(4.3.1) V ARIOUS CONSIDERATIONS AND VIEWS

A useful starting point in considering the views of others with regard to the ambit and extent of the duties of directors is Sealy’s contention. He notes,

580 R Baxt, and A Robinson & Hedderwicks, “Directors’ duties and corporate governance”, (1999) Company and Securities Law Journal, 17, 462.

581 HJ Goldschmid (1981), “The governance of the public corporation: internal relationships”, Commentaries on Corporate Structure and Governance – The American Law Institute–American Bar Association Symposiums 1977-78, 168.

582 JH Farrar, “The duties of care of company directors: one or many, delegation and business judgment”, (1999) New Zealand Business Law Quarterly, 5, 204.

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... what goes for employees would probably apply also to the case of any other interest group, such as local residents, customers, and so on. It should be stressed that the issue is not whether any of these

“wider” interests merits recognition and protection, but whether this can be satisfactorily achieved within the framework of company law as we know it, through the conceptual and remedial vehicle of directors’ duties. ⁵⁸³

However, this view may be too narrow, as it would, most likely, not provide interested stakeholders, other than the shareholders themselves, with an opportunity of participating in the decision-making processes at board level, or, perhaps, in representing themselves in a manner that is meaningful to them and to the corporation. It may be necessary to break away from the confines of traditional company law.

Furthermore, Sealy’s statement does not conform to the modern day view in allowing participatory or decision-making roles to all stakeholders in the corporation.

He notes,

(t)o extend directors’ duties so as to embrace the interests of employees and similar groups … is to deny any effective role for the law and the courts. The concept of “duty” ceases to be justiciable, and company law lacks proper enforcement procedures. At best, these enlarged “duties” can only provide directors with a defence against self-centred claims brought by shareholders. ⁵⁸⁴

With regard to the traditional model of the corporation, directors’ duties are perceived entirely in terms of the members, present and future. However, this simple model is inadequate when the interests of the other stakeholders, such as employees, are taken into account. If directors are to be required to have regard to the same, it is then no longer appropriate to regard the membership (shareholders) alone as the constituent body and to entrust it with an unfettered power to do as it pleases. Thus, it can be argued that, in this way, objective criteria ought to be used to measure the directors’ standards of care and skill, since these “new” stakeholders have had no say whatsoever in appointing them to office.

It is also argued that the position of shareholders is not “inherently special” and therefore the company should not only be run to maximise shareholder profits. There are three classes of stakeholders: shareholders, parties who contract with the company and parties who have a non-contractual nexus with the company (see part

583 Sealy, above n 509, 173.

584 Ibid 187.

2.8). All stakeholders (whether they have some contractual interests in the company or not) are, therefore, entitled to complain if the company has failed to deliver (see chapters 2,3 and 4). Stakeholders with contractual interests would include employees, customers, suppliers, business partners, subcontractors and creditors (see part 6.5.3). Stakeholders with usually no contractual interests would include neighbours, local authorities and communities and the government (see part 6.3.3).

Furthermore, an independent, non-executive director, who is not a representative of a major share owner or nominated by such share owner and is not a professional advisor or significant supplier or customer to the company or its group, has no significant contractual relationship with the company or group and is free from any business or other relationship that could materially interfere with his or her capacity to act in an independent manner (see part 6.5.2).

Nowhere is there an explicit promise to maximise shareholder profits. Furthermore, this promise cannot be implied from shareholders property rights. All that can be said is that there is a promise to run the business in accordance with certain objectives, which were established at such time when the shareholders invested. The traditional models currently in use do not provide compelling justification for the adoption of a rule of shareholder primacy. Thus,

it seems there is no such rule and nor should there be. ⁵⁸⁵

Sealy does concede, however, that there is a sound argument by some that, for the future, it will be necessary

for the law to conceptualise “the company” not as the corporate membership but as the corporate enterprise, … to formulat(e) new rules of director’ duties … where interests other than purely membership interests are affected. … Such an approach would … more accurately reflect the modern director’ own attitudes: … they are conscious that their company has shareholders, but they are … aware that it has customers, a workforce, goodwill, a product, a brand-name and logo, possibly even a company flag and anthem. ⁵⁸⁶

Sealy, however, notes unconvincingly that this duty, which is formulated, raises a justiciable issue. That is, where duties are owed to stakeholders who have potentially opposed interests, the duty “bifurcates and fragments” and becomes only a vague obligation to be fair, which then becomes non-justiciable. Thus, argues Sealy, it is impossible to impose co-existing duties towards all of the stakeholders in any

585 S Worthington, “Shares and shareholders: property, power and entitlement (Part 2)”, (2001) The Company Lawyer, 22 (10), 311.

586 Sealy, above n 509, 174.

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situation of conflict. If legislation does this, it would then abandon all control over the decision-maker. ⁵⁸⁷

However, in Ngurli Ltd v McCann it was noted,

the powers conferred on shareholders in general meeting on directors by the articles of association of companies can be exceeded although there is a literal compliance with their terms. ... Voting powers conferred on shareholders and powers conferred on directors ... must be used bona fide for the benefit of the company as a whole. ⁵⁸⁸

Sealy refers to the meaning of “the company as a whole” and notes that the phrase has an elusive meaning. Some commentators believe that it should include all stakeholders, including the shareholders, employees and creditors. The better view, notes Sealy, is to say that it could “mean different things in different contexts”, provided that the company is regarded as a commercial entity. ⁵⁸⁹

Modern corporations must, however, acknowledge that it should and does have obligations of social responsibility. That is, times have changed and therefore the interests of employees and of other interested stakeholders must be furthered by amendments to company and labour legislation in terms of which the fiduciary duties of directors in respect of these groups are placed alongside (and with equal enforcement) to those duties shown to the shareholders. Hence, there is a demand for a shift in emphasis in order that company and labour legislation can address the day-to-day problems of employees in the employment relationship, including the interests of other stakeholders, rather than exclusively concerning itself with traditional legal concepts and institutions. Thus, although the corporate entity has been used more and more in most economies, company law has, to some degree, remained fixed in the nineteenth century. Thus, any “new” company and labour legislation that comes into existence must permit directors to act in such a manner that the corporation’s interests are equally directed towards a consideration of its employee’s interests and the interests of other stakeholders.

Furthermore, Venter notes that in England, prior to the enactment of section 309 of the English Companies Act of 1985, which was referred to in chapter 2 of this thesis, the interests of employees could only be taken into account by the directors of a

587 Ibid 173.

588 Sealy, “’Bona fides’ and ‘proper purposes’ in corporate decisions”, (1989) Monash University Law Review Vol. 15 264, 267. See also Ngurli Ltd v McCann (1953) 90 CLR 438.

589 Ibid 269.

company insofar as a decision in this regard would contribute towards the profit-making goals of the company. ⁵⁹⁰ Thus, Bowen LJ in Hutton v West Cork Railway Co notes,

(t)he law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company. Charity has no business to sit at boards of directors qua charity. There is, however, a kind of charitable dealing, which is for the interest of those who practice it, and to that extent and in that garb (I admit a not very philanthropic garb) charity may sit at the board, but for no other purpose. ⁵⁹¹

However, Venter notes that in relation to the rights and interests of the employees, directors are under a duty to comply with the objects of the company, in a way that is not ultra vires. ⁵⁹² Thus, directors, in reaching their decisions, should take into account the interests of employees without acting ultra vires. Therefore, a company can no longer be viewed as one that only maximises shareholder profits. It should be regarded rather as an entity in terms of which the shareholders are the “providers of capital” and the “employees the providers of labour”. ⁵⁹³ Consequently, company law can no longer ignore the interests and rights of employees. If this view were adopted, South African company legislation would then become “legitimized” through the recognition of the rights and interests of employees. This is important in the transitional period, which South Africa is currently going through. Employees would then play a significant role in determining their futures, which would lessen any impacts in respect of the “social, political and economic future” of South Africa. Thus,

(l)awyers cannot continue wearing blinkers in their application of laws, which have become unsuited and are unable to cope with the realities of current corporate life. ... If one assumes that a remedy ought to lie where there is a legitimate interest of the employee and, which is worthy of protection, then company law ought to recognise, not necessarily that directors owe a duty to employees, but that the employees have a legitimate interest in enforcing the duty owed by directors to the company to act in the interests of the company as a whole. ⁵⁹⁴

Likewise, Botha argues for the need for corporations to take into account the rights and interests of the non-shareholder constituents and to develop and implement social responsibility concepts. ⁵⁹⁵ Thus, Botha notes that there is “a continuum”,

590 Venter, above n 357, 41.

591 Ibid 42. See also Bowen LJ in Hutton v West Cork Railway Co. (1883) 23 Ch. 654 at 673.

592 Ibid 44

593 Ibid 45.

594 Ibid 64.

595 D Botha, “The changing business in South Africa: some comments on developments in the scope and control of the social responsibility of business in South Africa”, (1994) South African Mercantile Law Journal Vol. 6, 90.

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which stretches from a broad to a strict interpretation. The groups at either end of this continuum are the “social reformers” and the “free-market proponents”. Social reformers extend the responsibility of business to include social responsibility. ⁵⁹⁶ Thus, the company accepts social values, which places constraints on behaviour and thus guides directors towards “socially-responsible directions”. Free-market proponents, however, focus solely upon the maximisation of profits for shareholders.

Levitt, however, notes that welfare and society are not the company’s business.

Thus, its business was to “make money, not sweet music”. ⁵⁹⁷

Furthermore, Friedman notes that it is not for a business to

rectify social ills, which burden a society. ... A doctrine of social responsibility subverts the ends of a free society: it is the objective of company officials to make as much money as possible for their shareholders - these officials have no authority to spend shareholders’ money on projects, which the officials deem to satisfy socially-responsible needs. ⁵⁹⁸

However, Botha notes that the South African corporate economy is shifting along the continuum fairly rapidly from a “mixed economy” at the free-market end to social reformation, as companies and stakeholders focus upon societal issues. ⁵⁹⁹

Although the South African corporate-management strategy had once been determined essentially by the primary profit-making function of maximising shareholders’ wealth, with the recent repeal of repressive laws, which formed the cornerstone of apartheid policy, the socio-political goals of corporations will surface and will result in a form of legal ideology characteristic of a social democracy. ⁶⁰⁰ In addition, “future corporate philosophy” in South Africa will be influenced by the implementation of programmes of “social responsibility”. If the two main objectives of improving the economy and social welfare are to succeed, both the government and the private sector need to be aware of their responsibilities towards the community.

Changes in socio-political attitudes in South Africa have allowed pressure groups to expect changes from corporations. These changes reflect a significant responsibility towards its employees and the community. Additionally, investment programmes

596 Ibid 91.

597 Ibid 91. See also T Levitt, “The dangers of social responsibility” in T Beauchamp & N Bowie (1983), Ethical Theory and Business, 2^nd edn, 91.

598 Ibid 91, referring to M Friedman, Capitalism and Freedom, 1962, at 133.

599 Ibid 91.

600 Ibid 92.

have been launched, which do not necessarily focus upon maximising shareholders’

wealth, but instead upon the “secondary, socio-economic goal”. ⁶⁰¹ Thus, the political structures in South Africa in the future will need to have significant economic dimensions - a change from the primary goal of corporations to maximise shareholder’s wealth to one that includes a much higher level of corporate social and community responsibility.

It should also be remembered that many shareholders do not regard themselves as charity organisations - they want good returns on their investments. If a corporation is heavily engaged in providing facilities for communities in order to demonstrate to the world their social responsibilities and the corporation is seen to be doing this at the expense of the shareholders, there will be little reason for many shareholders to invest their hard-earned monies within that organisation. In this regard, a vital balance needs to be struck in terms of which the shareholders’ interests are well looked after, but, at the same time, the corporation is assisting its communities and the environment (and perhaps the country itself) in a socially meaningful and significant manner.