June 5, 2009
Currently, corporation law does not exist; All that exists is company law, in which business appears as a nexus of contracts between directors and shareholders (corporate governance) and between directors and their employees (labour law), and suppliers and sub-contractors (commercial law). In consequence, the model of governance remains that of shareholder primacy: the business is the property of the shareholder who can use it, benefit from it and abuse it without having to answer to anyone.
This model is in crisis today because it is based on the separation of ownership of and control over the business, which gives management complete authority over its direction. Yet recent financial scandals in France and Europe have shown that directors can free themselves sustainably from this control. The measurestaken to attack this shift (law on financial security in France, Action plan for financial services in Europe, the Sarbanes-Oxley Act in the United States) remain inside the current framework, only reinforcing the control mechanisms of directors.
Only the Share Price Matters
Yet shareholders, being very dispersed, do not really intervene in business strategy. For the most part, firms are “black boxes” so they are content to simply follow the share price. The stock market value, presented as an indicator of shareholder confidence, serves today as a screen against financial policies for directors oriented exclusively towards the satisfaction of their financial interests at the expense of the long term profitability of capital investments of shareholders and the fruits of their employees’ labour.
But this model of shareholder primacy is in crisis today because the long term profitability of investments depends more and more on the management of social risks, social and environmental links to business activity and business’ relation to its environment. A business will be much more efficient in the future if it takes into account, in its strategies and in the missions it sets, the interests of external parties affected by its activities. We call these groups stakeholders. The business’ capital is no longer exclusively that invested by shareholders. Its accumulation and valuation should henceforth result from a partnership between employees, shareholders and external stakeholders. The directors are chosen to balance the interest of all these parties.
A Logic Founded on Cooperation
It is therefore necessary to radically rethink the concept of business itself, to break with the purely proprietary logic and substitute it with one based on cooperation in the sense of a partnership between different competing interests in the total value of a business: shareholders, employees, directors, but also external stakeholders.
From now on, questions of governance will be posed differently. The corporate law must define how different parties are implicated in its definition of objectives and business strategy. Directors’ control mechanisms will be designed more towards internal management, even if regulation is necessary to organize minimal interventions assuring the greatest transparency regarding reporting and access to information for social credit rating agencies.
In the European context, this new corporate law needs to be designed in the framework of the European directive that defines that status of a European Company. Currently, this directive opens the shareholders’ freedom of choice to include both classic structure and a dual structure (Supervisory Board + Board of Directors). But if the issue is to affirm a business model that integrates a decision to move toward sustainable development and corporate social responsibility, the dual structure is preferred. This is because it is the Supervisory Board, where strategy is developed and control over directors is exercised, that allows for the participation of representatives of employees and certain external stakeholders alongside those of shareholders. Beyond this reinforcement of control over directors, this governance structure allows for a better accounting of the strategic character of the relationship between business and its environment. The European Union should therefore encourage businesses to adopt this structure by strengthening the Social and Environmental Responsibility aspects of the directive itself.Author : Challenge for Europe