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Published: Fri, 02 Feb 2018

Whose interests should board of directors promote

Question 2.

“…the company, as an artificial person, can have no interests separate from the interests of those who are associated with it, whether as shareholders, creditors, employers, suppliers, customers or in some other way. So, the crucial question is, when we refer to the company, to the interests of which of those sets of natural persons are we referring? Of course, one could take the view that the beauty of referring to the interests of the company, without any further specification of what is meant, is that the answer to my question is left wholly ambiguous and obscure.” (Professor Paul Davies in the lecture at Melbourne University, 0ctober 2005)

Whose interests do you think the company serves and why? Critically discuss.


Amongst the interests of all the players and constituencies of a company, whose interests should the board of directors promote? There are basically two distinguished conventional corporate governance systems dealing with the competing interests. The shareholder theory emphases on profit maximization in the interest of shareholders, whereas the stakeholder model argues that multiple interests of corporate stakeholders such as creditors, employees and customers should be taken into consideration during decision-making process. However, I opine that these two models representing two extreme values are not conclusive. Rather the “enlightened shareholder value” approach provides a more comprehensive analysis on the issue by comprising interests of both shareholder and stakeholder.

Relying on the three corporate governance approaches, this essay aims to examine whose interests a company serves and to argue that the modern companies should be accountable to both internal and external players, but eventually running for the benefit of the shareholders

This essay is divided into four parts. Part 1 discusses the “company’s interest” in relation to Professor Paul Davies’ statement. Part 2 illustrates the traditional shareholder theory with reference to the common law. Part 3 analyzes different stakeholders interests under the stakeholders model. Part 4 evaluates “enlightened shareholder value” approach.

Part 1. What is “company’s interests”?

Lord Greene in Re Smith & Fawcett [1] set out a common law duty that directors must act in the company’s interests in exercising their discretion, but what is “company’s interests”? Many argue that although a company is a legal entity generating something akin to a real personality with real interests at law, it is no more than a lifeless entity in reality. [2] Nourse LJ in Brady v Brady pointed out that “the interests of a company, an artificial person, cannot be distinguished from the interests of the persons who are interested in it.” [3] Accordingly, the separation of company’s interests and the interests of its human players is a myth, it is suggested, rather than a fact. It is more accurate to argue that “a company” may be viewed as “a collection of individuals whose participation in the corporate entity is most typically for the promotion of their own individual self-interests” [4] and the term “company’s interests” may be construed as a comprisal of all those individual’s interests.

Regarding Professor Paul Davies’ statement about company’s interests, his observation that the answer to his question “… to the interests of which of those sets of natural persons are we referring?” is ambiguous somehow mirrors the fact that the interests of company embrace a wide range of interests but not limited to those of the shareholders or the owners. It may be broad enough to include the stakeholders whose livelihood depends on the operation of the corporate entity.

Part 2. The shareholder theory

The shareholder theory asserts that the directors of a company, working adhere to the delegated decision-making authority, should manage the company “for sole purpose of maximizing shareholders’ interests” [5] , which simply means promoting the company’s success by maximizing the returns on shareholders’ investments. Therefore, acting in “company’s interests” is to conduct the business in the way that promotes shareholder value. [6] 

One underlying nature of English company law, which has been incorporated into Hong Kong common law, is to govern the agency relationships, in particular between shareholders and directors. It is quite obvious from the precedents of English case law that a company is established for the interests of the shareholders in the sense that the directors are under a fiduciary duty to act in the interests of the company, and the interests of company usually equal to those of the shareholders. In Greenhalgh v Arderne Cinemas Ltd [7] , Lord Evershed refers “the company as a whole” to “cooperators”, by which the shareholders’ interests should be a top priority. The Court of Appeal in Heron International v Lord Grade [8] , where directors were responsible for the takeover bidding, suggested that directors had an obligation to secure the best price, i.e. best interest, for the shareholders.

Failure of the shareholder theory

The most obvious shortfall of this traditional model is that it fails to recognize the variation of preferences of the shareholders. A company is to serve shareholders interests does not mean it may serve the interest of every single shareholder. It is more probable to carrying out a balancing exercise in ranking different interests. Megarry J in Gaiman v National Association for Mental Health suggested “…paying due regard to the members of the company… as a whole” [9] , meaning that enhancing overall shareholder interests is the ultimate objective. Unfortunately, the theory is silent on this issue.

Moreover, there are cases proving that the directors in some occasions taking actions to serve the company interests nevertheless contrary to shareholders interests. In Re BSB Holdings Ltd (No.2), Arden J supports the proposition that if the company interests are in conflict with shareholder interests, as a whole or even some of them, the former should be preferred, provided that the shareholders are treated fairly. [10] Accordingly, company’s interests seem not refer merely to shareholders interests. Interests of others who are associated with the company should also be considered.

Part 3. Stakeholders’ interests under the stakeholder model

A famous proponent of the stakeholder model Professor Doss once commented that though directors owe a duty to shareholders to obtain an optimal profit, the interests of stakeholders cannot be disregarded [11] because all players and the company as a separate entity are interrelated. For instance, in considering employees’ interests, offering attractive remuneration may lead to a higher consumption of company’s products, in contrast strikes may cause huge losses to the company.

There appears no universal definition of “stakeholder”. The author prefers a broader interpretation from Vinten who defined stakeholders as “any individual who may be affected by the activities or affairs of the corporation” [12] which includes directors, creditors, employees, customers and even the general public. Then the stakeholder theory asserts that directors as the representatives of all the stakeholders should assure stakeholders interests because all of them are affected directly or indirectly by the achievement of the corporation’s activities and objectives. [13] 

Creditor’s interests

Creditor’s interests are often put at the bottom of the list. First, directors may not owe a duty to creditors. This traditional view has been discussed in Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd, where Dillon LJ said that:

“The directors indeed stand in a fiduciary relationship to the company, … and they owe fiduciary duties to the company though not to the creditors…” [14] [emphasis added]

Second, there is no pressing need for a company to pay off debts immediately even though its balance sheet shows a net surplus.

However, in times of insolvency, interests of the creditors are of utmost importance. In West Mercia Safetywear Ltd v Dodd, the Court expressed that creditors are “entitled to displace the power of the directors and shareholders to deal with the company’s assets”. [15] It was held in Colin Gwyer and Associates Ltd v London Wharf (Limehouse) Ltd [16] that if the board of directors passed a resolution without considering the interests of creditors properly, such resolution would be open to challenge when the company became insolvent. The modern view is that directors owe a duty to the future shareholders, i.e. the creditors.

If directors’ duty extends to the creditors only when the company is insolvent or nears insolvency, it is doubtful whether a company in fact serves creditors’ interests when making decisions in daily operations. I opine that the duty is more possibly to avoid harm to the creditors in allocating its assets than to promote or to serve their interests.

Employee’s interests

The justification for serving employees’ interests is that employees do risk their human capital while inputting their time and effort on their employment. [17] The English Parliament has codified the directors’ duty to promote the success of the company in Companies Act 2006 and s172(1)(b) requires the directors “to have regard to the interests of the company’s employees”.

However, the actual effect of the legislation has been questioned by many scholars on the basis that there is a lack of effective means to enforce such statutory duty. [18] Rather the employment law, which puts emphasis on employment relationship of trust and confidence [19] , may be a more useful tool in ensuring that the employee’s interest will not being unfairly and improperly exploited.

It is hoped that bringing employees’ interests in line with those of the company may help directors or managerial officers in building a stronger sense of belonging among the internals and hence, the employees are more likely to support the management decisions or even to shoulder some burden in times of economic difficulties. [20] 

Customer’s interests

Taking a more pragmatic approach, one should notice that businesses could hardly survive without the support of the customers. Corporations tend to set up customer services departments in order to show their concern over the interests of the customers and to maintain long-term business relationships with the customers. However, in responding to customers’ needs, the corporations are indeed expecting a long-term growth of business for the benefit of the company.

Tesco plc, a leading retail chains in the UK, is a good example to illustrate the importance of considering the interests of customers. During the early 1990s, Tesco plc was struggling between its competitor Sainsbury’s and some new European entrants in the market. Its management team conducted an opinion poll with 2,500 customers intending to look for a way out of the crisis. A surprising result showed that the customers were not satisfied with performance of Tesco plc because the company did not give them value. A series of customer services innovations, such as the introduction of online shopping services and loyalty card membership system, were followed by Tesco’s new strategy of placing value on the customers but not merely on the competition, in return making Tesco plc to be the largest retailer in the territory. [21] 

Social Responsibility

A significant argument is why a private entity should serve the public good. People argue that a company as a legal person has a considerable power to make decision and organize commercial activities which may affect the environment and the community at large. It has a social or moral obligation to be socially responsible. [22] However, I opine that the general interests of the society weigh much heavier in the directors’ decisions of the large enterprises only because activities of small businesses would unlikely impact the economy.

There is a close connection between shareholder value and social interests. [23] If an approach to company’s interests is to maximize shareholders returns, shareholders would be more willing to invest more. More job opportunities would be created as a result of such investment projects and hence, stimulates local economies. Meanwhile, the company gains reputation and goodwill. One may question the motivation of taking social responsibility: whether the company’s commitment to be socially responsible is in the interest of the society or in the interests of shareholders. If the answer is both, then the enlightened shareholder approach may be more accurate to describe the modern corporate governance system.

The social responsibility concept is ideal but it may be practically difficult. This can be illustrated by the decision of relocation of Burberry Plc factory from Treorchy, South Wales, to Spain and China which caused a loss of approximately 300 domestic job opportunities. [24] Obviously, Burberry was attracted by the low cost of production in Spain and China. The Burberry’s management was facing a dilemma over whether to relocate the factory and maximize company’s profit or to retain the relatively high-paid local workers.

Limitation of the stakeholder model

In my opinion, the theory is to a certain extent conceptually limited in the sense that it offers no practical framework for implementing an integrated perspective of corporate governance [25] , despite the fact that it urges modern company directors to regard stakeholders interests in the decision-making arena. The issue is how to settle the concerns over the inevitable competitions among the diverse stakeholder groups.

To prioritize the interests of stakeholders seems to be an endless search because different groups of stakeholders would argue from different perspectives which favor their own interests over others’. Instead of providing a priority list, it is more realistic to incorporate abstract regulations into the stakeholder model. s172 of 2006 Act is an instance showing the feasibility of such incorporation. Thus, every group of stakeholders will have a role to play and their interests would be protected.

Part 4. Enlightened shareholder value approach

In examining whose interests a company serves, there may not be a conclusive answer. “Corporation’s interests” should be interpreted broadly but not be confined to the wealth maximization and interests of shareholders. From the reasoning of Brady, one may understand that company’s interests are not absolutely equal to shareholders interests. However, it is unrealistic to conclude that the interest of a particular group of the stakeholders outweigh that of shareholders because a business would never be established initially for the benefit of people other than the owners. Proportional returns for the shareholders’ investment should be ensured. In this connection, shareholders interests and interests of other constituencies are unlikely of equal importance.

The enlightened shareholder value approach may be a new leading corporate governance model to resolve the issue. It emphases that modern companies tend to pursue “long-term investment by value-creating internal and external relationships” and hence to secure the success of the companies. [26] However, shareholders interests are probably predominant. Compared to the traditional shareholder model, the most contrasting views are that first, shareholder interests are not equivalent to company interests and the interests of non-shareholder constituencies are part of the company interests. Second, the interests of other constituencies will be protected only in a way that such protection would promote shareholders interests. Thus, if there is a conflict between shareholder interests and the stakeholders interests, the former prevails. It is thought that this shareholder-centred approach may be more acceptable to the shareholders, whereas the sustainability of a company would not be undermined if the interests of stakeholders such as employees and customers are being respected.

The enlightened shareholder value approach is a multi-interest approach requiring the directors of the company to ensure the interests of different groups are balanced, rather than neglecting neither the shareholder interests nor the stakeholder interests [27] , thus creates a win-win situation. For instance, taking the employee’s interests into consideration in exercising delegated management power may make the employees feel more valued and contented, and hence work harder and be more productive, which in turn, generates shareholder value.


In general, a company is a separate lifeless entity which generates profits depends on the management of competent directors. Its affairs are probably determined by the concerns of the self-interests of natural persons who associate with the company such as shareholders, creditors, customers and employees. Thus, the company in fact serves a variety of interests which should be protected at law or by practice of moral leadership.

The shareholder theory is not conclusive on the basis that company interests are not always equal to shareholders interests. Moreover, shareholders interests are, to some degree, fostered by the interests of other constituencies. In contrast, stakeholders interests may be overstated under the stakeholder model. The currently introduced enlightened shareholder value approach smoothens out possible conflicts between the two extreme values and reaches a satisfactory outcome.

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