectors to make redundancy payments to displaced employees beyond their legal entitlement.[6]

However, more recently, the stakeholder approach has taken root in the Commonwealth Caribbean, notably in Jamaica and Barbados. The Barbados Companies Act allows suits to be brought against the company from shareholders, debenture holders, former holders of shares or debentures; directors, officers, former directors or officers; and any other person who, in the discretion of the court, is a proper person to make an application.[7] Similar provisions exist in the proposed Jamaica Companies Act of 2004. These provisions move away from the rule in Foss and Harbottle,[8] where the court pronounced that directors owe a duty to the company alone and, in actions against directors, the company alone is the proper plaintiff. Courts have also suggested that creditors may have some legal interest,[9] but that position is still unclear.[10] Further, the Jamaica Companies Act (2004) allows that, in determining what are the best interests of the company, a director or officer mayhave regard to the interests of shareholders and employees and the community in which the company operates.[11] This suggests a social conscience. However, the flexibility in the wording of this provision indicates that the strict Contractual paradigm still prevails in the Caribbean.

That paradigm sees the company as essentially existing to maximize profits and owing an obligation exclusively to shareholders. Thus, any notionof imposing a social conscience on corporationsis seen invariablyas putting a fetter on businessand curtailing the managerial prerogative. If directors are required by law to consider the interests of other persons, outside of shareholders, then that might compromise legitimate business interests and limit its potential growth. Such an approach, in the view of some,signalsa movement towards greater government regulation, the antithesis of a laissez faire economy. Milton Friedman said it reeks of “unadulterated socialism” and “threatens the very foundation of our free society.[12]”

In the end, however, a balance must be struck. Certainly, directors must have the freedom to run the company in the way that they see fit. But, their pervasive influence cannot go unchecked. Proponents of the stakeholder approach argue that the courts may have gone too far in enforcing the principle of separate legal personality in Salomon v Salomon.[13] This therefore is a “one hundred, twenty five year” response to what is arguably “the most extensive legal privilege ever known to our societies.”[14]If directors are not legally liable to groups affected by their decisions, at least they should be mandated to consider the impact these decisions have on persons who claim a legitimate interest.

This contention is not overly intrusive of government if one accepts the notion that corporations are not ends in themselves, but only means to an end. When the legislature created the system of registration to insulate directors from personal liability for the company’s actions, it was not to benefit directors per se, but society on a whole. It was thought that the corporation was a vehicle for social advancement. Today, corporations have benefited tremendously from that protection, at times at the expense of the community. This stakeholder approach is a fair counter that would ensure corporations accept some level of social responsibility, while still preserving their autonomy.

The Case for Increased Corporate Democracy in the Caribbean

The debate for a stakeholder approach to corporate decision making versus a shareholder centric management style essentially involves two competing conceptions of the corporation. The first, according to William Allen, is the corporation as property.[15]This follows the strict Contractual argument, where the corporation is seen as the private property of shareholders and its primary objective is to maximize profits. In this model, directors are considered agents of shareholders and their obligation is exclusively to the company and its owners. Any consideration of other interests, outside those of shareholders, would be regarded as inimical to the company, and directors would be liable for corporate malfeasance.

In Parke v The Daily News, the plaintiff, shareholders of a publishing company, brought an action against the board of directors after the board announced its intention to make redundancy payments to displaced employees beyond their legal entitlement. The court ruled that such ex gratiapayments wereultra viresto the company and ordered an injunction. In the words of Plowman J:

The decision to devote the whole balance of the purchase price to the company’s staff and pensioners… was a decision that was not taken in the interest of shareholders, but was actuated by other motives, predominant among which was a desire to treat employees generously, beyond all entitlements… and that was ultra vires.[16]

This type of corporate altruism, according to proponents of the Contractual approach, is a violation of directors’ duty to shareholders. The property of the company, including assets in excess of expenses, rightly should go to the company or to shareholders in the form of dividends. Any redirection, even forbenevolent reasons, is improper. The court continued in The Daily News case:

If directors consider the interests of others (employees for i.e.), no matter how important they are to the life of the company, in priority to those of the shareholders, they act wrongfully.

There are instances, under this Contractual approach, where corporations are permitted to consider wider interests; but this must be where such considerations further the company’s primary objective of profit maximization. Thus, in Hutton v West Cork Railway Company, Lord Justice Bowen re-iterated the strict Contractual position, stating that: “it is not charity sitting at the board of directors, because… charity has no business to sit at boards of directors.” He went on, however,

There is… a kind of charitable dealing which is for the interest of those who practice it, and to that extent and in that garb (I admit not a very philanthropic garb) charity may sit at the board, but for no other purpose”[17]

This kind of charity, of which Lord Bowen speaks, is where the corporation believes that to advance its own interest, it is necessary to maintain a good public image and thus it would act generously towards other stakeholders. The aim,though, is self-seeking:to advance the interest of shareholders and the company, not to benefit the wider community. Thus, companies routinely give to charity in order to gain tax breaks or for positive publicity.

Proponents of the Contractual approach see the notion of stakeholder rights as repugnant. Professor Milton Friedman describes any deviation from the single-minded pursuit of profit and forcing companies to adopt a social responsibility as “fundamentally subversive” and “pure, unadulterated socialism,” something which could “thoroughly undermine the very foundation of our free society.”[18] He went on “if managements of big corporationsare entitled or worse obliged to consider public or social interests to support good causes and generally act for the public interest, the managerial prerogative is undermined and this will inevitably involve increasing control by government.”

This argument has merit. Corporations, because they represent a pooling of individual resources, are forms of private property and the protection of private property is a fundamental tenet of most advanced democratic societies. Forcing private entities to accept public responsibility seems unsettlingand is contrary to the laissez faire economic paradigm, which shapes Western economic thought. That paradigm argues for limited government involvement; that government should take a hands-off approach to business;and that individuals, guided by self-interest and functioning in a free and competitive market structure are best able to regulate their lives.[19]

Requiring companies to accept a social responsibility would fetter business because it may oblige directors to take decisions which benefit stakeholders, but to the detriment of the company and shareholders. Further, most people invest in corporations because they hope to gain a greater return on their investments. Pushing a social conscience for corporations may prove to be a disincentive to investors primarily concerned with the bottom line.

However, this line of reasoning only works if one sees the corporation as property. Critics of theContractual approach argue that it is too individualistic and private and puts too much emphasis on profit maximization to the exclusion of other ends.[20]If directors take this limited view, they run the risk of jeopardizing the interests of shareholders because of the increasing importance customers and the public at large place on responsible corporate conduct.[21] To these critics, the corporation’s objective is not profit, but rather continued success and part of this success requires that corporations function as good corporate citizens.

The second conception of the corporation is as a social entity. This view argues that corporationsare not solely the private property of shareholders, but rather are social institutions. Thus, “it is not strictly private, but tinged with a public purpose.”[22]That purpose is as a vehicle for social welfare. Yes, the corporation is a collection of individual resources and should be vested with a significant degree of autonomy, but the scope of corporate power is so pervasive that there must be some balance.[23] That balance should not unduly fetter the freedom of managers to run the company in the way they see fit, but it should afford some measure of consideration for the wider interests of those stakeholders affected by corporate decision-making.[24]

This argument is especially important for developing countries in the Caribbean and elsewhere. Without some form of corporate conscience, developing countries will be at the mercy of powerful multi-nationals, guided only by the pursuit of profit. Thus, a shift in paradigm to allow for corporations to accept a social responsibility to the community they serve would be a welcomed advancement in the struggle for so called “third world” development.

The view of corporations as social entities encompasses the idea that corporations are institutions in which many parties participate and are affected, and therefore the decisions made by corporations should involve the interests of all those involved. Essentially this is the stakeholder argument. Thus, the objectives of the corporation would be broadened to include concern for the advancement of all those who have a legitimate interest in its operations: shareholders, creditors, suppliers, customers, and the community.

Bottomley posits his term Corporate Constitutionalism to refer to this more normative framework of corporate governance. He reclassifies the corporation in political terms by focusing on its structure and processes. According to his argument, the corporation is a political entity. He goes on to explain that it is an established principle of political and constitutional theory that persons affected by decisions made by political institutions should be involved in the decision making.

Some argue that the courts went too in enforcing the principle of separate legal personality in Salomon v Salomon.[25] The stakeholder approach therefore is a “one hundred, twenty five year” response to what is arguably “the most extensive legal privilege ever known to our societies.”[26] If directors are not legally liable to groups affected by their decisions, at least they should be mandated to consider the impact these decisions have on persons who claim a legitimate interest.

This contention is not overly intrusive of government if one accepts that business and profit-maximization are not ends, but only means to an end. When the legislature created the system of registration to insulate directors from personally liability for the company’s actions, it was not to benefit directors per se, but society on a whole. It was thought that the corporation was a vehicle for social advancement. Today, corporations have benefited tremendously from that protection, at times to the expense of the community. This stakeholder approach is a fair counter that would ensure corporations accept some level of social responsibility, while still preserving their autonomy.

The stakeholder approach rains to However, with the advent of the limited liability company, which establishes a separate legal personality for the company and shields its directors from personal liability,[27] the need is there to ensure that the actions of directors are not reckless and reflect a view that company does share a responsibility in the community. In the Caribbean, workers and creditors are given greater protection. Creditors are agents of the community.

According to William T. Allen, the Chancellor of the Court of Chancery of Delaware,

S95Barbados states: “A director must have regard to the interest of the Co’s employees in general as well as to the interest of its shareholders.” This provision, the creation of social and political considerations, is reflective of perhaps the stake holder theory (posits

Limited liability – rights of companies – originally entrepreneur risk losing everything, however b/c of limited liability risk of loss removed from individuals; risk now passes to society – society should have rights.

The modern super-corporations it is said, must be expected to rise above ‘the morale of the market place which exhalts a single-minded myopic determination to maximize profits

Debate surrounding corp responsibility to community as whole to responsibility to shareholders w/ sole pursuit of profit maximization (Wedderburn)
The limited liability company by mere registration is the most extensive legal privilege ever known to our societies – modern commerce, industry and commerce largely conducted through this framework.
The modern super-corporations it is said, must be expected to rise above ‘the morale of the market place which exhalts a single-minded myopic determination to maximize profits

Hannigan reports that a balancing act is required: management must not be fettered but neither can unfettered, unsupervised, absolute discretion be permitted. The law's response has been to categoriz directors as fiduciaries and to apply strict fudiciary principles to them which are designed to ensure certain minimum standards of behavior from directors backed by severe penalties in the event of breach. (Hannigan)

An issue much debated in recent years is whether the directors shld be required to adopt a more inclusive approach and consider the interests not just shareholders, employees and creditors, but also broader constituencies such as its suppliers, customers, and the community a large (Hannigan).
The pluralist approach argues that a Co shld be required to serve a wider range of interests not subordinate to, or as a means of achieving, shareholder value, but as valid in their own right, ie the interests of a number of grps shld be advanced without the interests of a single grp (shareholders) being overriding. (under this approach, it is conceivable that stakeholder interest may trump shareholder interest) (Hannigan) The Review found that there were strong philosophical arguments against the pluralist approach on the grounds that: (i) it wldn’t necessarily achieve its objective but wld have the effect of leaving the directors with a broad (largely unpoliced) managerial discretion; (ii) it was unnecessary since, broader interests are included within the range of interests to which directors must have regard currently & it wld suffice simply to clarify the lgl position; (iii) the pluralist approach wld achieve external benefits through Co law which are better served by specific legislation applicable to all businesses (and not just registered companies) on planning, environmental and competition law etc; (iv) there was a risk that the pluralist approach (by diluting the obligation owed to shareholders) wld enable directors to frustrate takeovers against the wishes of the shareholders and so distort the operation of the market for corporate control which is an important accountability mechanism.
More generally, concerns that a pluralist approach wld turn directors away from business decision makers into moral, political and economic arbiters.
Business itself is pragmatic in accepting that failure to acknowledge the broader picture may damage a Co's reputation and shareholder value so there is agreement that the choice is not between enlightened shareholder value or pluralistic approach but rather a link approach.
Reform Proposals: In deciding what wld be most likely to promote the success of the Co, the director must take account in good faith of all the material factors that it is practicable in the circumstances- `the material factors' means the likely consequences (short and long term) of the actions open to the director, and all such other factors as a person of care and skill wld consider relevant, including such of the following matters namely:
Any well-run Co will, in any event and in their own self-interest, foster business relationships, have regard to local communities, maintain high standards of business conduct etc, whether or not such material factors are set out in the statute.
By `stakeholder' we mean those having a legitimate stake in the Co, using that in a broad sense (Farrar).
Ideally, all group on which the company has significant impact should be included if a defensible balance of interest is to be achieved but identifying and facilitating representation for all of them would likely prove impossible.
A stakeholder is an individual or group with a stake in the actions of a corporation (internet)

Section 225 of the Barbados Companies Act Cap 308.