Two perspectives of a company

Some have asked in bewilderment why the governing body (or Board) of an organization should act primarily in the best interests of the company itself and why they owe the duty of good faith (fiduciary duties) primarily to the company itself. The answer lies in the two schools of thought on what a company is?

One school of thought is that a company is an asset or property owned by the shareholders. Those who hold to this view expect the Board (or governing body) to be accountable to the owners namely the shareholders. This is the view that seems prevalent in State Owned Enterprises where governments generally as shareholders treat the entity as a property of government and so the Corporate Boards are beholden to either the Minister or Permanent Secretary. In effect this official becomes a default Board in and of himself. With this view in mind, the Board would always act with the shareholders’ interests at heart. They seek the best interests of the shareholders and not the best interests of the organization. The example of how SAA was run during the term of a former Chair who has now been reprimanded by the courts is a case in point.

A moderated view is that the company is an asset of the shareholders which the Board stewards on their behalf while taking into consideration the interests of other stakeholders. This is called the enlightened shareholder approach to corporate governance. This view of the organization is not accommodated in King IV. It may be acceptable only if the organization’s equity is owned by one person – although the interests of other stakeholders would still suffer.

The second perspective of a company is that it is a separate juristic entity with its own legal existence and rights independent of the shareholders. In this view the organization owes its existence to numerous stakeholders who provide different forms of capital for it to exist. Contrary to the previous view of only financial capital being the one considered, this view recognizes financial, social, environment, intellectual, human and manufactured capital as necessary for the existence of the organization. The stakeholders become the final licensors of the organization. This is called a stakeholder inclusive approach. Within this view the Board stewards the organization with the knowledge that they are accountable to all the stakeholders and not just the providers of financial capital (shareholders).

The following two quotes from the King IV report encapsulates this concept:

“King IV advocates a stakeholder-inclusive approach, in which the governing body takes account of the legitimate and reasonable needs, interest, and expectations of all material stakeholders in the execution of its duties in the best interest of the organisation over time.”

“Instead of prioritising the interests of providers of financial capital, the governing body gives parity to all sources of value creation.”

I recently read a SCA judgment which underlines this aspect of a company being an entity and not simply a property of the shareholders.  It was the case of Steinhoff minority shareholders who wanted to be compensated for lost value in the company due to alleged negligence of the Board. The Supreme Court of Appeal rejected this as it held that the shareholders had no right to lay this complaint as this was supposed to be done by the aggrieved party who was the company itself. A corollary was that the shareholders would get double compensation if the court ruled in their favor since, if and when the Company sued the directors and recovered the prejudice the shareholders would recover their value. The court on the basis of a rich legal heritage in the matter held that the loss of value in the Company would be a loss to the Company as an entity and not necessarily a loss to the shareholders. The underlying argument was that the company is to be viewed primarily as a legal entity with the right to sue and be sued as a juristic person with a separate existence from the shareholders. It is important to note that this judgement did not absolve the Board and management of Steinhoff of any wrongdoing. They may still have to face their day on court in that matter.

Shareholders normally revert to this argument when it suits them. For example the issue of the indebtedness of the company being separated from the wealth of the shareholder speaks to this concept. Often shareholders have often been heard to say, “I am not my company.” So this argument cuts both ways.

The contemporary view of corporate governance is that the company is a legal entity in and of itself and does not exists simply as an extension of the shareholders. That is why the governing body acts in the best interests of the organization.

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