Stakeholders incorporated: Can capitalism change if company charters stay the same?

Shareholders, investors and governments are expecting more of companies: that is an undeniable reality. The advent of third-party certification programmes such as B Corps, or classification of companies in accordance with shareholder participation, illustrates the increasing expectation that corporations will work for and together with stakeholders. 

Companies sit on a spectrum of corporate purpose, from Friedman's "shareholder primacy" model to the "stakeholder capital" model, in which a group's mission is to serve not only shareholders but customers, suppliers, workers and communities too. 

That range could be seen clearly during the pandemic, when some companies focused on dividend payments to shareholders while others cut dividends to support staff. 

The question now for governments and civil society is the extent that shareholder primacy will play in legislative development. 

Legal requirements are pushing companies along the spectrum from shareholder primacy, and at present these are focused on large companies with the greatest stakeholder impact. For example, companies in the UK with a premium listing have to explain their fundamental purpose and values under the UK Corporate Governance Code. Under section 172 of the Companies Act, large companies are required to prepare a statement that lists their stakeholders and says how they are taken into account in company decision-making. 

The Better Business Act Campaign advocates the greater promotion of stakeholder interests. It proposes a change to the Companies Act that would legally oblige directors of UK companies to operate in a manner that benefits all stakeholders. This leads to questions such as which group should be prioritised where there is a conflict, and what liability directors have to a group that has not been prioritised. 

Certified B Corporations are legally required to consider the effect of decisions on all stakeholders. The B Corp framework helps companies to protect their mission through funding rounds and leadership changes. It also gives entrepreneurs and directors more flexibility when evaluating potential sale and liquidity options. 

Those establishing a company in the UK can already set up a business where shareholder primacy is not the core purpose. A community interest company (CIC) trades with a social purpose or carries on other activities that benefit the community. CICs have an "asset lock" which means they can only transfer assets to an asset-locked body that is named in the articles. Similar legal corporate forms exist in Belgium (social purpose company), Spain (social initiative cooperative) and Greece (Koi SPEs). 

If new structures push companies away from the purpose of maximising shareholder value, shareholders may have to accept lower returns. They should also recognise that the rights of competing stakeholders may not be aligned with theirs but could be prioritised. 

All of this will change companies' legal liabilities as they decide what is acceptable to the wider stakeholder base. It may also increase the number of groups and individuals they are answerable to and who can bring a claim against them.

White & Case LLP has partnered with the Financial Times on the publication of its Moral Money Forum reports, which explore key issues from the ESG debate. This article has been reproduced with permission from the Financial Times.

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