Why Boards Must Look Beyond Shareholders

An effort to refocus corporate priorities and obligations is underway.

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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.

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Topics

Leading Sustainable Organizations

Corporate adoption of sustainable business practices is essential to a strong market environment and an enduring society. What does it mean to become a sustainable business and what steps must leaders take to integrate sustainability into their organization?
See All Articles in This Section

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Comments (4)
Jan Komorowski
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".
Jack Haffey
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 http://www.jackhaffey.blogspot.com 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.
Dr. Riaz Sahi
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.
Leslie Gaines-Ross
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.