Beyond Shareholder Wealth Maximisation

Towards a More Suitable Corporate Objective for Chinese Companies

Min Yan

• Publisher: Taylor & Francis
• Year: 2017
• Print ISBN: 9780367885830
• eBook ISBN: 9781351973588
• Edition: 1
• Topic: Business
• Subtopic: Corporate Governance
• Index: Business

The corporate objective, namely, in whose interests a company should be run, is the most important theoretical and practical issue confronting us today, as this core objective animates or should animate every decision a company makes. Despite decades of debate, however, there is no consensus regarding what the corporate objective is or ought to be, but clarity on this issue is necessary in order to explain and guide corporate behaviour, as different objectives could lead to different analyses and solutions to the same corporate governance problem. In addition to the study on the corporate objective in Anglo-American jurisdictions, the discussion of this topic in the context of China is also very important on the grounds that China has become the second largest economy in the world and is playing an increasingly significant role in global affairs. Though a socialist state, China has also been relying heavily on the corporate vehicle as the most important business organisational form to ensure its rapid economic development since its market reforms in 1978. Adolf Berle and Gardiner Means's observation made over eight decades ago that large public companies dominate the world remains true today, not only in the West but also in China. The regulation and governance of such companies will have a material impact on the further development of the Chinese economy, which could in turn directly affect the world economy. Company law and corporate governance therefore receive much attention and have become a vital issue in China. Although the current focus is primarily on corporate performance, the fundamental question at the heart of corporate governance, namely the corporate objective, is still unresolved.

Contrary to the widely held belief that the corporate objective should be maximising shareholder wealth, this book seeks to demonstrate that the shareholder wealth maximisation approach is both descriptively inaccurate and normatively unsuitable. As an antithesis to it, stakeholder theory generally develops to be a more suitable substitute. Justifications and responses to its main criticisms are offered from descriptive, normative and instrumental aspects, whilst new techniques of balancing competing interests and more workable guidance for directors' behaviour are brought forward as essential modifications. Along with the unique characteristics of socialist states, the stakeholder model is expected to find solid ground in China and guide the future development of corporate governance.

This book will be important and useful to researchers and students of corporate law, corporate governance, business and management studies.

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1 Introduction

Today corporate governance has become the single most important issue on the business agenda with incalculable political and social consequences both domestically and globally.¹ What the corporate objective is, namely, in whose interests should a company be run, remains the fundamental question at the heart of corporate governance² and the most important issue in corporate governance study today.³ Despite decades of debate, there is no consensus regarding what the corporate objective is or ought to be. However, clarity on this issue is necessary in order to explain and guide corporate behaviour, as different objectives could lead to different analyses and solutions to the same corporate governance problem. Contrary to the widely held belief that the corporate objective should be shareholder wealth maximisation, this book seeks to look beyond maximising shareholder wealth and demonstrate that it is both descriptively and normatively unsuitable. This book also intends to critically discuss the corporate objective for Chinese companies due to the importance of China’s role in the global economic and political arena.⁴ After revisiting shareholder wealth maximisation and stakeholder theory, the book advocates the stakeholder model as the basis for Chinese corporate law and corporate governance.

1.1 What is corporate objective and why should we study it?

A company, as any rational activity, requires an objective to justify its behaviour,⁵ and its performance can only be measured and evaluated after establishing such a criterion. If no goals or expectations exist, it would be impossible to judge the performance of a company and to evaluate how well the directors of the board have performed. Moreover, the key to how obligations/responsibilities should be allocated to achieve the best corporate governance⁶ largely depends on such an objective. If, for example, the ultimate corporate objective is the welfare of all stakeholder groups, then a good corporate governance structure should underlie their interests,⁷ and board directors should run the company for all stakeholders. Accordingly corporate performance should no longer be solely determined by the share price and the like. In contrast, if shareholder wealth maximisation is the corporate objective, i.e. shareholder interests are the primary concern of the company, then the focal point would turn to understanding shareholders’ roles and interests.⁸ In this context, directors should run the company to maximise shareholder wealth, and the basic issue in terms of corporate governance therefore becomes whether shareholder interests can be effectively protected and maximised. Consequently, it is of vital importance to clarify the ultimate objective of the company, especially the large public ones, in order to solve corporate governance improvement issues, determine the extent to which companies should be directed and managed, and provide guidance to directors.

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The corporate objective is arguably one of “the most important theoretical and practical issues confronting us today” because we need it to explain and guide corporate behaviour.⁹ In the words of Professor Henry Hu, “the core objectives animate or should animate every decision a corporation makes”.¹⁰ Different objectives can lead to different diagnoses and solutions to corporate governance problems.¹¹ It is also argued that “at the heart of the current global corporate governance debate is a remarkable division of opinion about the fundamental purpose of the corporation”.¹² And the answer to this issue becomes increasingly important as the business influences both individuals and societies.¹³ If directors take a company in the wrong direction as a result of the corporate objective being incorrect, then this might produce worse results. Put simply, a governance theory cannot begin without a purpose.¹⁴

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Unfortunately, company law in most jurisdictions fails to set out a corporate objective.¹⁵ Though in theory members of companies are able to determine the corporate purpose by including it in the company’s constitution (e.g. articles of association), few demand mandatory shareholder primacy. The vast majority of companies’ articles do not include a corporate objective.¹⁶

Moreover, today’s large public companies can hardly be seen as entirely private concerns, further complicating the issue. Companies, especially large public ones, are no longer private organisations – they have the ability to exercise social decision-making power.¹⁷ In Professor Parkinson’s words, “companies are able to make choices which have important social consequences: they make private decisions which have public results”.¹⁸ More concretely, Mary Stokes points out that:

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The company has become an organization whose significance almost rivals that of the state. It is the primary institution for organizing and employing much of our capital and labour resources and the primary supplier of goods and services in our community.¹⁹

Thus, as corporate behaviour is limited by political, social and economic environments, the extent to which members can determine the purpose of their company is not unrestricted.

Admittedly, during the preliminary stage of a newly established company, it is usually those entrepreneurial shareholders who take the initiative to seek and recruit essential resources to run the start-up. Whilst other corporate participants also play an important role and contribute indispensable investment, shareholders are more likely to exert a leading role at this stage. Shareholders’ contribution is crucial when a new company desperately needs initial monetary capital to purchase machines, raw materials and invest in business projects, which is often the case for a start-up. More importantly, it is not uncommon for a start-up company to have overlapping management and shareholder bodies. Although other corporate participants like employees and suppliers afford equally or more valuable support to the success of the company and thereby should not be subordinated, due to this overlap, shareholders who maintain control (or directly manage the company) normally have a larger role to play at this stage.²⁰

However, alongside corporate growth, the contribution and role of shareholders gradually becomes less important, though it is difficult to mark exactly at which point. On the one hand, the company is no longer heavily dependent on equity capital to finance new business projects and corporate expansion. A mature company relies more on accumulated corporate profits after years of operation, and debt funds.²¹ On the other, the classic separation of ownership from control is almost inexorable as the company expands. Widely dispersed shareholders can become rationally apathetic. In particular, after adopting strategies of diversified and balanced portfolios, shareholders or institutional investors are less concerned about the success of any one particular company than with their overall portfolio. As will be discussed later, the interests of diversified shareholders can be different from those of the company. Furthermore, it is not impossible for a shareholder to wish for one of her investee companies to fail in order to obtain higher aggregated proceeds from the portfolio. For example, if a hedge fund were to sell short a particular company’s shares, there are then ample grounds for it to wish the company to be poorly run or even fail. Due to the alienation of the interest in those shares as a result of having sold them short or some other modern financial arrangement, certain shareholders’ personal interests, particularly certain types of funds, may run completely counter to the interests of a given company. Consequently, “the old language of property and ownership no longer serves us in the modern world because it no longer describes what a company really is”.²²

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On the contrary, other corporate participants continue to provide indispensable resources and actively participate in corporate activities in pursuit of success. Unlike shareholders, who are able to mitigate risks through diversification, most other corporate participants cannot do so. Consequently, shareholders may not be particularly concerned about the success of a given company whilst the welfare of other corporate participants is still closely tied to the very company to which they have contributed and in which they have invested. As a result, for large public companies which are of course mature enough, there are few grounds for the shareholders to determine the corporate objective. Indeed, when a company transitions into a “mature” stage, it is questionable whether the original founder’s objective, if any, remains unchanged.²³

The corporate objective is not a new issue – the debate has been continuing for years. Berle and Dodd’s debate in the 1930s about...

Table of contents

• Cover Page
• Beyond Shareholder Wealth Maximisation
• Routledge Research in Corporate Law
• Title
• Copright
• Contents
• Dedication
• Table of Cases
• Table of Statutes
• List of Abbreviations
• Acknowledgements
• Foreword
• 1 Introduction
• 2 Shareholder Wealth Maximisation Revisited
• 3 Shareholder Power and Shareholder Empowerment
• 4 Shareholder Rights and Corporate Objective in China: Past and Present
• 5 Towards the Stakeholder Model
• 6 A More Suitable Corporate Objective in China
• Conclusion
• Index