Why Boards Must Look Beyond Shareholders

Many executives across the globe believe that a company’s board of directors has a fiduciary duty to place shareholders’ interests above all others. However, this view of shareholder primacy is an ideology, not the law.

Our research on the board’s fiduciary duty to shareholders clearly demonstrates that the law in many countries rejects the primacy of shareholder interests.

As a separate legal person, a corporation has two basic objectives: To survive and to thrive. Shareholder value is not the objective of the corporation; it is an outcome of the corporation’s activities. While shareholders entrust their stakes in a corporation to the board of directors, shareholders are just one audience among others that the board may consider when making decisions on behalf of the corporation.

These audiences, typically called stakeholders, may also include other financial stakeholders, such as bondholders, and nonfinancial stakeholders, such as employees, customers, suppliers, and NGOs representing various concerns of civil society. In the face of limited resources, no matter how large the corporation, directors must make choices regarding the significance of the corporation’s many audiences.

Over the past 12 months, we have gathered legal memos provided by leading law firms in 20 countries about the fiduciary duty of board directors in their respective countries. The template for these memos was developed in collaboration with Linklaters, a renowned global law firm. What’s more, we have commitments to produce these memos from law firms in all G20 countries and a number of others. To date, this research has shown — without exception — that the board directors’ primary duty is to the corporation itself as a separate legal person.

In some jurisdictions, most notably the United States, there is “primacy duality” in that the directors’ duty to the separate corporate person is coequal to directors’ duty to shareholders. In no jurisdiction is a duty to shareholders a higher duty than to the corporate person. In some jurisdictions, such as Brazil, fiduciary duty explicitly includes the corporation’s obligations to non-financial stakeholders.

Given that a board may have obligations to multiple stakeholders or audiences, we suggest that a company’s board of directors issue an annual “Statement of Significant Audiences and Materiality” (The Statement), which identifies the company’s significant audiences — and, by implication, those that are not significant. These audiences may include shareholders, bondholders, employees, or NGOs representing a variety of environmental, social, and governance (ESG) issues.

Only a page in length, The Statement enables the board to clearly and concisely communicate which issues are material to which of its audiences, and over what time frame. The benefits are clear for corporate reporting on material issues in financial or integrated reports: If, for example, a board decides that the only significant audience is short-term shareholders, then the only issues that are material are those that affect short-term financial results. Alternatively, a board may decide that the most significant audience is the company’s employees, and that it will cut dividends before approving layoffs.

Given the growing demand for corporate accountability on nonfinancial performance, boards of directors have a compelling reason to start producing Statements — and they are starting to heed that call. The Dutch insurance company Aegon’s management board is the first board of directors to complete a Statement. Their Statement identifies five specific financial and nonfinancial issues and explores how they affect various stakeholders. Through their Statement, Aegon’s board has defined the role of its corporation in society so that all of the company’s stakeholders can determine their own resource commitments to the corporation.

To expand the role of Statements in corporate reporting, we are working with several prominent organizations to build the legal case that boards of directors have a fiduciary obligation to the corporation, not to shareholders alone. These organizations include the UN Global Compact and the American Bar Association’s Sustainable Development Task Force, which wrote the legal memo for the United States and is curating all of these memos on the ABA website. To date, we have memos for Australia, Brazil, China, Chile, Colombia, Denmark, France, Germany, Hungary, India, Italy, New Zealand, Poland, Russia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. This collection of legal memos will continue to be updated on the ABA’s website and freely available to all.

Another group, The Principles for Responsible Investment, is on a parallel initiative regarding fiduciary duty on the investor side. Its soon-to-be-published comprehensive review of law and policy on investors’ fiduciary duty in eight countries argues that failure to take account of ESG issues is a breach of fiduciary duty, e.g., to pension fund trustees.

This compendium of legal memos on directors’ fiduciary duty is only one front in the authors’ campaign to make Statements a common feature of corporate reporting. Others include mobilizing investors to ask company boards to issue The Statement, finding companies who will lead in doing so, and exploring the relationship between the fiduciary duty of company directors and that of fiduciary investors. The goal of this campaign is that, by 2025, the board of directors of every listed company will be issuing an annual Statement of Significant Audiences and Materiality. Annual Statements are a clear and strong way for the board to articulate the company’s role in society, under their duty of care and loyalty to the prosperity of the corporate person.

Editor’s Update: In a recent video at the FT Robert G. Eccles further discusses stakeholder obligations and corporate disclosure.