Although large public companies dominate the world, there is no unanimity as to their objective. Andrew Keay tackles this very important topic with skill and in considerable depth. First, he examines the two most dominant theories, shareholder primacy and stakeholder theory. Unsurprisingly, he finds them falling short and goes on to propose the inelegant but well thought out “Entity Maximisation and Sustainability Model.”
Under his EMS model, directors are to endeavor to increase the overall long-term value of the corporation, while ensuring the corporation survives. While I find the objective rather uninspiring, Keay does an excellent job of building upon, if not extending, the work authors such as Margaret Blair, Lynn Stout and Marjorie Kelly. Keay’s most significant contribution may not be in his uninspiring although important model, but in explaining how EMS can be enforced, an area where stakeholder theory has long fallen short. Although I have my doubts Keay’s vision will be fully embraced anytime soon, his book does more than plants seeds, it points to systematic measureslay the groundwork for what I expect will be a long transition.
The problem with stakehoder theory is that not only is it problematic to balance the interests of various interests, such as shareowners and communities, that balancing becomes the whole purpose of the company. The same could be said for the team production approach. However, like stakeholder theory, concern for the general stability and reputation of the corporation as an institution over maximizing the profits of shareholders is less likely to lead companies embracing EMS to stock buybacks, cutting R&D or laying off long-term knowledgeable employees.
Keay quotes Morey McDaniel’s aphorism, “a right without a remedy is worthless.” He cites the Canada Business Corporations Act that allows a potentially broad range of people to bring proceedings, including members, secured creditors and directors, as well as “any other person who, in the discretion of the court, is a proper person.” Keay argues that while it makes sense to limit derivative actions to shareowners under a shareholder value approach, a much wider category of investors should have the right under EMS. “Investor” for Keay includes anyone with an firm specific investment in the company, such as shareowners, creditors, employees, communities, etc.
Another of several jurisdictions cited is Singapore. Their Companies Act provides that the range of persons who can apply for a derivative action includes “any other person who, in the discretion of the Court, is a proper person.” Looking at the UK, currently a court must refuse permission to continue a derivative action if directors have had their actions ratified by a general meeting of shareowners. “Under what is proposed here, this provision would need to be removed as the shareholders could stymie an application by another investor for permission.”
Accountability is much more enforceable under EMS than under stakeholder theory because “it will only be necessary to establish that the affairs of the company have not been carried out in such a way as to maximise and sustain it.”
That may sound simple but here in the US we have laws that require that shares held by pension or mutual funds have to be voted in the best interest of beneficiaries or fund holders. Mutual funds are required to report out on how they voted but voting practices on various topics vary wildly. (see, for example, voting profiles at ProxyDemocracy.org) I am not aware that anyone has ever been able to successfully bring a suit alleging a breach of fiduciary duty for fund voting behavior. It is hard for me to imagine that investors would fare much better, even if more countries provided the rights Keay seeks. Of course, that is no reason not to seek them. Jurisprudence in this area may take lifetimes to develop, so we’d better get started.
One of the strengths of the book is also a possible weakness. As Keay notes,
what the book has not sought to do is to address the responsibility of companies… The book has endeavored solely to address the objective of the company… objective and responsibility are separate issues, and arguably the latter depends on the former.
Although the book is very methodical in its approach and may provide an underpinning for the transformation of corporate governance guidelines, I question whether or not the model Keay presents is inspiring enough to elicit a call to action that will be taken up by sufficient numbers. Separating objectives from responsibilities may, like separating owners from liability, be at the heart of what got us into the mess we are in.
While Keay does an outstanding job of critiquing shareholder primacy and stakeholder theory, EMS doesn’t appear to be the all encompassing unified theory of corporate governance I was hoping for when I picked up the book. Of course, Andrew Keay’s goals were more modest and what I’m searching for may be an impossible dream.
Keay addresses some of the most important and complex issues of our time and is very creative in developing an innovative and promising theory. Widespread circulation of The Corporate Objective and discussion of the proposed EMS model would certainly move the debate well forward of where we stand today.
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