Between a Rock and a Hard Place: The Right and the Emerging Duty of the Corporate Board Go Beyond Profit Maximisation
The corporate board has a central place in the corporate law of most jurisdictions. It is the central decision-making organ in the corporation, and as a matter of law is to protect and promote the interests of the company. What this entails is one of the pervasive issues of corporate law, yet one that has not been meaningfully discussed over the last decades to the extent and in the depth that it deserves. Under the influence of the Chicago School of Law and Economics, the complex role of the board has often only been scrutinised under the reductionist and misleading perspective of boards as agents for the shareholders as principals.
Multijurisdictional comparative analysis into the role and duties of the corporate board has shown that boards are not as a matter of law the agents of the shareholders. Contrary to popular belief, the corporate board does not have a general legal duty to maximise returns for shareholders. Indeed, the corporate board has a right to go beyond profit maximisation in its decision-making. However, the social norm of shareholder primacy is so strong that it has taken over the space corporate law gives boards to promote the interests of the company, to the extent that two interlinked legal myths have developed: that shareholders own corporations, and that the corporation must be run in such a way as to maximize returns for shareholders. The result is short-termistic, narrow and unsustainable corporate behaviour.
In the face of the grand challenge of our time: securing the social foundation for people now and in the future while staying within planetary boundaries, how corporations are run is crucial. Corporate boards to a great extent have the legal competence to contribute to shifting business over from business as usual, this very certain path towards a very uncertain future, and onto a sustainable path. It is easy to argue why the boards should use this competence, also in the face of shareholders’ power and the risk of being replaced. That is, however, not the topic of this paper. Rather the paper will start by establishing briefly the right of the board to go beyond profit maximisation, and then concentrate on discussing their emerging duty to do so. The contours of the emerging duty may be seen through changes in the understanding of financial risk, of developments in the legal norms on international, European and national level, and the wave of litigation across the world for the unsustainable impacts of ‘business as usual’.