An effort to refocus corporate priorities and obligations is underway.

Many executives across the globe believe that a company’s board of directors has a fiduciary duty to place shareholders’ interests above all others. However, this view of shareholder primacy is an ideology, not the law.

Our research on the board’s fiduciary duty to shareholders clearly demonstrates that the law in many countries rejects the primacy of shareholder interests.

As a separate legal person, a corporation has two basic objectives: To survive and to thrive. Shareholder value is not the objective of the corporation; it is an outcome of the corporation’s activities. While shareholders entrust their stakes in a corporation to the board of directors, shareholders are just one audience among others that the board may consider when making decisions on behalf of the corporation.

These audiences, typically called stakeholders, may also include other financial stakeholders, such as bondholders, and nonfinancial stakeholders, such as employees, customers, suppliers, and NGOs representing various concerns of civil society. In the face of limited resources, no matter how large the corporation, directors must make choices regarding the significance of the corporation’s many audiences.

Over the past 12 months, we have gathered legal memos provided by leading law firms in 20 countries about the fiduciary duty of board directors in their respective countries. The template for these memos was developed in collaboration with Linklaters, a renowned global law firm. What’s more, we have commitments to produce these memos from law firms in all G20 countries and a number of others. To date, this research has shown — without exception — that the board directors’ primary duty is to the corporation itself as a separate legal person.

In some jurisdictions, most notably the United States, there is “primacy duality” in that the directors’ duty to the separate corporate person is coequal to directors’ duty to shareholders. In no jurisdiction is a duty to shareholders a higher duty than to the corporate person. In some jurisdictions, such as Brazil, fiduciary duty explicitly includes the corporation’s obligations to non-financial stakeholders.

Given that a board may have obligations to multiple stakeholders or audiences, we suggest that a company’s board of directors issue an annual “Statement of Significant Audiences and Materiality” (The Statement), which identifies the company’s significant audiences — and, by implication, those that are not significant. These audiences may include shareholders, bondholders, employees, or NGOs representing a variety of environmental, social, and governance (ESG) issues.

Only a page in length, The Statement enables the board to clearly and concisely communicate which issues are material to which of its audiences, and over what time frame. The benefits are clear for corporate reporting on material issues in financial or integrated reports: If, for example, a board decides that the only significant audience is short-term shareholders, then the only issues that are material are those that affect short-term financial results. Alternatively, a board may decide that the most significant audience is the company’s employees, and that it will cut dividends before approving layoffs.

Given the growing demand for corporate accountability on nonfinancial performance, boards of directors have a compelling reason to start producing Statements — and they are starting to heed that call. The Dutch insurance company Aegon’s management board is the first board of directors to complete a Statement. Their Statement identifies five specific financial and nonfinancial issues and explores how they affect various stakeholders. Through their Statement, Aegon’s board has defined the role of its corporation in society so that all of the company’s stakeholders can determine their own resource commitments to the corporation.

To expand the role of Statements in corporate reporting, we are working with several prominent organizations to build the legal case that boards of directors have a fiduciary obligation to the corporation, not to shareholders alone. These organizations include the UN Global Compact and the American Bar Association’s Sustainable Development Task Force, which wrote the legal memo for the United States and is curating all of these memos on the ABA website. To date, we have memos for Australia, Brazil, China, Chile, Colombia, Denmark, France, Germany, Hungary, India, Italy, New Zealand, Poland, Russia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. This collection of legal memos will continue to be updated on the ABA’s website and freely available to all.

Another group, The Principles for Responsible Investment, is on a parallel initiative regarding fiduciary duty on the investor side. Its soon-to-be-published comprehensive review of law and policy on investors’ fiduciary duty in eight countries argues that failure to take account of ESG issues is a breach of fiduciary duty, e.g., to pension fund trustees.

This compendium of legal memos on directors’ fiduciary duty is only one front in the authors’ campaign to make Statements a common feature of corporate reporting. Others include mobilizing investors to ask company boards to issue The Statement, finding companies who will lead in doing so, and exploring the relationship between the fiduciary duty of company directors and that of fiduciary investors. The goal of this campaign is that, by 2025, the board of directors of every listed company will be issuing an annual Statement of Significant Audiences and Materiality. Annual Statements are a clear and strong way for the board to articulate the company’s role in society, under their duty of care and loyalty to the prosperity of the corporate person.

Editor's Update: In a recent video at the FT Robert G. Eccles further discusses stakeholder obligations and corporate disclosure.

4 Comments On: Why Boards Must Look Beyond Shareholders

  • Leslie Gaines-Ross | September 4, 2015

    The idea behind the Statement is long overdue. It puts pressure on board members to prioritize stakeholders and also recognize who they might be overlooking as important to their reputation and sustainable outlook. I wholeheartedly agree that it is worth a Board’s time to seriously consider its role to society. With Eccles and Youmans efforts, we might finally begin to see how corporations exist to enhance the bottom line AND civil society.

  • Dr. Riaz Sahi | September 22, 2015

    This is my belief that the board members have to understand that they are not only obliged to look after the interests of stockholders, but also see that whatever they are doing is within the moral character which includes social responsibility towards society. They have tremendous power to remove the sufferings of others, and they have to remain morally committed by not letting managers to abuse power. Just having good intentions are not enough, they have to go beyond that to resolve dilemmas of life and business.

  • Jack Haffey | September 23, 2015

    Thanks to the authors, Robert G. Eccles and Tim Youmans, for this article. With them, I believe “shareholders are just one audience among others that the board may consider when making decisions on behalf of the corporation.” I also am not surprised that their research to date “has shown – without exception – that the board of directors’ primary duty is to the corporation itself as a separate legal person.”
    The authors’ suggestion “that a company’s board of directors issue an annual ‘Statement of Significant Audiences and Materiality (The Statement)'” is an excellent one. Their explanation that other efforts are underway addressing the fiduciary duty or obligation – of the board to the corporation and to shareholders and others (?) – is also good to read.
    I suggest that the authors continue this good work, and that achieving transparency – their goal as I understand it – is fine but not enough. They might consider not being agnostic on this matter. The ultimate long term value creation potential of every corporation – indeed of every organization – goes beyond transparency and really goes to the corporation’s reason for existence and the best conceptual and behavioral mindset to achieve this ultimate value level.
    The old “profit, the more the better” mindset should be discarded. It is both sub-optimal and almost criminally narrow. The necessary dominant mindset going forward is explained below and at the link it offers. I invite the authors to read and consider this 21st century dominant mindset proposal.
    So, at please find the June 24, 2015 blog post that explains the formula I offer for the 21st century essential dominant mindset – the mindset that will enable corporations (all organizations) to identify, get to and remain on their long term maximum value creation trajectory. CSR, Sustainability and the other specific means toward this end all fit in this actionable mindset – and this mindset replaces the old, tired and sub-optimizing, dysfunctional “profit, the more the better” mindset of the last 45 + years. Leadership and cultural adjustments are needed, and happiness, with ubiquitous virtues and unalienable rights – and a robust understanding of fiduciary obligations – are all part of this mindset’s elegance. It allows the best of human nature to flourish in the commercial and societal marketplaces.

  • Jan Komorowski | October 6, 2015

    Congratulations for the authors of the article. as the conclusion that “Shareholder primacy is an ideology, not the law,” writen by Harvard Business School’s Robert G. Eccles, which is of fundamental importance for the theory of Economics. In fact, all paradigms are of ideological provenience. We have to recognize a science of economics and ideological character of theories of economics. Than, after that, it is easy to understand a sense of economic doctrines, economic systems and economic ways of thinking, which determines a conventional understanding of rationality. Logic consequences of these categories for economy are presented in my article “Monetarism and the battle with the World Financial Crisis” which will be published in November 2015 in “International Journal of Business Administration”.

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