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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.