The Sustainable Corporate Objective: Rethinking Directors’ Duties

John Quinn

doi:10.3390/su11236734

Abstract

Traditionally, the purpose of directors’ duties within company law is to ensure that the powers of management given to directors are properly exercised. For instance, instead of using their managerial powers to further their personal interests or for some collateral purpose, directors are under a duty to take decisions which they think will further the company’s interests. In most EU jurisdictions, determining what acting in the company’s interest means is not mandated by law, but is rather left to the subjective business judgement of directors. The discretion allowed by this duty has allowed for, influenced in part by a law and economics approach to company law, the shareholder value norm to become entrenched. This paper argues that the law of directors’ duties should evolve to provide specific guidelines to directors on the question of the corporate objective. It supports existing arguments for a reform of EU company law to include a new duty requiring directors to ensure sustainable value creation. The paper argues that any such duty should be framed objectively and be enforced through public mechanisms rather than a reliance on private actors.

Highlights

The traditional reason for the law’s facilitation of the company is due to the economic benefits it provides
This paper supports a recasting of directors’ duties as advocated by Sjåfjell and Munoz-Torres, who call for a reform of EU company law to include a new duty requiring directors to ensure sustainable value creation [12]
The paper argues that an objective standard, coupled with a mechanism of public enforcement, creates this realistic chance of enforcement, thereby making it more likely to alter the norms of managerial behaviour away from shareholder primacy toward sustainable value creation

Summary

Introduction

The traditional reason for the law’s facilitation of the company is due to the economic benefits it provides. This paper supports a recasting of directors’ duties as advocated by Sjåfjell and Munoz-Torres, who call for a reform of EU company law to include a new duty requiring directors to ensure sustainable value creation [12]. The aim of such reform is to reimagine directors’ duties as a guide for directors to the corporate objective, with that objective being long term sustainable value creation This can only be achieved if a new duty carries with an appropriate legal standard with at least some potential for enforcement. The paper argues that an objective standard, coupled with a mechanism of public enforcement, creates this realistic chance of enforcement, thereby making it more likely to alter the norms of managerial behaviour away from shareholder primacy toward sustainable value creation

The Case for a New Duty

Subjective and Objective Standards in Directors’ Duties

Conclusions