In my personal opinion, to be a strong and independent leader, the general counsel needs the trust of the CEO – not only to advise on issues of legal compliance, but also on the righteousness of corporate action and, ideally as part of senior management, assist with the creation of sustainable stakeholder value. Importantly, the stakeholder group goes beyond the shareholder and also includes employees, customers, suppliers, the environment and the wider society in which a company operates as corporate citizen. A rigid adherence to the outdated doctrine of shareholder primacy could have the adverse effect of making corporate decision-makers potentially indifferent to the interests of other stakeholders, which, at least in the long run, may even harm the shareholders themselves.
Respectively, in his book Fixing the Game, Roger L. Martin, then-Dean of Rotman School of Management, made clear:
‘Total returns on the S&P 500 for the period from the end of the Great Depression (1933) to the end of 1976, the beginning of the shareholder-value era, were 7.5% (compound annual). From 1977 to the end of 2010, they were 6.5% – suggesting that shareholders have little to celebrate, despite having been made the clear priority.’
A sole focus on profit maximisation may not only overshadow a company’s true purpose in society, but even create unintentional pressures for corruption, which might ultimately tempt some managers towards taking irresponsible actions just to meet potentially unrealistic financial targets.
Consequently, human leadership with integrity is key, especially in a highly regulated and tech-reliant corporate environment. We must always retain and train our human ability to make responsible judgement calls in order to ensure sustainable decision-making in a fast-paced, globalised business. Leadership is not just about making shareholders wealthy. Leaders build a corporate culture where employees can feel safe and valued so that they may perform to the best of their abilities. It is about leading with kindness, concern and compassion, with regard to the society as a whole. The great thing about this is that it results in an organisation that creates sustainable benefits for all stakeholders, making a corporation a desirable commercial partner for anyone on a global level. Society does not want to do business with entities it does not understand and respect. A decent and humane management, relying on a strong, voluntary ethical framework and the power of morally capable people, is key to ensuring both internal and external sustainability.
Corporate governance codes around the world have begun to address the problem of shareholder primacy. For example, in the US, various state codes recognise the wider range of stakeholder interests beyond the shareholder. A revised UK Corporate Governance Code was published by the Financial Reporting Counsel in 2018, representing a refocusing of the role of the company and the board toward not only generating value for shareholders, but contributing to wider society. The German Corporate Governance Code, as amended in 2019 and about to enter into force, highlights the management and supervisory board’s obligation to ensure the continued existence of the company and its sustainable value creation that is in line with the principles of the social market economy. South Africa’s Institute of Directors published the King IV Report on Corporate Governance in 2016, establishing the transition from a purely shareholder-oriented capitalism to a wider stakeholder-oriented capitalism.
While this is a step toward recognising the problem of pure shareholder primacy, it is not a solution in and of itself. These codes cannot guarantee the inclusion of wider stakeholder interests when they are non- binding in nature and, as such, the company could easily opt out.
What, then, should be done to address this issue properly?
One solution is to move away from the classic corporate form where the shareholder(s) alone can dominate the direction in which a company is going. For stakeholder interests to be effectively included, we should change the corporate form by building an all-stakeholder entity where not only shareholders, but also employees, customers and representatives of the wider community could exercise a shared vote and, as such, have a legally binding say in the move toward sustainability. Such an entity would not only focus on the shareholder, but on each relevant stakeholder. In addition to maximising shareholder value, the effect of this would be that the company would fulfil its societal purpose by legally taking into account the entire context of its responsibilities.
However, achieving this legal solution is admittedly difficult. The fundamental changes to corporate laws required to create this multi-party entity are hard to achieve due to current market realities.
Nevertheless, there is a practical solution that can be done that does not involve significant changes to applicable corporate laws. By elevating the general counsel to the C-suite, the CEO can ensure a cross-functional dialogue within a working group on corporate strategy, and involve the general counsel in assessing wider stakeholders and general sustainability factors. The general counsel can play a cardinal role in supporting the CEO not only as a legal expert, but also as a trusted and accountable adviser, acting as part of the corporate moral compass.
Because while a company’s long-term success depends on strong performance and prudent risk management, it also depends on high integrity, which requires leadership from people with a refined ability to make moral judgement calls. The essence of integrity is, first, to ensure that the rules – whether legal, commercial, or ethical – are fair, and then to comply with them. Traditional moral values also must be reinforced, including (but never be limited to): honesty, fairness, trustworthiness, reliability and commitment to inclusion. It is crucial that the CEO and his or her colleagues around the table adhere to a sustainable corporate culture, in order to gain the trust and cooperation of all relevant stakeholders. A general counsel next to the CEO in the C-suite may prevent the company from significant costs and loss of reputation, ensure sustainable corporate decision-making and, last but not least, strengthen the legal function.
