The thrall of shareholder value: implications for CSR and directors' duties.(corporate social responsibility )

It is a human tendency to universalise the present moment, to assume things were always thus. Business and investment culture is not immune from this tendency. The present moment is distinctive for its sharp focus upon shareholder interests and share price to the exclusion of other stakeholder interests and measures of corporate performance. The primacy, indeed, exclusivity, accorded shareholder interests is here called 'shareholder value' as shorthand for 'shareholder value maximisation'.

This article argues that shareholder value presently holds business and investment culture in its thrall in a manner and to an extent that is significantly different from that applying only two or three decades ago. Shareholder value powerfully shapes the debate on corporate social responsibility (CSR) that is currently engaging two public inquiries, by the Parliamentary Joint Committee on Corporations and Financial Services and the Corporations and Markets Advisory Committee. The forces contributing to that culture and its impact on the CSR debate are examined in this article.

Shareholder value has negative consequences. It pushes corporations to avoid internalising (that is, bearing) costs of enterprise operations that they are not legally obliged to bear or which might be avoided because of poor enforcement. This arises since corporate law contains structural incentives for the corporation to impose such costs on society or other actors, and penalises in the longer term those corporations that voluntarily internalise them (the problem of social cost). Shareholder value also sits uncomfortably with social expectations with respect to corporate responsibility. Those expectations, and the mismatch with the shareholder value orientation of some corporate decision-makers, were evident in the public response to the decision of the directors of James Hardie Industries NV to refuse to augment the funds available to meet claims against its former asbestos subsidiaries. Those social expectations ultimately prevailed.

Central to each of the current inquiries into CSR is the question whether directors and managers should be obliged, or expressly permitted, to consider non-shareholder interests affected by corporate conduct. The article concludes with some observations on this question in light of shareholder value culture and the problem of social cost.

The dominance of shareholder value

The commonly accepted purpose of corporate activity and measure of corporate performance is the maximisation of shareholder value as expressed in the company's share price. A typical expression is that of the Hampel Committee on corporate governance in the United Kingdom:

 
   [t]he single overriding objective shared by all 
   listed companies, whatever their size or type of 
   business, is the preservation and the greatest 
   practical enhancement over time of their 
   shareholders' investment. The pursuit of this 
   objective might require the company to develop 
   relationships with a number of non-shareholder 
   groups but in doing so they must have regard to 
   the overriding objective just identified. …