Shareholder value or societal value: what should corporate boards be looking after?

December 2020 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE

financierworldwide.com

Around the globe, it is more and more accepted that corporate boards, when fulfilling their fiduciary and other duties, should not simply seek to maximise shareholder value or act in the best interest of their companies’ shareholders, but should act in the best interest of all of their respective stakeholders, with a view to the companies’ long-term success.

In continental Europe among other regions, this stakeholder model of corporate governance has long been an integral part of corporate law. As well as local corporate governance rules, the concepts of broad stakeholder governance and sustainable value creation have in recent years been increasingly embraced by corporate boards in the US as well. Through a prominent public declaration to that effect, this was made explicit by the US Business Roundtable in 2019. In addition, prominent New York lawyers like Martin Lipton continue to relentlessly sing the praises of the stakeholder model to American boards, noting that boards do in fact apply that model when confronting today’s urgent environmental and social challenges.

In an October 2020 memo, Mr Lipton and fellow lawyer Kevin Schwartz noted that: “for critics of stakeholder governance, pitting shareholders against other stakeholders offers the misleading allure of an existential conflict, one that requires directors to choose between value for one versus the other. But Delaware law nowhere demands that choice – and opponents of stakeholder governance know it. Indeed, even strict Friedmanist ‘shareholder primacy’ advocates acknowledge, as they must, that directors are fully authorised to use their business judgment to consider the variety of stakeholder interests essential to promoting sustainable success and growth in long-term corporate value.”

That latter description of the stakeholder governance model almost identically tracks the Dutch stakeholder corporate governance model as it has been laid down in the Dutch Civil Code and Corporate Governance Code for many years, and as it has been consistently applied by the Dutch courts.

So far, so good.

However, earlier in the autumn, 25 of the Netherlands’ leading law professors wrote an article, published in the Netherlands’ premier corporate law journal, in which they argue that a new requirement should be added in the Dutch Civil Code, under which executive board members would in future need to ensure that their company acts responsibly in society. Under the proposal, non-executive directors would be required to supervise executives’ responsible behaviour.

This new corporate governance requirement would be based, among other things, on the example laid down in South Africa’s King IV Code. The 25 professors argue that implementing such a requirement in Dutch law is called for because thinking in terms of shareholder value would, according to them, become more and more dominant. We beg to differ. Luckily, some leading Dutch professors, who are not among those 25 authors, as well as a series of prominent corporate executives, also disagree. It remains to be seen, however, what Dutch politics will do with it.

Why is board responsibility toward society such a bad idea, and unnecessary? Let us take a straightforward, bet-the-company type example, as outlined below.

In a series of unsolicited bids for a Dutch publicly traded company, the bidder was successfully rebuffed by the target board. In each instance, the target board rejected the bidder’s approach having weighted the interests of the respective companies’ miscellaneous stakeholders, including the target company’s employees, suppliers, customers, shareholders and other interested parties. On that basis, Teva ended up not acquiring Mylan, América Móvil ended up not acquiring KPN, PPG ended up not acquiring AkzoNobel, and Kraft ended up not acquiring Unilever.

In each of these cases, shareholders made it clear that they would have loved the boards of those companies to talk price with the bidders. The target boards did not do so, however, arguing instead that they had considered all stakeholder interests and concluded that the relevant acquisition was, on balance, not in the interests of all of the company’s stakeholders.

Simply put, Dutch boards generally do, or, at least, profess to, weigh all stakeholder interests at any time – and, it should be noted, not just upon receiving an unsolicited bid for their company.

Adding a further corporate governance requirement to corporate law, to the effect that boards should see to it that their companies are responsible players in society, would simply create more paperwork. Boards would develop – and report on – vague promises, diverting management attention away from what really matters: successfully running a successful company for the benefit of its stakeholders. Only if success for the companies’ stakeholders is achieved, in the long term, will society really be able to benefit from those companies. That said, doing the right thing from an environmental, social and governance point of view will in any case already be necessary for those companies to attract satisfied stakeholders, including shareholders, lenders, employees and customers. Therewith, as noted, under Dutch law, boards currently have a duty to safeguard the long-term interests of their company and all of its stakeholders. Those boards should continue to be allowed (and expected) to focus on that duty.

However, to make things even worse, the 25 Dutch professors also propose to include in the Dutch Civil Code an option for corporations to lay down their ‘corporate purpose’ in the companies’ articles of association. This option, modelled after French law, sounds innocent, but is not. If a company does in fact lay down a corporate purpose in its articles of association, the board would need to report annually on how it pursues that corporate purpose. Essentially, that would mean that the ‘purpose’ of a company would be laid down in a hard-to-amend, inflexible corporate document, and the board would from that moment onwards annually need to demonstrate how it was in fact pursuing that magical ‘purpose’. A more sensible approach might actually see a board, from time to time, discuss with the relevant company’s stakeholders its purpose and how it intends to achieve it (i.e., by entering into actual stakeholder engagement, instead of a paperwork process).

In short, stakeholder governance can deliver great results for a company and society, but a board duty toward society as a whole could end up killing the company.

Alexander J. Kaarls is a partner at Houthoff. He can be contacted on +31 6 5165 9263 or by email: a.kaarls@houthoff.com.

Alexander J. Kaarls

Houthoff