The Impact of the Regulatory Environment on the Definition of the Best Interests of the Corporation

Abstract

The enlarged definition of directors’ duty of loyalty is often presented as one of the pillars of the legal architecture of corporate social responsibility. As opposed to an exclusive orientation of directors’ duty of loyalty toward shareholders, an enlarged definition of the duty of loyalty would allow for the consideration of the interests of stakeholders other than shareholders in determining the best interests of the corporation. However, will an enlarged definition of corporate directors’ fiduciary duty really bring about the demise of the traditional model in which primacy was given to shareholders and replace it with a more socially responsible model in which primacy is given to the interests of the community and the various stakeholders of the firm? This article argues that the true impact of an enlarged definition of the duty of loyalty cannot be assessed without taking into account the whole regulatory environment surrounding the corporation. What needs to be considered, in particular, is the resulting effect of the three types of control that shape the definition corporate directors are likely to give to the best interests of the corporation: legal control, market control and the control of non-legally enforced norms. The focus on control leads us to look closely at the state of the underlying mechanisms of control, be they legal, market or non-legal, the identity of the actors that use them, and the heterogeneity of the corporate models and objectives supported within each type of control. The impact of these three types of control must be taken into account whenattempting to assess which interpretation of the duty of loyalty will likely prevail. The picture that emerges from this study is one in which the dominant orientation of the corporation is more in line with an institutional model that grants primacy to the interests of the corporation itself rather than to community interests, but in which the strong influence of shareholders through legal and market control mechanisms ensures that some primacy will be given to shareholders’ interests when directors seek to establish which course of action would be in the best interests of the corporation.