Enlightened Shareholder Value Research Articles

“Director's Duty to Promote the Success of the Company”: Should Hong Kong Implement a Similar Provision?

Section 172 of the UK Companies Act 2006 is arguably one of the most controversial provisions that has been introduced into the company law of the UK. It incorporates the concept of enlightened shareholder value, together with a list of non-exhaustive factors that directors ought to take into account in promoting the success of the company. The discussion focuses on a recent review undertaken by the Hong Kong Standing Committee on Company Law Reform (SCCLR) as to whether Hong Kong should follow the UK by incorporating a similar provision to section 172 of the Companies Act 2006 in its Companies Bill. Contrary to the SCCLR recommendation, the primary conclusion drawn is that it makes commercial sense for a similar provision to be introduced in Hong Kong. A careful examination of section 172 of the Companies Act 2006 shows that it simply reflects existing law and modern business practices. Therefore, the purpose of implementing such duty on directors does no more than reinstate the practical reality.

Moving Towards Stakeholderism? Constituency Statutes, Enlightened Shareholder Value and All That: Much Ado About Little?

While Anglo-American jurisdictions have seen shareholder primacy dominate as the theory which provides what the objective of the large public company is to be, there are indications in the past 20 years that the stakeholder theory, the other leading theory that addresses the objective of the company, has become increasingly popular in many Anglo-American jurisdictions, and there is some suggestion that this approach is developing support in academic and practitioner circles. A number of factors have been identified to support this view and are adverted to in the paper. This paper focuses on legal developments in Anglo-American jurisdictions (and particularly the US and UK) to assess whether there is a movement in these jurisdictions to more of a stakeholder approach as far as its corporate governance is concerned. To this end the paper examines so-called constituency statutes in the US and their impact, and the concept of enlightened shareholder value as it has been developed in the UK (under the Companies Act 2006), as well as referring briefly to developments in Canada and Australia. The paper concludes that the pieces of legislation examined in the paper only appear to provide greater stakeholder focus and they really add, from a strict legal viewpoint, little in a drive towards stakeholderism. This is due to a number of reasons but a major one is the lack of power in stakeholders to challenge directorial actions in the courts or in any other way.

The bank directors' duties: time for the new enlightenment?

In the aftermath of the recent banking crisis, much of the debate on how to secure future financial stability has focused on forms of bespoke banking regulation and corporate governance. This article, however, considers the potential effect on the directors of banks of the newly codified duties under the Companies Act 2006. In particular it studies S.172 – the duty to promote the success of the company – and the impact of 'Enlightened Shareholder Value' (ESV). It questions the enforceability of this new provision and suggests ways it could be reinforced to have a greater influence over the banking industry.

CORPORATE SOCIAL RESPONSIBILITY AND THE COMPANIES ACT 2006

The Companies Act 2006 enshrines in law the concept of ‘enlightened shareholder value’, a form of corporate social responsibility, in place of a director's traditional common law duty of loyalty. This article demonstrates that the conceptual foundations of the enlightened shareholder value approach are flawed, resulting in a confusing compromise, with potentially damaging efficiency consequences.

Shareholder Primacy in Corporate Law: Can it Survive? Should it Survive?

The dominant theory in Anglo-American jurisdictions as far as determining the objective of large public companies, has been, and still appears to be, the shareholder primacy theory. Nevertheless, it would seem that in the past 20 years the stakeholder theory has become increasingly popular in many Anglo-American jurisdictions. Some scholars point to the advent of enlightened shareholder value in corporate legislation in the UK as an indication that the UK might be moving to a more stakeholder approach to the management of companies. Other scholars have noted that financial innovation in the commercial world means that shareholder primacy is problematic, and still others point out that contracts drafted by creditors of the company frequently restrict the implementation of shareholder primacy. With this in mind, this paper seeks to deal with two questions. First, can shareholder primacy survive under various challenges? Second, should it survive in any event? The paper seeks to address those questions by analysing the arguments supporting shareholder primacy and assessing whether these arguments are strong enough and provide sufficient justification for the theory to withstand the present and future challenges to it. The analysis is undertaken not only from a legal perspective, but also from finance, economics, ethics and organisational behaviour perspectives.

Legal Practitioners, Enlightened Shareholder Value and the Shaping of Corporate Governance

This article examines lawyers' responses to the Companies Act 2006, section 172, which controversially introduces the concept of enlightened shareholder value into the law of the UK, together with a non-exhaustive list of factors that directors must take into account when making decisions. It argues that, in the absence of judicial precedent on the meaning of section 172, uncertainty regarding its requirements and fears of derivative litigation, advisers' interpretations of section 172's requirements are likely to be influential in shaping directors' and shareholders' responses to the law. The article considers the impact lawyers' advice may have on the decision making of boards and the willingness of shareholders to bring derivative actions for breach of the section, and assesses the corporate governance implications of these findings. It concludes that, while shareholders' lawyers are likely to discourage derivative litigation, lawyers' advice may well result in more boards adopting an enlightened shareholder value approach.

The evolution of directors duties: bridging the divide between corporate governance and corporate social responsibility

However challenging the prospects, there are growing indications of large corporations taking their social and environmental responsibilities more seriously, and of these issues becoming more critical in the business agenda. The substance of company reports is changing, from purely environmental reporting up until 1999, to sustainability reporting (social, environmental and economic), which has become the mainstream approach of global companies. Though some of the expressed concern may be part of the discourse of political correctness, there does appear to be a significant shifting of opinion among executives. At the confluence of these multiple emerging initiatives and trends towards greater corporate social and environmental responsibility, there is emerging a dynamic stakeholder model for driving enlightened shareholder value (or more expansively, stakeholder values). This article examines how the duty to promote the success of the company offers legal encouragement to pursue responsible strategies on the part of directors and managers, and how legal and moral liability is converging. Similarly, the effect of the modern prudent investor rule is that institutional investor decision-makers are given latitude to follow a wide range of diversified investment strategies, provided their choice of investments is rational and economically defensible, they may sustain a portfolio balanced by environmental, social and governance criteria.

After the OFR: Can UK Shareholder Value Still Be Enlightened?

This article examines the likely impact of the United Kingdom's Company Law Review (CLR) on its system of corporate governance. The CLR recommended that company law should be amended to require companies to pursue ‘enlightened shareholder value’. This would be ensured primarily through a requirement on listed companies to produce an Operating and Financial Review (OFR). The OFR was introduced into law but was recently unexpectedly abolished by the Chancellor. The article examines the theoretical approach taken to corporate governance by the CLR and the way in which the OFR was expected to affect corporate governance. It then asks whether shareholder value would in fact have been enlightened by the OFR, given the institutional context in which it would have operated. While there are considerable grounds for scepticism about whether the OFR would have worked as the CLR expected, it is unfortunate that it was withdrawn because it was an important experiment in disclosure of qualitative information about intangible assets. The article concludes with some thoughts about whether shareholder value could still be enlightened in the absence of a mandatory OFR.

From Industrial Relations to Investor Relations? Persistence and Change in Japanese Corporate Governance, Employment Practices and Industrial Relations

The international drift towards corporate governance reform changed into a higher gear in the latter half of the 1990s. As the process of corporate governance reform unfolded, it brought into sharp relief contrasts between three different models of corporate governance: the classical model, the enlightened shareholder value model and the pluralist model.The corporate governance reforms envisaged by the Keizai Doy0kai and Nikkeiren employers' associations can be classified under the pluralist model. However, the findings of an extensive questionnaire survey conducted on executive managers of large firms suggest that the enlightened shareholder value model seems to be supported by one out of every three executive managers in Japan. Spurred by reforms of the Commercial Code and other laws relating to corporate governance, major firms are increasingly looking to establish a system of consolidated management encompassing the entire corporate group, with emphasis on maximizing capital efficiency.Taking place in parallel with this development are changes in employment practices. Although long-term stable employment practices are not likely to be changed drastically in the foreseeable future, it is highly likely that the seniority system will be further eroded, wage differentials will widen, terms of employment and working conditions will become individual-specific, and remuneration systems will be diversified. However, labour unions are failing to find ways of coping with these prospects, and are continuing to lose influence.