A recent article published in the January 30, 2017 Law Times “Time to End Shareholder Primacy” by Mr. Warren Ragoonanan, caught my attention and I have been thinking about it since.
This blog represents my thoughts and concerns on the article and the Supreme Court of Canada case of BCE Inc. v. 1976 Debentureholders (2008) 3. S.C.R. 560 referenced in the article.
The Law Times article is a well written summary of how the concept of shareholder primacy came to dominate the legal understanding of the duties of directors for a corporation.
The author correctly identifies that shareholder primacy is the paradigm that all corporations exist solely to maximize shareholder wealth.
In examining the fiduciary duties of directors, the author goes on to state that the shareholder primacy paradigm results in these duties being interpreted in way that equates the corporation’s best interest with the shareholder’s best interest.
The author then describes why this paradigm “has terrible consequences”. The terrible consequences seem to fall under social and environmental impacts of decisions being disregarded by directors.
In advocating for a managerialist view or corporate social responsibility model for directors’ duties, the author states:
“…if we want to, we can abandon shareholder primacy for another paradigm better suited to today’s challenges”
“The fundamental problem with the shareholder primacy approach is…to address the issues facing business today – diversity, climate change, living wages, international business and human rights – there is nowhere to begin.”
Citing BCE Inc., where the Supreme Court of Canada stated that “directors can look to the interests of “…inter alia, shareholders, employees, creditors, consumers, governments, and the environment to inform their decisions”, the author of the Law Times article expresses apparent relief that the Supreme Court of Canada allows directors everywhere to factor in interests outside of the shareholder class.
I must confess that it was on reading the Mr. Ragoonanan’s thesis that I found myself somewhat shocked.
If it is not clearly obvious, the problem with the thesis and potentially the Supreme Court of Canada’s decision in BCE is that they seem to disregard what may happen when a corporation or its board of directors make an explicit declaration to international capital markets that they will not guide their decision-making with regard to shareholder primacy.
The reason the shareholder primacy model has arisen to such prominence in the business and legal world as a guiding paradigm for directors’ duties, to a great extent, has to do with the increasing efficiency of capital markets. With traditional barriers to the timely movement of capital decreasing with each generation, the ability of an informed investor to move capital to places of safety or highest return greatly increases.
Interestingly the initial debates around shareholder primacy vs. corporate social responsibility arose in or around 1932, at the time of increasing regulation and modernization of the capital markets.
With greater efficiency comes the prospect that the capital or shareholder class, will locate their investment decisions where their interests (and preservation and growth of their investment) are most respected.
While a corporation and its board may wish to signal its social virtues to the marketplace or a particular segment of the marketplace like consumers or government (ie. that they are placing a higher priority on interests other than that of the shareholders) they must do so carefully recognizing the corollary statement that is then made to the marketplace and the shareholder class.
In efficient markets, capital can move quickly and effortlessly to where it will be safest and see the highest return.
Why would a shareholder motivated solely by protection and growth of its capital investment continue to place its investment with a company that has identified its concerns and duties as more closely aligned with concepts of climate change, or even government interests (as is invited by the Supreme Court in BCE), than that of the shareholders who actually own the venture and have provided the capital to allow the venture to go forth?
While it could very well be that ancillary interests like climate change and government interests could align with the interests of the shareholder class over the short or long term, any effort to place those duties above or primary to that of shareholders would seem to be socialist folly.
Savvy investors would do well to monitor the marketplace and investigate boards of directors of corporations to assess whether shareholder primacy motivates the decision-makers on the board, or whether the board has developed an attraction to social interests beyond capital return.
While the judges of the Supreme Court of Canada in BCE Inc., do invite directors to consider extraneous social interests beyond shareholders, thankfully for capitalists everywhere, the BCE Inc., decision does not prohibit a board of directors from continuing to align the best interests of the corporation with the interests of shareholders above all others.