Учебный год 22-23 / Critical Company Law

114 Critical company law

existing mechanism to control corporate managers, concluded that only a strong reassertion of the director’s fiduciary duties to act in the interest of stockholders could prevent managerial abuse. In ‘Corporate powers as powers in trust’15 he set out five areas of corporate power in order to demonstrate that any such powers were, in law, subject to equitable limitations which assured that managerial actions were exercised solely in the interest of stockholders.

In response, Dodds argued that the traditional view, that directors owed a duty to maximise profits for stockholders, was based on assumptions that were no longer true and no longer acceptable to the public and business world alike.16 The first assumption was that the corporation is private property, which Dodds argued has rarely prevailed in business law and ethics and which in the context of large corporations with absent owners and professional managers was entirely inaccurate.17

Business – which is the economic organisation of society – is private property only in a qualified sense, and society may properly demand that it be carried on in such a way as to safeguard the interests of those who deal with it either as employees or consumers even if the proprietary rights of its owners are thereby curtailed.18

The second assumption, that stockholders were the beneficiaries to whom managers as trustees were bound to represent, was likewise inaccurate. He argued that whether one considered the distinct legal personality of a company to emerge because of the legal act of incorporation,19 thus rendering it a legal construct, or whether one considered it to have emerged because of ‘the very nature of things’, in the legal realism tradition, the conclusion was the same. Directors owed a fiduciary duty to act in the interests of the entity, not in the interests of individual stockholders. And what the law construed as the entity was something of a movable feast. The America of the 1930s, he argued, was much more inclined to construe the interest of the entity to be expressed as the interests of employees and consumers as well as stockholders. For example he quotes part of Swope’s20 plan for industry in which

15 Berle, A, ‘Corporate powers as powers in trust’ (1930–31) 44 Harv L Rev 1049. These included the power to issue stock, the power to withhold dividends, the power to acquire stock in another corporation, the power to amend the corporate charter and the power to merge.

16Dodds, M, ‘For whom are managers trustees?’ (1931–32) 45 Harv L Rev 1162.

17Dodds reviews a number of legislative controls that have prevailed over business organisation and the substantial degree of social planning in respect of public utilities.

18Op. cit., Dodds, p 1162.

19A view Dodds calls the traditional view.

20President of the General Electric Company.

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he states that, ‘organised industry should take the lead, recognising its responsibility to its employees, to the public, and to its stockholders.’21 He also refers to a leading business executive statement on a manager’s duty as being first to investors, ensuring that their capital is ‘safe, honestly and wisely used’, second to employees, third to customers and last to the general public. Furthermore, he notes an increased judicial willingness to allow directors to take socially responsible decisions including an acceptance of charitable donations from corporations. Dodds concluded that the prevailing judicial and business view was that ‘those who manage our business corporations should concern themselves with the interests of employees, consumers, and the general public, as well as stockholders’.22

In answer to this, Berle set out the social purpose of pursuing and protecting the legal arguments he articulated in his previous article. He argued that in the absence of a strong administrative body capable of responsibly negotiating the di ering claims against a corporation, the primacy of shareholders’ claims should be fiercely protected. If neither a strong government nor fiduciary duties were in place the result was that ‘management and control become absolute’.23 A system which was based on private ownership, he argued, should protect the interests of private ownership. To do otherwise would be to jeopardise the welfare of ordinary people whose wealth was now that of the passive bond or stockholders, who were entirely dependent on the actions of a handful of managers. To replace a director’s fiduciary duty to stockholders with one which gave directors more discretion (suggested by Dodds as a means to enhance social responsibility), he argued, was to ‘simply hand[ed] over weakly to the present administrators with a pious wish that something nice will come of it all’.24 It would, he argued, create, ‘economic civil war’.

Mr Swope and Mr Young were, he argued, noble exceptions to the rule of self-interested management. Thus he concluded:

With due appreciation of the fact that the appraisal is bitterly unjust to many men in the corporate system [such as those mentioned above] it must be conceded at present, that relatively unbridled scope of management has, to date, brought forward in the main seizure of power without recognition of responsibility – ambition without courage.25

Ultimately, Berle did not believe that it was possible to make capitalism less

21Op. cit., Dodds, p 1155.

22Op. cit., Dodds, p 1156.

23Berle, AA, ‘For whom corporate managers are trustees’ (1931–32) 45 Harv L Rev 1367.

24Ibid, p 1368.

25Ibid, p 1370.

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the labour force had little power to resist),28 the post-war economy had empowered both the state and the working person. This shift in power he attributed to three developments in British society. The first development was that ‘decisive sources and levers of economic power have been transferred from private business to other hands’.29 Public authorities, including nationalised industries, had taken control over much of the economy. Within nationalised industries ‘economic decisions in the basic sector have passed out of the hands of the capitalist class into the hands of a new and largely autonomous class of public industrial managers’.30 As well as being the country’s largest employer, Crosland argued that public authorities wielded a ‘substantially greater power over business decisions even when these remain in private hands’.31 This was because politically, the government had committed itself to orientating fiscal policy to a ect such social measures as full employment. Furthermore, it taxed directly and indirectly to encourage particular production patterns.

The second development was the enhanced political power of the workforce. Economic prosperity and government policy had meant that it was a seller’s market for employees. Trade unions had strengthened and their demands were generally met. The labour force’s security was business’s insecurity. Part of the reason for business’s subordination to its workforce resulted from the third development Crosland identified, that of the ‘psychological revolution within industry and the altered role of profit’.32 Crosland argued that a number of factors had shifted power over business away from the capitalist or share-owning class to specialised non-share-owning managers. The ‘diversity and technical intricacy’ of industry meant a much greater reliance on experts, rather than the merely wealthy, so that ‘scientists and specialised technicians [were] appointed to boards of directors’.33 As well as the emergence of the Berle–Means corporation, Crosland argued that there were additional factors within British society that had undermined the actual and psychological strength of shareholders. Economic growth had increased company size, tax policies made private companies less feasible than large public companies and managers, paid by wages not dividends, had only small incentives to heed the interests of shareholders. Indeed, argued Crosland, they had little need to heed the capitalist class as a whole as their ability to plough back profits into industry (rather than return high dividends to shareholders) meant that companies were much more independent from

28Crosland cites the plight of the Jarrow workers as a potent symbol of capital dominance and governmental compliance.

29Ibid, p 7.

30Ibid, p 11.

31Ibid, p 7.

32Ibid, p 14.

33Ibid, p 15.

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financial institutions than they had been before the war. Furthermore, managers’ personal prestige was not dependent on profitability. Indeed in the post-war socialist climate, it could equally be enhanced ‘by gaining a reputation as a progressive employer, who introduces co-partnership or profit sharing schemes’.34 Buzzwords such as ‘co-operation’, ‘participation’, ‘communication’, ‘democratic leadership’ and ‘permissive management’ littered boardroom discussion.35 Crosland even went as far as to say that the manager ‘longs for the approval of the sociologist’!36 It was a trend in business that continued late into the 1970s, demonstrable in many examples including a CBI Committee which said that a company must be a ‘good citizen in business’,37 or the Institute of Directors stating that directors owed a duty to ‘employees, customers and creditors as well as . . . in some degree to the state’.38 Indeed, it is probably worth mentioning anecdotally, and in order to give a flavour of the time, that the state was the preferred environment in which to pursue professional aspirations, with brighter students pursuing careers in the public sector leaving the less able to take jobs in the second choice private sector.

For Crosland, these shifts in both corporate governance and the economy as a whole meant that British capitalism had undergone a fundamental change which rendered the Marxist arguments in favour of fundamental economic shifts ‘obsolete’. Such theories, he argued, were premised on nineteenthcentury capitalism to which the post-war economy bore no resemblance. Economic power had shifted from both industrial and finance capitalists into the hands of specialised management, employees, trade unions and government. ‘Is this still capitalism?’ he asked. His answer was ‘No’.39

In the basic industries, nationalisation has wholly deprived the capitalist class of its power of decision. But it has been similarly deprived in much of the private sector. The growth of the managerial joint stock corporation has transferred the function of decision making to a largely non-owning class of salaried executives, who su er singularly little interference from the nominal owners. Even this new business class finds its freedom of action limited to an extent which its capitalist predecessors never did – partly from the growth in the role of government but mainly by the growth in the power of labour, stemming generally from the rise in

34Ibid, p 17.

35Ibid, p 19.

36Ibid.

37Quoted in Ireland, P, ‘Toward a less degenerate capitalism? Corporate governance, stakeholding and the company’ (1996) 23 JLS.

38Ibid, quoting CBI Committee, ‘The social responsibilities of the British public company’ (1973) 23 Institute of Directors, Guidelines for Directors, 13.

39Op. cit., Crosland, p 42.

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trade union strength and specifically from the altered conditions of the labour market.40

Ireland argues that the height of the British establishment’s acknowledgement of the ‘end of capitalism’, in the Labour administration of 1974–79, came in the form of the Bullock report.41 Premised on the assumption that shareholders had no practical or moral claim on the activities or loyalties of directors, its main proposal was the equal number of worker and shareholder representatives on the boards of large companies.42 If shareholder-orientated goals need no longer be pursued, then the character of British capitalism could be moulded by the composition and policies of the company board as Crosland had described. The company board could therefore act as a mediator of government policy, imbued with the social goals of a socialist administration. The swift and negative response by industry to the possibility of worker participation on the board heralded the radical societal shift away from Labour’s social democratic policies and to its polar opposite, the neo-liberalism of the 1979 Conservative administration under the leadership of Margaret Thatcher. With this new administration came the abandonment of the corporate governance goals of social corporations and the re-adoption of shareholder primacy goals.

ANTI-ORGANISATIONALISM, NEO-LIBERALISM AND THE FREE MARKET: CORPORATE GOVERNANCE AND SHAREHOLDERS

In England in the 1980s, the economic and political e ects of the previous decade laid the foundation for the emergence of a strong, reconstituted Conservative Party, whose ideology has been subsequently dubbed the New Right or Neo-Liberalism. British society prior to their electoral victory was characterised by internal conflicts and contradictions which can, to a great degree, explain the emergence of this new Conservative Party.43 As Stuart Hall describes, the two primary contradictions in British society were the demands of the market economy and the policy responses of the Labour Government. The British economy, engulfed in recession, placed demands upon the social democratic Labour Party which lost them their political and moral credibility. They could no longer claim to represent working people whilst requiring that same class to conform to the constraints of a capitalist crisis.

40Ibid, p 30.

41Op cit. Ireland on the Report of the Committee of Inquiry on Industrial Democracy, 1977, Cmnd 6706.

42In 1976 the same strategy was adopted in large firms in Germany.

43Hall, S, ‘The politics of Thatcherism’, 1983, London, Lawrence and Wishart, pp 19–30.

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Throughout the 1970s, Callaghan’s Labour Government introduced the harsh monetarist policies advised by the IMF and slashed spending on the welfare state. Later, when these policies were re-adopted by the new Thatcher Government, they were heralded as responsible, innovative and liberating. This suggests that ideology was the dominant feature of successful policy decisions. The Conservatives could adopt the previously unpopular policies of the Labour Government because they expressed them in a di erent way and they did not carry the political baggage of Labourism. Such policies, in the hands of the Labour Government, were seen as treacherous and authoritarian. Labour had represented itself as the party of the working class, and so in order to impose less socialist economic policies it needed to persuade its voters of the unlikely proposition that these policies were ultimately in working people’s interest. A short-term deprivation that would pave the way for long-term prosperity. However, the ideological initiatives to liken the interests of workers to the success of capitalism, characterised by Hall as ‘corporatist

. . . incorporating sections of the working class and unions into the bargain between state, capital and labour’, floundered.44 The problem with this political approach to economic crisis was, argued Hall, Labour’s inability to appear to represent the people it governed. And although Labour had always encompassed di erent political thought from the socialism of Tony Benn to the social democracy of Crosland, its economic policies in this period looked hypocritical.45 The Labour Party appeared to betray the class it represented and they responded by participating in the huge industrial unrest which dominated England in the 1970s.

In this context the New Right and subsequently ‘Thatcherism’ was able to convey the clarity of vision that Labour’s policies could not, argued Hall. They were able to capitalise upon Labour’s political dilemmas by treating popular perceptions of Labour as an authoritarian government as a reality. Ideologically, Thatcherism linked social welfare policies with intrusive antiindividual state activities, neatly disassociating itself from both. According to Hall, the Conservative Party enhanced its popularity by side-stepping the issue of being a party representing a particular class interest and, instead, advanced what he called a ‘people to party’ approach. It represented the nation, while the Labour Party represented class interests. And, in order to represent one class Labour had needed to create an interventionist and controlling state.

The New Right’s populist approach was encapsulated in anti-state rhetoric such as the abolition of the ‘nanny state’ which was said to both encourage scroungers and stifled entrepreneurialism. In the context of interventionist

44Ibid, p 24.

45Ibid, p 26. Hall states that ‘ “Labourism” is not a homogenous political entity but a complex political formation. It is not the expression of the working class “in government”, but the principal means of the political representation of the class.’

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Labour policies, argues Hall, this rhetoric was a covert and highly successful attack on Labour and social democratic politics generally. Importantly, it followed Milton Friedman’s line of connecting personal freedom with a free market. Since the 1950s Friedman had been putting the case for business governed only by the market and not by social policies and had co-founded the Chicago School of Economics based on a neo-liberal economic theory. Friedman received the Nobel Prize in economics in 1976 and created an economic theory, monetarism. However, it took the failure of the left and the project of organisationalism to make his theories part of mainstream thought. The 1980s made him the man of the moment. In 1962 he had argued that only the market produced both economic prosperity and promoted a free society.46 Accordingly, the unencumbered company was a moral imperative and engineering a company’s activities in the interests of employees simply wrong, the actions of a freedom-hating minority. At the time of publication his ideas were mildly eccentric. By the 1980s they were common sense.

Coupled with Friedman’s monetarist economics, the New Right’s rhetoric drew from the classic articulations of liberalism. Intellectuals such as Adam Smith, John Stuart Mill and, in particular, Hayek were drawn upon as masters of common sense for their reasoned antipathy to state intervention and their association of laissez-faire policies with individual liberty and economic progress. Hayek was especially acute on this point, writing, as he was, in the aftermath of fascism. A lone voice in the post-war ‘organisationalism’, Hayek directly associated a thriving dynamic economy with a minimalist state that was underpinned by the rule of law. In contrast, an interventionist government, one which controlled the economy rather than allowing a market of contracting individuals to operate freely was necessarily, he argued, arbitrary and discriminatory. Such a government could not function under a legal system whose rules were, ‘fixed and announced beforehand’, it required flexibility to respond to circumstances as they arose, in a manner that was unencumbered by a priori legislation.47

Hayek argued that legislation passed by an interventionist government was merely the expression of party politics and involved rules with a substantive content, designed to achieve a particular end. Under an interventionist government, individuals could not rely on a known status quo and could not predict the actions of their state. In order to achieve self-expression and economic growth, individuals required a system of pre-set, formal rules to which all, including government, were subject. With such a system individuals could ‘predict actions of the state which may a ect these plans’48 and

46Friedman, M, Capitalism and Freedom, 1962, Chicago: University of Chicago Press.

47Hayek, F, The Road to Serfdom, 1976, London: Routledge, Kegan and Paul. First published 1944.

48Ibid.

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only under these conditions could a free market operate. For Hayek, it was only the rule of law that could prevent government undermining individual property rights and suppressing individual e ort, two key elements of the allegedly entrepreneurial spirit much vaunted in the 1980s.

A society of individuals pursuing their own economic objectives within ‘formal and generalised’ rules gave rise to what Hayek called a ‘spontaneous order’, or what Adam Smith similarly called ‘the invisible hand of the market’. In Law, Legislation and Liberty,49 Hayek expanded his theory on the dynamic character of spontaneous order, justifying it on the basis that as individuals possessed better local information than the state and possessed a self-interest in making use of it, an economy based on individual self-interest, a free market, would be bound to thrive. Individuals possessed the most accurate knowledge of their own circumstances, local resources and potential for growth and profit making. And, unlike the state, it was the individual who had access to the most precise and up-to-date ‘decentralised’ and ‘fragmented’ knowledge, and it was the individual who had the greatest self-interest in making use of this knowledge toward the furtherance of his own enrichment and ultimately the enrichment of society as a whole.

Centralised planning, argued Hayek, stymied the intrinsic power of the individual, disabling him from taking full advantage of his unique position. ‘Hence the familiar fact that the more the state plans, the more di cult planning becomes for the individual.’50 According to Hayek, a planned economy, such as that pursued to a degree under organisationalism, although dressed up as creating the greater human good, in fact encouraged discrimination, and suppressed creativity and freedom, a perspective to which the New Right readily subscribed. Thatcher’s Government drew from this language of liberty and identified its attainment with the restriction and reduction of the machinations of the state.

From this perspective and within the context of this neo-liberal hegenomy, the company would no longer be conceived as a public institution in which managers responded to the policy objectives of central government. In Hayek’s view, even the most benign policy objectives were inherently antiliberal and open to abuse. In a free society, government made no substantial intervention into economic activity. The company as a vehicle for the economy was therefore the concern of private citizens, whose pursuit of wealth would enhance the overall wealth and well-being of society. Shareholders were economic actors, in possession of private property, the share. They were entitled to have the company run in the interests of their private property and no such entitlement should be extended to those without such private property interests, such as employees. Individual private property was central to

49Hayek, FA, Law, Legislation and Liberty, 1979, Chicago: University of Chicago Press.

50Op. cit., Hayek, The Road to Serfdom, p 57.

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the New Right’s attack on post-war welfarism. In an ingenious conjunction of its anti-state welfare ideology and that of individual private property, council houses were sold to their occupants, taken from council control and transformed into the private property of former council house tenants.

Philosophically, the orientation of the rule of law around the protection of private property, maintained by liberal thinkers from Locke to Hayek, is justified on the basis that these individual rights act as a bu er against the intervention of the state. Freedom, formal equality and private property are, for liberals, intrinsically connected by ‘. . . recalling the link . . . between having a property in one’s person and being a free man’.51 It is the freedom of the individual to sell their personal skills and strengths in the market for a price determined by market forces that is the starting point for the ascendance of private property. Thus,

having this most basic right in my own person seems to entail having the most basic of liberal freedoms – contractual liberty, liberty of occupation, association and movement and so on – and it is compromised whenever these freedoms are abridged. The connection between property and the basic liberties is in these cases constitutive and not just instrumental.52

For modern liberal thinkers it is the subservience of private property rights in person and things to the dictates of collectivism and the state that create a situation where ‘we move away from private property to communal or collective institutions, [and] the practical knowledge available to society is diluted or attenuated’.53 Under collectivism, the individual is constrained by the values of others. The result according to Grey is that ‘Communal systems of ownership embody a bias against risk and novelty – a fact which may go far to explain the technological stagnation of the world’s socialist economies’.54

The New Right, therefore, were adverse to the notion that private industry should be constrained by public or non-economic criteria. Interference with the spontaneous order of the market was akin to socialism and all its accompanying evils. Thus, when the Committee to Review the Functioning of Financial Institutions, appointed under the premiership of James Callaghan but published in 1980 under the government of Margaret Thatcher, noted that ‘criticism [of company policy] by small-scale shareholders or by financial journalists constrained as it is by the laws of libel, can frequently be ignored’,55

51Gray, J, Liberalism, 1995, Buckingham: Open University Press, p 58.

52Ibid, p 63.

53Ibid.

54Ibid, p 65.

55Committee to Review the Functioning of Financial Institutions, 1980, p 249.