Corporate Governance

International studies show that while the shareholder primacy model of corporate governance has been tagged in the United States of America, and by inference Australia, as the dominant paradigm, it has never met universal acceptance[1].

The shareholder primacy model is an Orwellian slogan which owes the equation of the “best interest of the shareholders” with “the best interests of the company” to a particular economic cohort arising out of the Chicago School of Economics[2]. In its double-speak characteristics it ranks with “all people are men” and “Australia was discovered by Captain Cook”.

Why it is said to be a priori in the interests of a corporation to distribute a dividend to a shareholder, but not to contribute funds to environmental preservation says more about the political manifesto of the Chicago School movement than it does about corporate governance.

The paradigm’s incorrectness can be unmasked, not only by reference to its lack of universality, but by recognising that a corporation is an emergent phenomenon[3]. A star is not hydrogen; a termite mound is not termites; and a language is not words. A corporation may exist without shareholders entirely[4].

As an emergent phenomenon a corporation must exist in an ecosystem. Shareholding capital may be a dominant feature of many corporations, but it is not only unnecessary for the existence of a corporation, it is insufficient. A corporation without other stakeholders is an undiscovered species. The necessities for a corporation will depend purely upon its environment, its mechanisms to resource itself and what it must provide back to the ecosystem in which it exists in order to continue to do so.

The reasons why consideration of stakeholder interests might go further than shareholders has its origins in the social contract by which shareholders were permitted the privilege of incorporation in the nineteenth century. Salomon v. A. Salomon & Co. Ltd. (1897) AC 22 was the House of Lords decision which confirmed the limited liability of shareholders. At its core, the social contract which permits corporations grants privileges and sets limits on those privileges. The nature and extent of those privileges and immunities is a matter of social governance, but in a civilised world the constituents must seek in most respects to govern themselves. That is one imperative for corporate social responsibility.

The second imperative for corporate social responsibility arises out of the age of economic and international development in which we find ourselves. It encompasses the notion of “sustainability”, and the growing realisation that measures of purely economic growth do not take proper account of economic externalities such as environmental degradation or non-renewal resource exhaustion. The social contract is becoming more sophisticated to the point where society at large will not tolerate corporations appropriating externalities to add to shareholder value without putting something back. The international treaties moving toward addressing carbon contributions to the atmosphere provide a topical illustration.

This is the context in which Corporate Social Responsibility must be viewed for it to become incorporated into a theory of successful corporate governance. It is not charity; it is not waste; it is not art for art’s sake; but a methodology properly directed toward the health and survival of the corporation as a matter of sophisticated judgment in a diverse and changing world.