Cultural values and corporate governance

What is the role of cultural values in understanding the mechanisms and processes that influence the way in which corporations are governed and controlled? There are two facets to this question. The first one is external culture: the social and cultural norms characteristic to the country where the company carries on its business. The second one is internal culture: the internal set of corporate values that underpin the relations among corporate constituencies. Both aspects of corporate culture have become prominent topics in the corporate governance literature.

External culture as driver of corporate governance

Scholars approaching corporate governance from a socio-cultural perspective argue that informal rules, such as social and cultural norms are at least as relevant as law, politics or economics in influencing corporate governance structures and models. Geert Hofstede is one of the pioneer researches on the interplay between national cultural beliefs and workplace values embedded in corporate governance policies. In his extensive research, Hofstede identified four national cultural dimensions that underpin the diverse corporate governance models around the world: the power distance index, individualism versus collectivism, masculinity versus femininity, uncertainty avoidance index, long term versus short term normative orientation, and indulgence versus restraint.[1] Two of these factors are especially thought-provoking and deserve a closer examination: the power distance index, and masculinity versus femininity index.

The power distance element refers to commonly held beliefs and attitudes about inequality of power in organisations and institutions. This index is useful in understanding the role of national cultural values in shaping the dynamics between employees working at different levels on the corporate ladder. It casts light on the widely diverging expectations and attitudes that exist worldwide as regards acceptance of unequal powers and rights, styles of management and leadership, power-dependency relations, and employee obedience and loyalty. Members of organisations from societies exhibiting a high power distance index (PDI) are likely to be more accepting of a strict hierarchical order. China is one of the countries with a very high PDI index. Inequalities among people and the power of formal authority tend to be broadly accepted in this country. Employees are generally not encouraged to have aspirations beyond their rank, and there are very few defences against power abuses in the superior-subordinate work relationships. Russia is another example of a very high PDI index. The gap between powerful and dependent people is high, which leads to a great significance of status symbols and roles in business interactions inside and between organisations. Other countries with a high DPI include France, Brazil and India. At the opposite end of the spectrum, countries with a low DPI are characterised by a decentralised organisational structure, high value placed on egalitarianism, close relations between managers and team members, consultations of employees, and straightforward communication channels. Countries falling in this category include Austria, Canada Finland, Norway and the United Kingdom.

The masculinity versus femininity (MAS) index is another driver of differences in national corporate governance and organisational values. Societies that embrace stereotypical masculine values such as competitiveness, assertiveness, and material rewards for success tend to favour managerial decisiveness and a focus on financial returns. Switzerland, the United Kingdom  and the United States are examples of high MAS index countries. Prominent masculine corporate values include a ‘live in order to work’ philosophy, decisive management, and a strong emphasis on competition and financial performance. Scandinavian countries, in contrast, are feminine societies with a low MAS index. Translated into corporate culture, feminine values underpin organisations that prioritise participatory decision making procedures, consensus, solidarity, equality, and conflict resolution though compromise and negotiation. Sweden is the most feminine society according to Hofstede’s rankings, followed by Norway and Denmark.

Hofstede’ path-breaking research provides a unique insight into the correlation between national cultural values and the internal structures and values of organisations. Although his work has been criticised on both theoretical and empirical and grounds, Hofstede’s ideas highlight the essential role of national culture as a driver of corporate governance structures and processes.

A renewed focus on internal corporate culture

The role of the internal corporate culture in promoting high quality corporate governance is the focus of a special report by the UK Financial Reporting Council published last month. The report, entitled ‘Corporate Culture and the Role of Boards’ examines how boards and executive management establish and promote a corporate culture capable of delivering long-term business and economic success. More specifically, the Report draws on interviews with FTSE chairpersons and CEOs to determine the values, attitudes and behaviours that companies apply in their relations with shareholders, employees, customers, suppliers and the wider community. The key observations and suggestions of the Report include:

  • the responsibility of the board to evaluate the company’s internal set of cultural values, to consider how to report on it, and to ensure that the company’s purpose, strategy and business model are aligned with its internal values
  • the responsibility of senior managers to embody the desired culture and oversee its implementation at all levels and in every aspect of the business
  • increased transparency and accountability regarding the way in which the company’s business respects the wide range of stakeholder interests

The Financial and Reporting Council aims to use this Report and the feedback it generates to update its 2011 ‘Guidance on Board Effectiveness’.

[1] Geert Hofstede, Gert Jan Hofstede and Michael Minkov, Cultures and Organizations: Software of the Mind, 3rd ed (New York: McGraw-Hill USA, 2010), originally published in 1991; Geert Hofstede, Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations, 2nd ed (Thousand Oaks, Calif: Sage Publications, 2001), originally published in 1984.


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Recent developments in corporate board diversity

The Hampton-Alexander Review of women on FTSE 350 boards

Earlier this year, the Department for Business, Innovation and Skills announced the formation of a new independent review on increasing the representation of women in corporate leadership positions. The review is led by Sir Philip Hampton, Non-Executive Chairman of GlaxoSmithKline (chair of the review) and Dame Helen Alexander, Chair of UBM (deputy chair of the review). The new body continues on from the Davies Review, which pushed the representation of women on FTSE 100 boards from 12.5% in 2010 to 26.1% in October 2015. A new target for female board representation is set at 33% of FTSE 350 by 2020. The Hampton-Alexander Review also extends the focus below the board, to the executive senior layers of FTSE 350 companies. It aims to consider options, make recommendations and work with the business community to improve the representation of women in corporate leadership. The review is expected to present recommendations by the end of 2016.

Viewed against the latest trends and figures, the objectives of the Hampton-Alexander Review appear optimistic. The most recent FTSE 350 statistics show that, overall, women hold 22% of the board seats. Only 60 companies (17%) have 33% or more women directors, and 16 companies have no female directors at all. More worryingly, the pace of progress has slowed significantly after October 2015, when the final Davies Report was released. According to the latest Female FTSE Board Report released by Cranfield University, City University London and Queen Mary University London, there has been no increase in the female representation on FTSE 100 boards after the Davies Review ended. Moreover, only 24.7% of the new board appointments after September 2015 went to female directors, the lowest rate in five years.

Progress is slow in the executive ranks as well. Only 7% of executive directors in FTSE 350 are women, dropping to 5.6% in FTSE 250. A recent study led by KPMG finds evidence of a ‘career bottleneck’ for senior female executives at executive committee level in FTSE 100 companies, where there was no significant increase in female representation over the past two years. The report cautions that, based on this pace of change, it is impossible to predict when, or if, women will acquire the 30% critical mass in executive committees of large UK businesses.

Cracking the lavender ceiling

The glass ceiling metaphor has become a popular representation of the informal barriers that prevent women from ascending to the highest levels in an organisation.[1] The glass ceiling is the most noted and debated form of systematic discrimination, but is not the only obstacle to diversity in leadership. Racial and ethnic stereotypes often portray qualified persons in a light that is unfavourable to leadership, thus preventing them from reaching board seats. African Americans are sometimes stereotyped as antagonistic and lacking competence, Hispanics as uneducated and unambitious, while Asian Americans are pigeonholed as quiet and unassertive.[2] Lesbian, gay, bisexuals and transgender (LGBT) employees are likely to face discrimination in male-dominated contexts, a phenomenon sometimes labelled as the ‘lavender ceiling’.[3] The lavender ceiling undermines the access of LGBT employees to leadership positions, as well as their acceptance as ethical leaders and role models.[4]

In the EU, the latest Eurobarometer survey shows that LGBT people face a high risk of discrimination. A majority of respondents believe that discrimination on the basis of sexual orientation (58%) and gender identity (56%) is widespread in their country. In the UK, 19% of LGB employees have experienced verbal bullying from colleagues, customers or service users because of their sexual orientation in the last five years. Almost a third of them have been bullied by their manager and more than half by people in their own team. Approximately 42% of transgender people are not living permanently in their preferred gender role because they fear it might threaten their employment status.

The effects of the lavender ceiling are clearly visible in large corporations around the world. A recent study by the Human Rights Campaign Foundation shows that 91% of Fortune 500 companies have policies against discrimination based on sexual orientation and 61% against gender identity. In practice, however, these LGBT-inclusive policies have significant limitations. Over half of the surveyed LGBT employees hide who they are in the workplace and 23% of them remain closeted for fear of not being considered for advancement or development opportunities.

Two recent market-led initiatives promise to crack the lavender ceiling in large US corporations. The first one is the Quorum Initiative, a project aiming to connect companies with qualified, experienced LGBT corporate executives and potential board candidates. The project was launched in 2015 by Out Leadership, a New York-based advisory firm dedicated to the promotion of the business case for LGBT inclusion in executive leadership.

According to Out Leadership, there are currently fewer than ten open LGBT directors on Fortune 500 companies, amounting to a dismal 0.03%. To address this lack of diversity, Out Leadership is building the world’s most comprehensive database of top LGBT executives around the world, with a particular focus on candidates who are women or people of colour. At the same time, it works on developing the companies’ internal pipeline of LGBT future business leaders, via the OutNEXT project. OutNEXT pairs outstanding openly LGBT employees identified and selected by member companies, with networking and leadership development opportunities offered by top experts such as EY or McKinsey & Co.

The second market initiative comes from institutional investors. A recent joint statement issued by public officials who are fiduciaries of 14 US public pension funds, notes that “straight directors predominate in corporate boardrooms” and calls on their portfolio companies to “include nominees who are diverse in terms of race, gender, and LGBT status.” The joint statement emphasises the corporate governance benefits of diversity, which include better financial performance, enhanced firm reputation, increased innovation and group performance. Another recent report by CalPERS, California’s largest public pension fund and one of the leading institutional investors worldwide, provides further support for the business case of LGBT diversity. The report finds evidence that companies with an open and inclusive LGBT environment outperform the market by 1.7 – 3.3% annually.

It is hoped that these recent market-driven initiatives and reports will increase awareness of the benefits of diversity in corporate leadership and will accelerate the efforts toward removing the glass and lavender ceilings from the corporate hierarchy.

[1] The origins this metaphor are not altogether clear. It is usually attributed to Carol Hymowitz and Timothy Schellhardt, whose 1986 Wall Street Journal article made this phrase popular. See Carol Hymowitz and Timothy Schellhardt, “The Glass Ceiling: Why women can’t seem to break the invisible barrier that blocks them from the top jobs” The Wall Street Journal, 24 March 1986.

[2] Ronit Kark and Alice H. Eagly, “Gender and Leadership: Negotiating the Labyrinth” in Joan Chrisler and Donald McCreary, eds, Handbook of Gender Research in Psychology, vol. 2 (New York; London: Springer, 2010) 443 at 449.

[3] Annette Friskopp and Sharon Silverstein, Straight Jobs, Gay Lives: Gay and Lesbian Professionals, the Harvard Business School, and the American Workplace (New York: Touchstone, 1995) 108.

[4] Kark and Eagerly, supra note 2 at 449.


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Filling the void: the Brexit effect on employment law

by David Cabrelli

Having been cast as unnecessary “red tape”, a burden on business, inflexible, uncompetitive and inefficient, it is widely assumed that a sizeable number of domestic employment laws derived from European Law will be in the firing line in the event of a Brexit. In a well-publicised written opinion produced for the TUC, the leading labour law barrister, Michael Ford QC, has provided some support for this assumption. He noted the vulnerability of these EU-derived employment rights and labour laws, and divided and categorised them according to whether a future UK government would be likely to repeal, dilute or preserve them. In this blog, I will probe what might fill any void created by the removal of employment rights rooted in EU law. Surprisingly, the common law would appear to have as significant a role to play as domestic legislation in this context. The potential involvement of the common law is somewhat paradoxical, particularly in light of its perceived ‘undemocratic’ credentials, it being a source of law crafted incrementally by unelected judges.

Turning to the legislation listed in the ‘repeal’ camp, the understanding is that statutory rights to information and consultation on collective redundancies are liable to removal. These rights afford trade union or employee representatives the right to be informed and consulted about managerial proposals to effect redundancies of more than 20 employees in any period of 90 days or less. The effect of any repeal of these provisions is likely to be partial, which can be ascribed to the domestic ‘unfair redundancy’ protections provided to employees on an individual basis pursuant to Part XI of the Employment Rights Act 1996 (ERA). These pre-date the accession of the UK to the European Economic Community in the early 1970s. It is a fundamental part of any fair and proper pre-redundancy process that the employer engages in consultation with employees provisionally earmarked for redundancy on an individual basis: a failure to do so will very likely render any dismissal for the reason of redundancy unfair under Part XI of the ERA, enabling an employee to secure compensation. As such, the notion that employees will no longer have any entitlement to be consulted about proposed redundancies is inaccurate, since domestic law will step into the breach.

Another piece of legislation that Michael Ford QC identifies as ripe for repeal is the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (TUPE). This is rooted in the European Acquired Rights Directive 2001, which is designed to protect employees from dismissal or variations of their contractual terms in the event of a change of identity of their employer, e.g. on a sale of the business and assets of the employer to a third party, or an outsourcing situation. I am slightly more sceptical about the prospect of a UK Government repealing TUPE than some other commentators, despite the lack of enthusiasm of employers and the Government for such provisions. It is more likely that particular provisions will be cherry-picked and done away with.

Although it is probable that the right of transferring employees to be collectively consulted on a proposed transfer of their employer’s business will be removed, as will the right not to have the terms of their contract varied, it is likely that other domestic legislation and the common law will adapt to confer some protection, albeit admittedly not entirely equivalent to that removed. For example, the domestic protections on dismissals and redundancies conferred under Parts X and XI of the ERA will continue to impose an obligation on the employer to consult with an employee pre-dismissal about any proposed dismissal or redundancy. Likewise, the common law of the contract of employment regulating the variation and implied terms of that contract will function to ensure that some measure of control over the behaviour of the employer is imposed if the latter attempts to foist contractual amendments on transferring employees without their consent.

The common law will also be relevant in the event that the EU-derived rights to annual leave/holiday pay and maximum weekly limits on working hours in the Working Time Regulations 1998 (SI 1998/1833) are removed. For example, the implied terms of the employment contract place limits on the power of employers to exercise contractual options to extend the working hours of employees (Johnstone v Bloombsury Health Authority 1991) and it is likely that similar common law protections would be adapted to afford employees a range of rights to annual leave as a means of ensuring that employers exercise reasonable care for the physical and psychiatric well-being of their employees.

Finally, Michael Ford QC also pinpoints the protections for agency workers, part-time workers and fixed-term workers as targets for future repeal, each of which are grounded in EU law. These measures ensure parity of treatment with permanent, full-time workers directly employed by the employer. Whilst any repeal would be a regressive development for workers’ rights, in light of the statistical evidence that the majority of such atypical workers are female, domestic anti-discrimination legislation arguably could fill the gap to offer them redress if they were treated less favourably than permanent, full-time workers colleagues who are directly employed by the employer. This would be based on the statutory tort of indirect sex discrimination, since such unequal treatment would be in contravention of section 19 of the Equality Act 2010.

Of course there are deficiencies in the domestic legislation and the common law that could or would operate to plug any spaces left by the repeal of UK legislation based on EU labour laws. For example, the common law underwrites the ability of employers to dictate contractual terms, imposes implied terms designed to ensure the subordination of the employee to the employer, and confers unrestricted powers in favour of employers to dismiss and re-engage employees with few legal sanctions. However, I would argue that once EU laws are removed, domestic statute and the common law could well reach out and expand to occupy the field. The regenerative capacity of the common law and its ability to reinvigorate workers’ rights ‘in the gaps’ created by repealed labour legislation should not be underestimated.

As explicitly recognised in recent judgments, the judiciary are fully aware of movements in underlying social and economic conditions that are prejudicial to the cause of workers’ rights, and are not afraid to use them as a justification for common law expansion. In this way, they have shown themselves to be just as prepared to apply the accelerator on progressive common law developments as they are to hit the brake. The end result is that any post-Brexit legislation that is passed to strip back labour laws may not necessarily have the effect that is intended.

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Brexit and employment law: a bonfire of red tape?

by David Cabrelli

If you’ve been following the Brexit debate in the media, you no doubt will have noticed how European employment laws are frequently bandied around as the sort of laws that Britain could do without, thank you very much. As welcome as a giant cheesecake at the Weight Watchers Annual Convention, the European Working Time Directive is never far away from the lips of Brexiters, and is routinely cited as the one of the worst kinds of “red tape” laws coming out of Brussels. But have you ever stopped to think about the assumption that underpins such statements? That is the notion that all employment laws, including those that are designed to protect workers from excessive working hours, are in fact a barrier to economic growth. Cast as drivers of inefficient intrusions into management time, such employment protection measures are deemed to be unnecessary pieces of social regulation, which must be stripped back. By doing so, employers would be rendered free to co-ordinate their labour force as they see fit, thus retaining flexibility in their internal labour markets, and increasing employment rates and overall economic growth.

In this blog, I aim to probe the received notion that employment laws are inefficient. A slew of justifications for this claim will be examined, before moving on to focus on the counterclaims made by economists who argue instead that employment laws promote economic efficiency. Ultimately, as lawyers, and not economists, this is not an issue for us to resolve, but a flavour of the economic arguments in favour of and against the introduction and preservation of employment laws in a countries’ legal order is a useful thing to understand. Whenever proposals for reform of employment law are suggested by government, it is particularly eyebrow-raising how frequently some of the claims and counterclaims we are about to examine are in fact versed as part of the relevant debate.

Turning first to the claim that employment laws are inefficient, it is contended that countries with policies encouraging flexible labour markets and less rigid employment laws will have companies that generate higher stock market returns: since the likelihood of being fired is greater in the absence of job security protections such as unfair dismissal laws, employees will invest greater effort to succeed. They will do so in order to minimise the scope for them to be discharged, and as such, will achieve greater satisfaction in their jobs. This increased satisfaction rate translates into higher firm productivity and stock market prices. For the same reason, there is evidence to suggest that one consequence of increased employment protection legislation is a reduction in worker effort in their jobs, together with higher staff absences in comparison with workers with more limited employment protection laws, such as casual workers, temporary workers, and other atypical workers. In essence, countries who choose to introduce rigid employment laws are acting as surrogate regulators of the terms and conditions of the contracts of employment of employees and employers in their jurisdiction. By over-riding the independent judgments of workers and employers in favour of the collective and social interests of certain sections of society, efficiency is reduced. Although equity in the workplace might be increased via redistributive employment laws – although this point is not conceded by adherents of this view – efficiency is clearly impeded.

This view is countered by those who support employment laws. The principal rejoinder is that such laws act as positive factors contributing to an increase in the productive output of workers. The suggestion being made here is that an alignment between equity and efficiency is not impossible. For example, those in favour of employment laws will point towards the evidence that suggests protective employment laws do not have any negative effects on equality, productivity or unemployment, and that they may have a positive impact on innovation and productivity. The positive impacts suggested here may be attributable to the “efficiency wage” theory. This is the idea that better-paid and happier employees enjoying higher contractual benefits and treated well and appreciated by their employers in the workplace equates to higher productivity and firm value.

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US Bill on Gender Diversity in the Boardroom

Last month, the New York Congresswoman Carolyn Maloney introduced a legislative proposal aiming to promote gender diversity on US corporate boards. The Gender Diversity in Corporate Leadership Act (H.R. 4718) aims to strengthen diversity disclosure requirements and to increase the role of the Security and Exchange Commission (SEC) in encouraging gender diversity. The legislation would require listed companies to disclose in the annual proxy materials the gender composition of their boards and board candidates. It would also require the SEC to establish a Gender Diversity Advisory Group, charged with studying and recommending ways to increase gender diversity on corporate boards.

Women occupy around 16% of the seats on the boards of US listed companies (S&P 1500), according to a recent study by the US Government Accountability Office. In the largest US listed companies (S&P 500), the board female representation has increased five percentage points over the past 10 years, from 15% in 2005 to 20% in 2015.[1] This increase has been mostly market-driven. The market has created an impressive array of initiatives promoting gender parity in the workforce, including non-profit organisations, diversity awards, diversity rankings and board-ready female databases.

Catalyst is one of the most prominent non-profit US organisations promoting gender diversity in the workplace. Founded in 1962, it currently has more than 800 members worldwide, including business corporations, partnerships, business schools, and associations. It publishes regular census and research reports tracking the progress of gender diversity in boardrooms and executive suites worldwide. It also publishes good practice studies of its member companies, which are available to all other members. Catalyst’s annual diversity reports are widely covered by media and are often invoked by legislations, policy makers and academics. The 30% Club is another prominent organisation. Its name refers to the group’s goal to boost the proportion of women on boards to 30%, which is believed to be the critical mass required for a minority to have a significant voice in a group. Launched in the UK in 2010, the Club is currently present in ten countries (including the US) through local chapters. The Club campaigns for the attainment of 30% female board representation towards the end of this decade. It also aims to develop the pipeline for female directors and executives, by focusing on the earlier stages of women’s careers and education.[2]

Diversity awards are another market tool for encouraging board gender equality. The Catalyst Award honours annually the most successful innovative organisational approaches to the recruitment, development, and advancement of all women. Another notable initiative is the DiversityInc Top 50 Companies for Diversity, compiled annually by DiversityInc, a US-based foundation. Gender diversity indexes also increase the visibility of the gender equality issue. 2020 Women on Boards, a US-based non-profit organisation, publishes annually a Gender Diversity Index (GDI) of Fortune 1000 Companies. The GDI is a subset of the 2020 Gender Diversity Directory, a database of public and private companies categorised by the gender composition of their boards.

Moreover, databases with women who are qualified to be appointed on company boards have been created. The most notable initiative is the Global Board Ready Women, a database of women who are suitable to be considered for publicly listed company board-level positions. The database was created by the European Business Schools Women on Boards Initiative, which includes over 180 leading business schools and professional organizations from 70 countries from around the world. Other similar projects include the Stanford Women on Boards Initiative, WomenCorporateDirectors (WCD) Foundation, and Diversity in Boardrooms.

Despite widespread market support for board gender balance, the progress remains slow. At the current rate of change, if equal proportions of women and men joined boards each year, it would take more than four decades for US companies to achieve full gender parity.[3] The slow pace of progress, it has been argued, is a market failure that calls for government intervention.[4]  In contrast to Europe, where quotas legislation is increasingly popular,[5] the US regulator prefers to encourage firms to increase number of women directors using a combination of recommendations and disclosure requirements. SEC requires listed companies to disclose whether they consider diversity as a factor in selecting the board members. If a company has a policy for considering diversity, it must disclose how such policy is implemented, as well as how the nominating committee (or the board) assesses its effectiveness.[6]  The SEC rule does not define diversity, and this leaves scope for companies to interpret it narrowly or broadly. This allowed many companies to issue only brief statements indicating that they considered diversity as part of an informal policy.[7] To address this ambiguity, a recent petition submitted to SEC by several institutional investors proposes that the disclosure requirements specify expressly that companies must include information about directors’ gender, racial, and ethnic diversity, as well as their mix of skills and experience.[8]

At state level, there are no significant gender diversity obligations imposed by corporate law. Resolutions encouraging board diversity have been passed in California, Illinois and Massachusetts. [9] The Delaware law requires directors to be natural persons, but has no provisions regarding qualifications or diversity attributes.[10] The Delaware Court of Chancery emphasised that it is the shareholders’ prerogative to determine the fitness or unfitness of individuals to become directors, and it would be highly improper for the court to second-guess their options.[11]

The Gender Diversity in Corporate Leadership Act is in its infancy. To become law, the Bill must be approved by both the House of Representatives and the Senate, and signed by the President. The journey is long, but it has an auspicious start. The Bill garnered the support of Catalyst, the American Bar Association, and leading national business association, the US Chamber of Commerce.

[1] Spencer Stuart “US Board Index” (2015). The 30 Percent Club figure is 19.2%.

[2] Other relevant US organisations include the Thirty Percent Coalition and 2020 Women on Boards.

[3] Us government Accountability Office, “Strategies to Address Representation of Women Include Federal Disclosure Requirements” (2016)

[4] See e.g. the European Commission, “Impact Assessment on Costs and Benefits of Improving the Gender Balance in the Boards of Companies Listed on Stock Exchanges” (2012)

[5] The European Commission, “Gender Balance on Corporate Boards: Europe is Cracking the Glass Ceiling” (October 2015)

[6] See Regulation S-K of the Securities Act of 1933, 17 C.F.R. § 229.407(c)(2)(vi)(2010).

[7] Luis Aguilar, “Speech by SEC Commissioner: Board Diversity: Why it Matters and How to Improve It” (2010)

[8]Petition for Amendment of Proxy Rule Regarding Board Nominee Disclosure” (2015)

[9] ABA Commission on Women in the Profession, “Report to the House of Delegates” (2016) 10

[10] Edward Welch, E. and Andrew Turezyn, Folk on the Delaware General Corporation Law 2009: Fundamentals (Philadelphia: Aspen Publishers, 2009) 244

[11] In Re Gulla, 115 A. 317, 318 (Del. Ch. 1921)

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The exercise of fiduciary powers for mixed purposes: A comment on Eclairs Group Ltd v JKX Oil and Gas plc


The proper purposes doctrine, also known as fraud on a power, is a cornerstone of the law of legal powers. The donee of a fiduciary power must exercise it only for the purposes for which it was conferred by the donor. For company directors, this rule is codified in s 171(b) of Companies Act 2006, which states that directors must “only exercise powers for the purposes for which they are conferred.”[1]

Directors, like other fiduciaries entrusted with the administration of another’s interests, enjoy a wide degree of authority that enables them to apply their business judgment in complex and rapidly changing contexts. Their decisions are often driven by several objectives and have multiple effects, proximate and remote. When a fiduciary is motivated by multiple purposes, all influential in different degrees, but some proper and some improper, the decision process is open to challenge. The judicial scrutiny of motives and purposes is a challenging task, akin to embarking on “a dark and unknown voyage across an exceedingly misty sea.”[2] What is the appropriate test for identifying the principal purpose? Is it possible to weigh all concurrent purposes and rank them in order of intensity? When improper purposes exist, is the decision liable to be set aside although the fiduciary exercised the power in complete good faith, with the sole aim of protecting the beneficiary’s interests?

In Eclairs Group Ltd and another v JKX Oil and Gas plc[3] the UK Supreme Court addressed these questions in the context of directors’ power to impose restrictions on voting and other rights attaching to shares. The decision clarifies the relation between the proper purposes rule and the duty to promote the success of the company, and suggests new developments regarding the test to determine the principal purpose. On the first point, the justices were in agreement that a genuine desire to protect the long term interests of the company will not validate the exercise of a power for a purpose that is outwith the range of purposes for which that particular power was granted. On the second point, the majority proposed, in obiter, a new test for identifying the principal purpose for which a power was exercised. When multiple purposes exist, it was argued, the principal purpose is the one but for whose presence the power would not have been exercised as it was. This is a departure from the current test, under which the principal purpose is the purpose about which directors felt the strongest. The other justices declined to express a conclusive view on the appropriate test, and appeared to hold strong reservations about the but-for test.

Eclairs, it is submitted, is a step in the right direction. The but-for test increases the certainty and predictability of directors’ exercise of powers, because it allows a decision to stand when it can be demonstrated that the directors would have adopted the same decision, had they placed appropriate focus on the permissible purpose. Nevertheless, this area of law remains uncertain until the but-for test is confirmed by the ratio decidendi of a Supreme Court decision.

The Facts

JKX Oil & Gas Plc was the parent company in a group whose main business consisted of development and exploitation of oil and gas reserves, primarily in Russia and Ukraine. The company was struggling, and the value of its shares fell to historically low levels. This made it vulnerable to hostile takeovers. The directors of JKX feared that two of the company’s minority shareholders, Eclairs Group Ltd and Glengary Overseas Ltd, planned to acquire control. Both these shareholders were controlled by Russian businessmen who had a reputation of corporate raiders.

In March 2013, Eclairs asked JKX to convene an extraordinary general meeting to consider ordinary resolutions for the removal of two directors and the appointment of three new directors. The proposed directors were associates of the two minority shareholders. JKX responded by issuing disclosure notices addressed to the minority shareholders and their controllers. The articles of association of JKX provided that the board had the power to issue a disclosure notice requesting information about persons interested in its shares, and the power to restrict the exercise of rights attaching to shares in the event of non-compliance. These powers were largely similar to those found in ss 793-797 of the Companies Act 2006. The disclosure notices requested information about the number of shares held, their beneficial ownership and any agreements or arrangements between the various persons interested in them, relating to the acquisition of shares in JKX, or to the exercise of any rights conferred by the holding of such shares. The responses came promptly. They admitted the existence of interests in JKX shares, but denied any agreements or arrangements. The directors considered that the responses were inadequate, because they believed that there were secret understandings between the addressees which they had not disclosed.

In April 2013, JKX convened the annual general meeting (AGM). The agenda included proposals for re-election of directors, and extending their powers to allot shares and disapply statutory pre-emption rights. In May 2013, Eclairs published several statements inviting the JKX shareholders to oppose the proposed AGM resolutions. Without the support of Eclairs and Glengary, the proposals requiring a special resolution were certain to fail, and those requiring an ordinary resolution were unlikely to pass.

Shortly before the AGM was due to take place, the JKX board resolved to exercise the power to issue restriction notices in relation to the shares held by Eclairs and Glengary, suspending their voting rights and restricting their transfer. Eclairs and Glengary challenged the board’s exercise of this power. They advanced several grounds, including breach of the proper purposes rule in s 171(b) of the Companies Act 2006. The only proper purpose for which the power to restrict shareholders’ rights could be exercised was to extract the relevant information. The board’s real purpose, the minority shareholders argued, was to ensure that the resolutions at the forthcoming AGM would be passed.

The Court Decisions

The High Court

The minority shareholders were successful at first instance.[4]

Mann J found that the directors had reasonable cause to believe that the responses to the disclosure notices were false or materially incorrect, because they failed to provide information on agreements or arrangements as to the exercise of voting rights. He also established that all directors shared a genuine desire to obtain the information which they felt had been withheld from them, and were at all times animated by an honest intention to act in what they perceived to be in the best interests of the company. Nevertheless, their exercise of the power to impose restrictive notices was improper.

After extensive cross-examination of most of the directors, the judge reached the conclusion that their principal purpose was to disenfranchise Eclairs and Glengary, so as to maximise the prospects of passing the AGM resolutions. The majority of directors did not regard the extraction of proper information as the main purpose of the power to impose restrictions. They believed they could use the power in what they conceived to be the best interests of the company, without a link to the extraction of information. In this case, their main objective was to hinder the cause of the raiders, with a view to benefit JKX in the long term.

Mann J disagreed with this approach. Although all directors genuinely believed that their decision was in the best interests of JKX, that did not change the fact that the power was exercised for an impermissible purpose. The only purpose for which the power to impose restrictions was conferred was to “provide a sanction or an incentive to remedy the default” in the disclosure.[5] The desire to benefit the company as a whole was not in itself sufficient for imposing restrictions, but could have been an appropriate objective “in conjunction with a more legitimate approach to the decision to impose restrictions.”[6]

Writing in obiter, Mann J went on to investigate what would have happened, had the directors confined themselves to the proper purpose of imposing restrictions as a means to compel the production of information. He found it “virtually inevitable” that that the directors would have reached the same decision and imposed the same restrictions.[7] The crucial difference between what had happened and the hypothetical scenario was that in the latter case the imposition of the restrictions would have been primarily motivated by a desire to induce the provision of information, coupled with a perception that it would be appropriate to prevent the minority shareholders from voting while they were withholding information that was relevant to the directors and the other shareholders. In the hypothetical case, the directors’ strong views about the dangers that the raiders posed to JKX’s long term interests would have been a secondary consideration, and would not have affected the propriety of their decision. Since the hypothetical case was not pleaded and did not arise until the final stages of the trial, Mann J did not allow JKX to raise it and to claim that they would have reached the same decision.[8] Consequently, he ruled that the board’s exercise of power was voidable and should be set aside.

JKX appealed and Eclairs cross-appealed. JKX did not contest the trial judge’s factual findings as to the directors’ principal purpose, but challenged his interpretation and application of the proper purposes doctrine. Eclairs challenged the decision as regards the validity of the disclosure notices and the directors’ cause to believe that the notices had been inadequately answered.

The Court of Appeal

The Court of Appeal unanimously rejected the cross appeal, but was divided on the proper purposes aspect.[9]

Sir Robin Jacob and Longmore LJ allowed the appeal, arguing that the proper purposes doctrine was not applicable to the directors’ power to disenfranchise shareholders. In their view, neither the statutory provisions of the Companies Act 2006 nor JKX’s articles of association limited the power to impose restrictions to the sole purpose of obtaining the requested information. When the board knows, or has reasonable cause to believe, that the information provided is false or materially incorrect, it has the power to restrict the voting rights of the shareholder, subject only to an overriding duty to act in the best interests of the company. In other words, failure to comply with a disclosure notice gives the directors a right to impose restrictions for any purpose which they in good faith consider to be in the interests of the company, including influencing the outcome of a forthcoming AGM. In the majority’s view, to restrict the power only to the purpose of obtaining information would mean to emasculate it and subvert the board’s constitutional authority to act in the best interests of the company.[10] This interpretation, the judges added, is not unduly harsh on shareholders. They can avert the restriction of their rights by simply providing accurate and timely information.[11]

In a long and forceful dissent, Briggs LJ rejected the majority’s arguments and defended Mann J’s analysis of the proper purposes doctrine. He stressed that directors, like trustees or other fiduciaries, must exercise their fiduciary powers for the purposes for which they were given. This rule is all the more important where the power is able to affect the constitutional balance of authority between shareholders and directors.[12] As regards the application of the proper purposes rule to the case at hand, Briggs LJ endorsed Mann J’s view that the directors’ principal purpose was improper. The exercise of the power was not validated by the concurrent existence of a subordinate but proper purpose, namely the desire to protect the company and its shareholders from the consequences of being kept in the dark about interests in the JKX shares.[13]

The Supreme Court

All five justices of the Supreme Court agreed to allow the appeal and restore Mann J’s decision but expressed different views on the proper course of action for identifying the principal purpose of a power.

Lord Sumption wrote the reasons for allowing the appeal, and the other justices concurred. He pointed out that the Court of Appeal erred in its interpretation of the purposes for which the power to impose restriction notices was granted. When the instrument granting the power is silent, the range of proper purposes is determined by looking at the context in which the power was granted and at its effects.[14] In the case at hand, all relevant circumstances point to the conclusion that the power to restrict the rights attaching to shares is subsidiary to the power to request information.[15] The Court of Appeal was wrong to regard it as independent from the need to obtain accurate information. The power to impose restrictions cannot be turned into a tool to manipulate the outcome of shareholders’ resolutions, or a weapon of defence against corporate raiders. This would upset the constitutional balance of rights between shareholders and directors, with broader implications on the proper operation of the capital market.[16]

In Lord Sumption’s view, the power to impose restriction notices has three closely related purposes: to induce the shareholder to comply with a disclosure notice; to protect the company and its shareholders against having to decide in the absence of all relevant information; and to impose a sanction on the addressee of a disclosure notice for as long as the non-compliance persists.[17] None of these purposes was dominant when the JKX board decided to restrict the minority shareholders’ rights. As the trial court established, the board’s main objective was to influence the outcome of the forthcoming AGM. Consequently, exercise of the power should be set aside, as per Mann J’s decision.

Lord Sumption’s analysis of the meaning and application of the proper purposes rule in the case of mixed purposes was the main point of disagreement between justices. Drawing on British and Australian precedents, he argued that, when a decision to exercise a fiduciary power is motivated by a mix or proper and improper purposes, the principal (or dominant, or substantial) purpose should be identified using a causal but-for test. The decision will be invalid if the improper purpose is causative, in the sense that, but for its presence, the power would not have been exercised.[18]

The but-for test for determining the most relevant purpose, Lord Sumption argued, has several advantages over the more conventional test, which equates the principal (dominant, substantive) purpose with the “weightiest” purpose, i.e. the purpose about which directors felt the strongest. First, the former test avoids the practical difficulties of the latter. When multiple concurrent purposes exist, it is difficult and impractical to weigh them and rank them in order of intensity.[19] Second, as a matter of principle and policy, a fiduciary power must be exercised only for the purposes for which it was given. When, as it is often the case, mixed purposes exist, the law allows the decision to stand as long as it has not caused injustice to the interests it seeks to protect. When injustice occurred, the evaluation of the decision inevitably moves “in the realm of causation.”[20] If without the improper purpose the impugned decision would not have been adopted, then it would be irrational to allow the decision to stand simply because the directors also had proper and weightier considerations in mind. Conversely, if both proper and improper motives existed, and the power would still have been exercised in the absence of the improper ones, there is no compelling reason to set the decision aside.[21]

In most cases, Lord Sumption conceded, the two tests will lead to the same result. The weightiest purpose is often causative as well. In Eclairs, however, the two tests led to different results.[22] The trial judge found that the weightiest purpose, namely the desire to influence the outcome of the AGM and defeat the corporate raiders, was improper, which rendered the decision voidable. He also found that the weightiest purpose was not causative. Had the directors applied their minds to the proper purposes of the power to impose restriction notices, they would have reached the same decision. Consequently, under a but-for test, the decision would probably have been allowed to stand. The latter scenario, however, was not pleaded in due course, and could not be taken into account.

Lord Hodge agreed unconditionally with the but-for test to the proper purpose rule, while Lord Clarke and Lord Mance (with whom Lord Neuberger agreed) declined to express a conclusive opinion. In their view, determining the test to be applied where multiple purposes exist requires further debate.

Lord Mance expressed “sympathy” with Lord Sumption’s but-for test, but remained sceptical about the rationales for adopting it.[23] He questioned Lord Sumption’s interpretation of the British and Australian cases that he invoked in support for the causal test, and disagreed that a causal approach has practical advantages over the principal (weightiest) purpose approach. In his view, it may be easier to identify the weightiest purpose than to determine how directors would have acted had they not taken into account improper considerations.[24] Furthermore, the evidential standard required to establish a causal link is unclear. Is probability enough or does the test require certainty that the decision would have been the same?[25]


Eclairs is illustrative of the most frequent scenario in which the proper purposes rule is invoked in company law: the exercise of a power affecting the balance of authority between directors and shareholders. In UK company law, the company’s constitution is essential in determining the distribution of decision-making powers between directors and shareholders. In contrast to other jurisdictions, where a board’s authority is provided directly by statute,[26] the Companies Act 2006 has no general provisions on directors’ powers. UK boards receive their powers from the shareholder body, through the provisions of the articles of association.[27] S 171 of Companies Act 2006 reinforces this contractual arrangement, by confining directors’ powers strictly to the purposes for which they were granted.

The board’s temptation to usurp the constitutional distribution of powers is more acute in two contexts. First, when the control of the company is disputed between competing groups, there is a real danger that the board will use its powers to maintain the status quo or to favour a particular group. Second, boards may be tempted to use their powers to undermine the shareholder franchise, by influencing the outcome of a general meeting. There is a long line of precedents relevant to these scenarios, forbidding directors to use their authority for the primary purpose of usurping shareholders’ rights.[28]

Although the danger of misusing the powers to usurp the constitutional balance of authority is real, the proper purposes rule must not unduly restrict directors’ discretion. The courts must be careful not to intervene in the company’s internal management when reviewing the business decisions of directors. It is well established, both in UK company law and elsewhere, that courts will not review the commercial merits of directors’ decisions.[29] Consequently, the test for determining if a power was exercised for proper purposes must balance the need to protect the constitutional allocation of powers inside the company with the need to shield directors’ decision making authority from judicial second-guessing. Taking into account both these considerations, it may seem appropriate to consider proper any purpose that directors believe, in good faith, to be in the best interests of the company and its members as a whole. This is the approach that the majority of the Court of Appeal took in Eclairs.[30]

Such a broad understanding of the proper purposes rule, however, is not supported by relevant authority. In Hogg v Cramphorn Ltd, Buckley J stated that directors’ belief that what the majority shareholders intended to do was detrimental to the interests of the company is irrelevant to the question of proper purposes.[31] Similarly, in Howard Smith v Ampol Petroleum, Lord Wilberforce stated that, in determining the range of proper purposes associated with a particular power, the duty to act in the best interests of the company is not directly relevant.[32] More recently, in Dryburgh v Scotts Media Tax Ltd, Lord Glennie examined the relevant precedents and concluded that directors are not allowed to rely on the duty to act in the best interests of the company when they used a power for a collateral purpose.[33]

The confusion between the two duties may have been caused by their historical interconnection. Before Companies Act 2006, directors’ core fiduciary duty and the proper purposes rule were often amalgamated in a compound duty to “act bona fide in what [the directors] consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose.” [34] Companies Act 2006 reformulates and separates the two duties, thus ending the earlier debates about their independence. S 171(b) codifies the proper purposes rule as a positive duty to exercise powers only the purposes for which they are conferred, as opposed to the negative equitable duty not act for any collateral purpose. The duty to act in the interests of the company is codified in s 172 as a duty to promote the success of the company. The two duties, although distinct, often overlap. Within the objective limits of a power, a director may use it for any purpose which he believes promotes the success of the company. Where a power is used for a collateral purpose, however, it does not matter whether the director honestly believed that in exercising the power as he did he promoted the success of the company, or whether the decision, objectively viewed, was in the company’s best interests.[35]

If the duty to promote the success of the company is not directly relevant to the proper purposes rule, how is the propriety of a purpose determined? The courts have answered this question by developing a four stage test: (1) identify the power whose exercise is challenged; (2) identify the proper purposes for which the power was conferred; (3) identify the substantial purpose for which the power was exercised; and (4) determine if that purpose was proper.[36] Steps two and three are particularly difficult to apply in a corporate context.

The main practical difficulty in applying step two is that directors’ powers are often granted in broad terms, to allow them to be used for a variety of profitable purposes and business opportunities. It is generally agreed that identifying the proper purposes of a power is a matter of interpreting the instrument granting the power and the context in which it was granted.[37] In company law, the interpretation of the articles of association is the main method by which courts determine if a particular purpose is proper. The delegated powers, however, do not have an intrinsic, exhaustive list of proper purposes. The constitution is rarely the product of detailed debates about the purpose of a specific provision or power. Most provisions are either adopted from the model articles or are broad, boilerplate statements.[38] In Howard Smith, Lord Wilberforce recognised this difficulty and acknowledged that it is impossible to enumerate exhaustively the proper purposes of a power.[39]

While step two requires an objective analysis of the source and context of the delegation of power, step three is a subjective exercise.[40] In determining the particular ends that the directors intended to achieve, the courts must take into account the all relevant circumstances that existed when the decision to exercise the power was made.[41] When the directors are motivated by more than one purpose, the test for legality is the primary or dominant purpose.[42]

The traditional understanding of the primary or dominant purpose is the purpose that weighted the heaviest in directors’ minds when they exercised the power.[43] In Eclairs, Lord Sumption questioned the practicability of the weightiest purpose test, by emphasising the difficulties associated with measuring the intensity of each purpose and arranging them in order of importance.[44] Lord Sumption’s view finds support in Australian jurisprudence and case law. In many cases where multiple purposes exist, it is argued, not even the decision maker is able to identify which purpose was the most influential in his mind. Consequently, it is artificial and meaningless to ask the court to evaluate the purposes and select a dominant one.[45] Allowing the courts to uphold or invalidate a decision based on what they consider to be the most influential purpose in directors’ minds may give judges the power to interfere with directors’ business judgment, which goes against the fundamental principle of judicial non-interference with a company’s management.[46]

The but-for test avoids these pitfalls. It neither requires an evaluation of the intensity of purposes, nor creates the danger of judicial second-guessing of business decisions. When directors are actuated by both proper and improper purposes, the proper purpose rule is breached only if there is an improper purpose which is causative, in the sense that, but for its presence, the decision would not have been taken as it was. In Eclairs, Lord Sumption relied on Whitehouse v Carlton Hotel Pty Ltd[47] as support for the causal test. Although the but-for test analysis was obiter in Whitehouse, numerous other Australian courts have applied this test.[48] The test was also applied by British courts, mostly in the context of trustees’ powers of appointment. The test has doctrinal support as well. After reviewing a significant number of authorities on the application of the proper purposes rule, the leading treatise on legal powers concludes that “the ‘but for’ test seems more appropriate and more consistent with the reported cases.”[49]

A causal approach to the proper purposes doctrine has close parallels to the fiduciary duty to take into account relevant considerations and omit irrelevant ones (the duty of genuine consideration).[50] This duty is not breached automatically when a relevant consideration is ignored, or when an irrelevant one is taken into account. A fiduciary will be in breach if it can be demonstrated that, but for his ignorance or misunderstanding of a relevant consideration, or but for the presence of an irrelevant consideration, he would have acted differently, or not at all.[51]


For the most part, the distinction between the weightiest and the causative tests for identifying the principal purpose may be irrelevant. The weightiest purpose will usually be causative as well. When the two tests lead to different results, as in Eclairs, identifying the most suitable test becomes a pressing concern. Lord Sumption’s interpretation of the proper purposes rule has strong intellectual appeal. Allowing a decision to stand when it can be proven that the same result would have been achieved if the improper purposes had been ignored enhances the certainty and finality of fiduciaries’ decisions and reinforces the general principle against interference with their exercise of discretion. The Supreme Court’s decision in Eclairs, however, could only suggest these developments in general terms. The trial judge investigated only tentatively the causal link between the improper purpose of aiming to influence the outcome of the AGM and the exercise of the power to impose restrictions, and refused to allow any point on causation to be raised. It is to be hoped that the Supreme Court will follow Lord Sumption and adopt the but-for test in the future.

[1] S 171(b) codifies the pre-existing law on the subject. See Re West Coast Capital (LIOS) Ltd [2008] CSOH 72, per Lord Glennie at [21].

[2] Ex Parte Hill (1883) 23 Ch D 695 at 704, per Bowen LJ.

[3] [2015] UKSC 71; [2016] 1 BCLC 1.

[4] Eclairs Group Ltd and another v JKX Oil and Gas plc and others [2013] EWHC 2631 (Ch); [2014] 1 BCLC 202.

[5] [2014] 1 BCLC 202 at 265.

[6] Ibid. at 273.

[7] Ibid at 274.

[8] Ibid at 271.

[9] Eclairs Group Ltd and another v JKX Oil & Gas plc and others [2014] EWCA Civ 640; [2014] 2 BCLC 164.

[10] [2014] 2 BCLC 164 at 201-202.

[11] Ibid. at 201.

[12] Ibid. at 199.

[13] Ibid. at 197-198.

[14] [2016] 1 BCLC 1 at 18.

[15] Ibid. at 19.

[16] Ibid.

[17] Ibid. at 18.

[18] Ibid at 11-13.

[19] Ibid at 11.

[20] Ibid.

[21] Ibid.

[22] Ibid.

[23] Ibid. at 25

[24] Ibid.

[25] Ibid.

[26] See e.g. section 141(a) of the Delaware General Corporation Law.

[27] David Kershaw, Company Law in Context: Text and Materials, 2nd ed. (Oxford: OUP, 2012) 191.

[28] Fraser v Whalley (1864) 2 H & M 10; Cannon v Trask (1875) LR 20 Eq 669; Anglo-Universal Bank v Baragnon (1881) 45 LT 362; Piercy v S Mills & Co [1918-19] All ER Rep 313; Hogg v Cramphorn Ltd [1966] 3 All ER 420; Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126.

[29] See Carlen v Drury (1812) 1 Ves & B 154, 158, per Lord Eldon: “This court is not to be required to take the management of every playhouse and brewhouse in the Kingdom”. See also Andrew Keay, Directors’ Duties, 2nd ed. (Bristol: Jordans, 2014) 110-111; Geraint Thomas, Thomas on Powers, 2nd ed. (Oxford: OUP, 2012) 444.

[30] [2014] 2 BCLC 164 at 201-202.

[31] Hogg v Cramphorn Ltd [1966] 3 All ER 420 at 428.

[32] Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126 at 1134. See also Regentcrest v Cohen [2001] BCC 494, 514, per Jonathan Parker J.

[33] Dryburgh v Scotts Media Tax Ltd [2011] CSOH 147 at [92].

[34] Smith & Fawcett Ltd, Re [1942] 1 All ER 542 at 543, per Greene LJ. See also JJ Harrison (Properties) Ltd v Harrison [2002] 1 BCLC 162 at 173, per Chadwick LJ.

[35] Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598; Advance Bank v FAI Insurances (1987) 12 ACLR 118 at 137; Whitehouse v Carlton Hotel Pty Ltd (1987) 11 ACLR 715 at 721.

[36] Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126 at 1134; Madoff Securities International Ltd (in liquidation) v Raven and others [2013] EWHC 3147 (Comm) at [195]-[196].

[37] Peskin v Anderson [2001] 1 BCLC 372; Criterion Properties plc v Stratford UK Properties LLC and others [2006] 1 BCLC 729. Richard Nolan, “Controlling Fiduciary Power” (2009) 68(2) Cambridge Law Journal 293 at 299.

[38] Kershaw, supra note 27 at 395-396.

[39] Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126 at 1134 (“To define in advance exact limits beyond which directors must not pass is, in their Lordships’ view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated”). See also David Kershaw, “The Illusion of Importance: Reconsidering the UK’s Takeover Defence Prohibition’” (2007) 56(2) International & Comparative Law Quarterly 267 at 282-289.

[40] Nolan, supra note 37 at 299.

[41] Thomas, supra note 29 at 454.

[42] Hirsche v Sims [1894] AC 654, PC; Hindle v John Cotton Ltd (1919) 56 SLT 625; Mills v Mills (1938) 60 CLR 150, Aust HC; Howard Smith Ltd v Ampol Petroleum Ltd and others [1974] 1 All ER 1126 at 1131.

[43] [2016] 1 BCLC 1 at 10.

[44] Ibid.

[45] David Bennett, “The Ascertainment of Purpose when Bona Fides are in Issue: Some Logical Problems” (1989) 12(1) Sydney Law Review 5 at 7; Keay, supra note 29 at 101-102.

[46] Keay, supra note 29 at 101.

[47] Whitehouse & Anor v Carlton Hotels Pty Ltd (1987) 61 ACLR 715 at 721 (“As a matter of logic and principle, the preferable view would seem to be that, regardless of whether the impermissible purpose was the dominant one or but one of a number of significantly contributing causes, the allotment will be invalidated if the impermissible purpose was causative in the sense that, but for its presence, the power would not have been exercised”).

[48] Keay, supra note 29 at 103-104.

[49] Thomas, supra note 29 at 454.

[50] Pitt v Holt and Futter v Futter [2011] 2 All ER 450 at 478-479.

[51] Thomas, supra note 29 at 550-551.

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Are Corporations Gendered?

To the dyed-in-the-wool neoclassical law and economics scholar, thinking about business corporations in terms of gender attributes is pushing the reification metaphor a notch too far. An emerging corporate governance body of research, however, suggests that there are connections between values that are stereotypically associated with the masculine or feminine gender, and the values that directors and managers prioritise.  Directors who emphasise stereotypical masculine values such as power, achievement and competitiveness, are more shareholder oriented. Conversely, universalism, benevolence and concern with relationships, values associated with the feminine gender, correlate positively with a stakeholder approach. As the Anglo-American model of corporate governance moves away from unmitigated shareholder primacy towards a more long-term, stakeholder-inclusive approach, managers and boards of directors are expected to display more attributes belonging to the female gender and leadership stereotypes. This insight brings a new perspective on the multitude of recent legislative, regulatory and market-based initiatives aimed at increasing female representation in the boardroom and in executive positions.

Corporate personality and corporate values       

Neoclassical and institutional economics, which have been the dominant ideologies behind the Anglo-American model of corporate governance over the past few decades, attach little importance to the idea of separate corporate legal personality. Building on the visionary insights of Berle & Means, Coase, and Jensen & Meckling, the prevailing contemporary understanding of the corporation emphasises its contractual foundations. The corporation is neither a person, nor a thing capable of being owned, but a set of contracting relationships among individuals. References to its separate personality only obscure the essence of these transactions.[1]

Before the rise of the neoclassical theory of the firm, philosophers, political scientists and lawyers were engaged in seemingly interminable debates about the real or fictitious nature of the corporate personality. These controversies died down at the end of 1920s, when the corporate realism theory succumbed to a series of persuasive critiques.[2] In the recent years, however, the interest in realist ideas has been revived by issues such as corporate criminal liability, or the extent to which corporations should be given human rights, such as freedom of speech, freedom of religion, or the right not to provide self-incriminating evidence. Another current problem that echoes past controversies on corporate personality is whether corporations can be said to have interests and values.

The problem of corporate interests and values is often addressed from the shareholders versus stakeholders orientation of directors and managers. The shareholder-stakeholder debate is as old as the modern theory of the firm. Launched with the Berle-Dodd dispute of the early 1930s, the issue of whom directors and managers should serve continues unabated to this day.[3] The Anglo-American corporate governance has traditionally embraced the shareholder wealth maximisation perspective. Legislative and regulatory reforms over the past decades, however, have given more prominence to the interests of non-financial corporate stakeholders. These reforms include increased transparency on non-financial and sustainability issues, and fiduciary duties to consider the interests of non-shareholder constituencies. The shift towards a more inclusive stakeholder approach has affected the public perceptions and expectations regarding effective corporate leadership.

Corporate values and gender stereotypes

An emerging strand of research in corporate governance links the shareholder versus stakeholder interests orientation with feminine and, respectively, masculine attributes and leadership styles.

Research on gender stereotypes consistently identifies two distinct types of behaviour, labelled “agentic” and “communal”. The agentic qualities are associated with a masculine style and the communal qualities are regarded as feminine. The agentic stereotype refers to a self-interested, task-focused orientation and concern with mastery, dominance, and control. The communal stereotype refers to an interpersonal orientation and concern with relationships and the welfare of others.[4]

In the context of leadership roles, research has established the existence of a deeply-rooted perception that effective leaders are endowed with agentic qualities, such as ambition, confidence, self-sufficiency, and dominance, and display fewer communal attributes. The role of business executive, in particular, is thought to require agentic attributes such as task focus, decisiveness, and competitiveness. This perceived fit between what is managerial and what is masculine led to the “think manager – think male” effect, which has proven to be relatively durable since the early 1970s.[5]

These gender differences have also been found at boardroom level. Adams and Funk found that male and female directors are significantly different in terms of priorities and sets of values. Male directors are more concerned with power and task achievement, while female directors care more about universalism and benevolence.[6]  Furthermore, Adams et al. provide evidence that these differences in values between male and female directors correspond to a difference in shareholder and stakeholder orientation. Directors who emphasise stereotypical agentic values are more shareholder oriented.  Conversely the feminine communal leadership style correlates negatively with a shareholder wealth maximization approach. [7] Further research confirms these insights. Bear et al. show that firms with a higher percentage of female directors are more stakeholder oriented. They have more favourable work environments, higher concern for environmental CSR and a higher level of charitable giving.[8] Matsa and Miller provide direct evidence that Norwegian firms affected by gender quotas increased their employee costs and employment levels, while decreasing their returns to shareholders.[9]

Enlightened shareholder value and the androgynous board

In recent years, the “think manager – think male” phenomenon has shown signs of subsidence. Several factors have combined to create an emerging, androgynous leadership style.

At market level, the increasing presence and visibility of females in leadership positions are gradually altering perceptions about optimal leadership attributes.[10] At doctrinal level, there is a growing recognition that effective leadership requires a combination of the features associated with the masculine, task‐oriented and the feminine, relations‐oriented leadership styles. Thus, a new dimension to gender and leadership stereotypes has been added: the androgynous leadership style, incorporating both male and female qualities.[11]

The increased relevance of stakeholder concerns in Anglo-American corporate governance brings to the forefront the need to redefine the set of values on which the model of effective leadership is based. The board’s ability to nurture strong relations with the various corporate stakeholders has become a central part of its overall purpose and function. The relational function of the board is increasingly recognized as central in providing and maintaining resource networks that are essential for the company’s survival and success. Thus, the stereotypical feminine qualities of interpersonal orientation and concern with the welfare of others have become an essential requirement for an effective board.


[1] Michael Jensen and William Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” (1976) 3 Journal of Financial Economics 305 at 310; Frank Easterbrook and Daniel Fischel, “The Corporate Contract” (1989) 89 Columbia Law Review 1416 at 1426.

[2] William Bratton, Jr., “The New Economic Theory of the Firm: Critical Perspectives from History” (1989) 41 Stanford Law Review 1471 at 1491.

[3] Adolf Berle, “Corporate Powers as Powers in Trust” (1931) 44 Harvard Law Review 1049; E. Merrick Dodd, “For Whom Are Corporate Managers Trustees?” (1932) 45 Harvard Law Review 1145; Adolf Berle, “For Whom Managers Are Trustees: A Note” (1932) 45 Harvard Law Review 1365.

[4] See David Bakan, The Duality of Human Existence: Isolation and Communion in Western Man (Boston: Beacon Press, 1966); Linda Carli and Alice Eagly, “Gender Effects on Social Influence and Emergent Leadership” in Gary Powell, ed., Handbook of Gender and Work (Thousand Oaks, CA: Sage, 1999) 203; Ronit Kark and Alice Eagly, “Gender and Leadership: Negotiating the Labyrinth” in Joan Chrisler and Donald McCreary, eds., Handbook of Gender Research in Psychology, vol. 2 (New York: Springer, 2010) 443 at 448-449.

[5] Richard Martell et al., “Sex Stereotyping in the Executive Suite: ‘Much Ado about Something’” (1998) 13 Journal of Social Behavior and Personality 127.

[6] Renee Adams and Patricia Funk “Beyond the Glass Ceiling: Does Gender Matter?” (2012) 58 Management Science 219 at 220.

[7] Renee Adams, Amir Licht and Lilach Sagiv, “Shareholders and Stakeholders: How Do Directors Decide?” (2011) 32 Strategic Management Journal 1331 at 1348.

[8] Stephen Bear, Noushi Rahman and Corinne Post , “The Impact of Board Diversity and Gender Composition on Corporate Social Responsibility and Firm Reputation” (2010) 97 Journal of Business Ethics 207 at 210.

[9] David Matsa and Amalia Miller, “A Female Style in Corporate Leadership? Evidence from Quotas” (2013) 5 American Economic Journal: Applied Economics 136.

[10] These initiatives include: non-profit organisations (such as Catalyst, The 30% Club, or 2020 Women on Boards), diversity awards (such as the Catalyst Award, or DiversityInc Top 50 Companies for Diversity), diversity indexes (such as Gender Diversity Index (GDI) of Fortune 1000 Companies) and board-ready female databases (such as Global Board Ready Women).

[11] Daewoo Park, “Androgynous Leadership Style: An Integration Rather than a Polarization” (1997) 18 Leadership & Organization Development Journal 166; Anne Koenig et al., “Are Leader Stereotypes Masculine? A Meta-Analysis of Three Research Paradigms”, (2011) 137 Psychological Bulletin 616.

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The Benefit Corporation: From CSR Label to Hybrid Corporate Form

Corporate social responsibility is the new norm in business. With the rapid growth of socially conscious customers,[1] employees[2] and investors,[3] no company can afford to ignore CSR. Green, responsible, sustainable, ethical or socially conscious have become staple terms to describe products or business strategies. Businesses that are genuinely committed to corporate social responsibility find it increasingly difficult to distinguish themselves from competitors that make similar claims but do not actually share the vision. This problem, often referred to as “greenwashing,” is affecting ethically-minded consumers, investors, and businesses alike.

Third-party certification is an important remedy against greenwashing. In both Europe and the US, social and environmental labelling initiatives have multiplied in recent years.[4] These labels usually certify a specific product (e.g. “Organic” or “Fair Trade” coffee), facility (e.g. a “LEED” or “Energy Star” building) or line of business (e.g. “Rainforest Alliance” farms or forestry companies). They do not offer a complete picture of a company’s performance across all relevant environmental, social and governance indicators.

To address this gap, B Lab, a Pennsylvania-based not-for-profit organisation, has created a certification system for businesses wishing to be recognised as genuinely committed to social responsibility. In 2007, B Lab launched a certification programme that evaluates businesses (incorporated or non-incorporated) against a set of rigorous social, environmental, accountability and transparency standards. Unlike CSR certifications that target a particular product or line of business, the B Lab certification applies across all product lines and issue areas of the certified entity. Businesses that achieve the minimum performance standards and meet the legal requirements become certified benefit corporations (or certified B Corps).[5]

To date, over 1,200 businesses from 38 countries have the status of certified B Corporation.[6] These tend to be start-ups or small businesses, but a few house-hold names such as Ben and Jerry’s or Patagonia have also joined the B Corp family. Although increasingly popular, the B Corp certification has no legal status: it is simply a label provided by a private organisation, without any specific legislative framework or legal consequences attached to it. The B Corp certification is thus mainly a marketing tool that enhances the visibility of socially responsible businesses wishing to distinguish themselves from greenwashing competitors. It does not address the legal obstacles that mission-driven for-profit companies face in the US and elsewhere. Chief among these obstacles is the deeply ingrained view that the core role of managers of business corporations is to maximise shareholders’ wealth.

Fiduciary duties and the US constituency statutes

Milton Friedman, Nobel Prize laureate and one of the twentieth century’s most prominent advocates of free markets, famously stated that the one and only social responsibility of a business corporation is to increase its profits by all available legal means.[7] US corporate law largely reflects this view: the current legal framework is structured to ensure profit maximisation, not social responsibility.[8] The Michigan Supreme Court forcefully articulated this idea almost a century ago, in Dodge v. Ford Motor Company.[9] The company’s president and majority shareholder, Henry Ford, sought to use the corporate profits to subsidise car price reductions and to increase employment, instead of distributing dividends. Henry Ford’s vision is a textbook example of genuine CSR: the interests of customers and employees were ends in themselves, rather than mere means to shareholder wealth maximisation. This, however, was the very reason why the court found Henry Ford’s decision flawed:

A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.[10]

The current American corporate law remains largely unchanged. A board’s decision to use retained earnings to finance price reductions or to increase employee salaries is immune from shareholder attack only if it is justified as a device to increase long-term shareholder wealth.

The constituency statutes adopted by a majority of US states over the past two decades have not redressed the balance between shareholders and other constituencies. The constituency statutes were adopted in response to the wave of hostile leveraged buyout transactions of the 1980s. These transactions were often highly detrimental for non-shareholder constituencies. The typical hostile acquirer replaced incumbent senior managers, sold off core corporate assets, laid off employees and increased significantly the corporate debt. Intense managerial lobbying led to the rapid adoption by state legislatures of non-shareholder constituency statutes.

These statutes grant directors the power (but, with very few exceptions, not the duty) to balance the interests of other corporate constituencies against the interests of shareholders in setting the corporate policy. The constituency statutes offer little in the way of genuine CSR. They neither displace shareholder wealth maximisation nor give directors the power to advance the interests of other stakeholders as ends in themselves. Moreover, none of these statutes grants any non-shareholder constituency the right to sue directors for failure to take their interests into account.[11]

Delaware, the most important corporate law jurisdictions in the US,[12] does not have a constituency statute. The Delaware Supreme Court has ruled that, in creating anti-takeover defences, the board may consider the interests of other constituencies only if there is a related benefit to the long-term shareholder value.[13] In a recent decision, the Delaware Court of Chancery reaffirmed that there is very little scope for genuine CSR in Delaware law, both in the regular course or business and in a change of control scenario.

eBay Domestic Holdings, Inc. v. Newmark[14] concerned the validity of the business model adopted by Jim Buckmaster and Craig Newmark, the founders of the free classifieds website Craigslist. Buckmaster and Newmark were majority shareholders and directors of Craigslist. Their business plan was to operate the company in the interest of the community as a whole, by maintaining nearly all classified advertisements free of charge. Although a for-profit business, Craigslist’s business culture and values placed customers ahead of shareholders. Buckmaster and Newmark adopted a series of protective devices (including a shareholder rights plan) which allowed them to protect their business vision against eBay, a disgruntled shareholder.

Chancellor Chandler held that, in most instances, genuine CSR is incompatible with the for-profit corporate form. In a for-profit corporation, a policy that does not seek to maximise shareholder value is inconsistent with directors’ fiduciary duties:

I personally appreciate and admire Jim’s and Craig’s desire to be of service to communities. The corporate form in which Craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends […] Having chosen a for-profit corporate form, the Craigslist directors are bound by the fiduciary duties and standards that accompany that form […] I cannot accept as valid for the purposes of implementing the Rights Plan a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders.[15]

In light of these decisions, there is considerable uncertainty in the US corporate law as to when and to what extent corporate directors may consider the interests of non-shareholder constituencies. Hence the need for new legal solutions able to meet the unique needs of for-profit mission-driven businesses. Several alternative forms of business organisation have been created, such as hybrid not-for-profit corporations, low-profit limited liability companies (L3Cs), or flexible purpose corporations. None of these vehicles, however, has proven effective in serving the public interest and in meeting the needs of the entrepreneurs, investors, and consumers.[16] This is the gap that the registered B Corp, a newly introduced form of business corporation, aims to fill.

Registered B Corps: “Milton Friedman would have loved this” [17]

The certified B Corp programme launched by B Lab did little to alleviate the legal uncertainties regarding the compatibility between directors’ fiduciary duties and promotion of other constituencies’ interests. Something more was needed: a hybrid form of business organisation able to balance effectively the profit seeking and social benefit functions. Hence, B Lab partnered with Drinker Biddle and Reath LLP and drafted Model Legislation[18] for benefit corporations (often referred to as B Corps or registered B Corps).[19]

Certified B Corps and registered B Corps are two distinct aspects of the benefit corporation movement. The former is a marketing tool allowing mission-driven businesses anywhere in the world to be attested by B Lab as being socially responsible. The latter is a legally recognised form of for-profit corporation, available to companies with their registered offices in one of the US jurisdictions that have passed benefit corporations legislation.

Maryland was the first US state to pass benefit corporation legislation in 2010. Other states followed suit quickly. Currently, 27 states have passed benefit corporation statutes, and 14 other states are in the process of adopting them.[20] The benefit corporation statutes are placed within existing state corporation codes, so that the latter apply to benefit corporations in every respect except the matters explicitly covered by the former. There are no taxation benefits specific to registered B Corps.

To date, nearly 1600 benefit corporations have been incorporated across the US, including companies like Method Products, Ben and Jerry’s, Patagonia, Plum Organics, Greyston Bakery and Rasmussen College.[21]  In July 2013, Delaware became the 19th state to enact benefit corporation legislation. The Delaware B Corp is officially named “public benefit corporation” or “P.B.C.”, but is typically be referred to as benefit corporation or B Corp. Currently there are close to 200 benefit corporations in Delaware.[22]

The benefit corporation statutes vary from state to state, but they have similar core requirements with respect to purpose, accountability, and transparency:

  • benefit corporations must have as stated purpose the creation of a material, positive impact on society and the environment;
  • in discharging their fiduciary duties, directors must take into account, in addition to shareholders’ interests, a wide range of non-financial interests;
  • benefit corporations must report regularly on their overall social and environmental performance as assessed against a comprehensive, credible, independent, and transparent standard.[23]

The Model Legislation requires B Corps to have as stated purpose the creation of a general public benefit and, optionally, more specific public benefit purposes. The general public benefit purpose requires consideration of the effects that the business has on society and the environment. These include:

  • the effects on employees of the benefit corporation, its subsidiaries, and its suppliers;
  • the interests of customers;
  • community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries, or its suppliers are located;
  • the local and global environment.[24]

Examples of specific benefits include:

  • providing low-income individuals or communities with beneficial products or services;
  • protecting or restoring the environment;
  • promoting the arts, sciences, or advancement of knowledge.[25]

The idea behind requiring a general public benefit was to prevent the use of the B Corp form by corporations only interested in greenwashing. Without a general benefit requirement, some B Corps could choose only a narrow specific public benefit purpose and dismiss as irrelevant all other non-financial considerations when making decisions.[26]

Although directors must take into account the effects that their business decisions have on a wide range of stakeholders, these stakeholders are not owed any direct duties and normally have no enforcement rights.[27] The Model Legislation introduces a “benefit enforcement procedure” which specifies the circumstances under which a claim for failure to pursue the stated public benefit purpose, or a claim for breach of duty may be asserted against the B Corp or its directors or officers.[28]

The Delaware benefit corporation legislation differs from Model Legislation in several respects. First, Delaware requires companies to choose one or more specific public benefit purposes, rather than simply allowing them to do so.[29] Second, Delaware requires reporting to shareholders on a biennial rather than annual basis.[30] Finally, the Delaware statute does not include a special benefit enforcement proceeding. Enforcement of directors’ duties follows the general corporate law regime.

To B or not to B Corp

What are the advantages of becoming a registered B Corp, as compared to a regular for-profit corporation? From a corporate law perspective, there are several clear advantages.

First, in a takeover scenario, the target’s directors must consider the long-term interests of the benefit corporation, including the possibility that these interests may be best served by the continued independence of the benefit corporation.[31] This may not always be allowed in a regular corporation. The Craigslist case showed that mission-driven entrepreneurs running a regular for-profit company may not be able to maintain their business vision in the face of a hostile change of control.

In Delaware, a state without a constituency statute, in a change of control scenario the business judgment rule standard of review is replaced with the enhanced scrutiny standard. Under this standard, directors’ decision-making must satisfy the requirements laid down in Unocal[32] and Revlon[33]. Unocal holds that a board of directors may implement anti-takeover defences only if they have reasonable grounds to believe that the proposed threatens the target’s corporate policy and effectiveness (which includes the need to protect non-financial interests), and the defensive measures are proportional to the threat. In Revlon the Court declared that, when the sale or break-up of the company is inevitable, the target managers’ fiduciary obligations require them to maximise the value of the existing shareholders by seeking the highest price available. Under the Delaware benefit corporation statute, however, the board’s obligation to consider other constituencies and society as a whole does not go away in the context of a merger or acquisition. Even if a board concludes that it is in the interests of shareholders and other constituencies to sell the company, it cannot simply sell to the highest bidder, without considering which bidder is the most suitable to continue promoting the public benefit purpose.[34]

Second, B Corp statutes remove the existing ambiguities regarding directors’ ability to consider non-financial interests as ends in themselves when making business decisions. Despite the protection that the business judgment rule offers to regular business decisions, there is a widespread belief that directors’ options are constrained to acting only in the financial interests of shareholders. This impediment is removed by the new corporate form, which explicitly requires directors to take multiple interests into consideration when making decisions.[35]

Finally, the registered B Corp form offers to mission-driven entrepreneurs certain safeguards to maintain the public benefit focus over time. For example, the amendment of the constitutional documents to delete the public benefit purposes and terminate the B Corp status requires a super-majority of two-thirds or more of voting rights.[36]

Beside these legal benefits, registered B Corps reap the same marketing benefits as certified B Corps. They stand out in an increasingly confusing marketplace, by voluntarily committing to be legally bound by higher standards of corporate purpose, accountability, and transparency. 

The future of benefit corporations

The benefit corporation statutes have the potential to create a meaningful impact on the corporate social responsibility movement, by giving mission-driven entrepreneurs and managers the tools to create and enforce a long-term sustainable business strategy. But will the B Corp movement garner enough traction to achieve this potential? Several challenges lie ahead.

The first challenge is viability. Will B Corps prove sufficiently attractive for investors? Even socially responsible investors will look for a record of long-term returns or strong long-term prospects that give them confidence to part with their money. Sceptics doubt that registered B Corps will be able to compete with greenwashing regular for-profit corporations. Registered B Corp, they argue, are destined to remain small businesses, since it is very unlikely that such corporations will be able to bear the costs of an initial public offer and the costs of subsequent compliance with listing requirements.[37]

Another test that B Corps have to pass is that of a continuing genuine commitment to the public benefit. If, despite the safety measures aimed to prevent greenwashing, B Corps will be used as window-dressing to attract ethical investors and customers, the benefit corporation movement will rapidly lose credibility among socially responsible investors and policymakers.[38]



[1] NIELSEN, “Global Consumers are Willing to Put Their Money Where Their Heart is When it Comes to Goods and Services from Companies Committed to Social Responsibility” June 17, 2014

[2] Jeanne Meister, “Corporate Social Responsibility: A Lever For Employee Attraction & Engagement” Forbes, June 06, 2012

[3] Eurosif, “European SRI Study” (2014); US-SIF, “Report on US Sustainable, Responsible and Impact Investing Trends” (2014)

[4] See e.g. UNOPS, “A Guide to Environmental Labels” (2009)

[5] h


[7] Milton Friedman, “The Social Responsibility of Business is to Increase Its Profits” New York Times Magazine, September 13, 1970

[8] William H. Clark, Jr. et al., “The Need and Rationale for the Benefit Corporation: Why It Is the Legal Form That Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public” White Paper (2013) p 5 (hereinafter “White Paper”)

[9] Dodge v. Ford Motor Company, 170 N.W. 668 (Mich. 1919)

[10] Ibid at 684

[11] Leo Strine, “Making It Easier For Directors to ‘Do the Right Thing’?” (2014) 4 Harvard Business Law Review 235 at 238-239 (hereinafter “Strine”)

[12] Delaware remains the chosen home of more than half of all US publicly traded companies; 65% of Fortune 500 companies are incorporated in Delaware. Delaware Division of Corporations, “Annual Report” (2013)

[13] Unocal Corp. v. Mesa Petroleum Co. 493 A.2d 946 (Del. 1985)

[14] eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010)

[15] Ibid. at 34

[16] For an analysis of these organisation forms see Annex B to the White Paper.

[17] Andrew Kassoy, co-founder of B Lab, cited in B Lab, “Maryland First State in Union to Pass Benefit Corporation Legislation” CSR Wire, April 14, 2010

[18] (hereinafter “Model Legislation”)

[19] To avoid confusion with certified B Corps, I will refer to benefit corporations as registered B Corps.


[21] (1589 as of 07 April 2015)

[22] (184 as of 07 April 2015)

[23] Model Legislation ss. 401-402.

[24] Model Legislation s. 301

[25] Model Legislation s. 102


[27] S. 365 (b) of the Delaware statute expressly specifies that directors owe no duty to stakeholders: “A director of a public benefit corporation shall not […] have any duty to any person on account of any interest of such person in the public benefit or public benefits identified in the certificate of incorporation or on account of any interest materially affected by the corporation’s conduct […] [A director] will be deemed to satisfy such director’s fiduciary duties to stockholders and the corporation if such director’s decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.”

[28] Model Legislation s. 305. This section broadens the categories of persons that can bring a derivative suit against the directors of a B Corp, to include directors, 5% owners of the parent company, and other persons to which such a right is granted in the constitutive documents of the benefit corporation.

[29] The Delaware Code s. 362 (a)

[30] The Delaware Code s. 366

[31] Model Legislation s. 301 (a) (1) (vi)

[32]Unocal Corp. v. Mesa Petroleum Co. 493 A.2d 946 (Del. 1985)

[33] Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. 506 A.2d 173 (Del. 1986)

[34] Strine at 246

[35] Model Legislation s. 301 (a)

[36] Model Legislation s. 105 (a)

[37] Lois Yurow, “Benefit Corporations and the Public Markets – Will We Ever See a Public Benefit Corporation?” Governance and Accountability Institute, Sustainability Update, November 24, 2014

[38] Strine at 249

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Recent Developments in Sustainability Reporting

A new Directive on sustainability reporting

On 29 September 2014 the EU Council adopted a new Directive concerning disclosure of non-financial and diversity information by large companies and groups. The Directive proposal was drafted by the European Commission in April last year, and adopted by the European Parliament this April. The new Directive amends the recently adopted Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, which replaced the so-called “Accounting Directives” (the Fourth Company Law Directive 78/660/EEC on the annual accounts of certain types of companies and the Seventh Company Law Directive 83/349/EEC on consolidated accounts). The new Directive will enter into force 20 days after its publication in the EU Official Journal, giving the Member States two years thereafter to transpose it into national legislation.

The new Directive imposes on large companies a “report or explain” obligation. The reporting obligation applies to “public-interest entities” (as defined by Art. 2(1) of Directive 2013/34/EU) having more than 500 employees, i.e. approximately 6000 large companies and groups across the EU. Companies concerned are required to disclose in their non-financial reports information concerning their existing policies on environmental, social, employee, human rights, anti-corruption and bribery matters, including a description of the outcomes of their policies, relevant non-financial key performance indicators and main risks related to these matters. Companies which do not pursue policies for these matters will have to provide a clear and reasoned explanation for their choice.

In the UK, the majority of the disclosure requirements of the new Directive are already covered by the duty to prepare a Strategic Report. Sections 414 A-E of the Companies Act 2006, introduced by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, impose on companies other than those subject to the small companies regime an obligation to prepare a Strategic Report. The Strategic Report must include, among other matters, a description of the principal risks and uncertainties facing the company and an analysis, using key performance indicators, of relevant environmental and employee matters. Additionally, quoted companies must include in their Strategic Report information about the company’s policies on environmental, employee, social, community and human rights matters as well as their policy on board diversity. The main change for UK companies introduced by the new Directive is the obligation to disclose the existing policies and outcomes on anti-corruption and bribery issues.

The Directive aims to strike a balance between constraining companies to be more transparent and ensuring an adequate degree of freedom on what and how to report. Companies will retain significant control on the extent of the information disclosed and the form in which it is made public. On the latter point, companies are free to choose the set of national or international non-financial disclosure guidelines that best suit their business.

Despite the recent proliferation of international reporting guidelines and standards, currently there is no generally accepted comprehensive international standard for disclosure of non-financial information. The sustainability reporting guidelines developed by the Global Reporting Initiative appear to be the most widely adopted non-financial reporting framework.[1]  Currently in its fourth update (G4), the GRI framework provides guidelines on reporting formats, areas of disclosure and key performance indicators for all organisations, large and small, across the world.[2]

The global context

The adoption of the new Directive is part of a global trend to move away from a purely voluntary disclosure of non-financial information towards a stronger emphasis on mandatory disclosure. A recent joint study by UNEP, KPMG and GRI showed that approximately two thirds of the existing national reporting standards are mandatory.[3] At the same time, the joint study revealed an emerging trend to view mandatory and voluntary disclosure as complementary, rather than exclusive options. Many reporting entities go beyond the prescribed minimum and provide additional sustainability reporting as dictated by their business environment. A recent study prepared for the European Commission, for instance, shows that almost 80% of the world’s 250 largest companies report on their sustainability.[4]

Given the current diverse international framework for sustainability reporting, as well as companies’ increased appetite for voluntary disclosure, what is the actual utility of the new “report or explain” obligation introduced by the recent Directive? The Impact Assessment study accompanying the new Directive identifies two main problems that the instrument aims to address. The first one is a market failure evidenced by the fact that “companies have not been able to provide an appropriate response to users’ and societal demand for non-financial transparency.”[5] The second problem is a regulatory failure: legislation at both EU and Member-State level is unclear or inconsistent in terms of the disclosure requirements imposed, creating a multitude of reporting practices and formats that make comparisons across the Internal Market very difficult.

The alleged market failure raises a related question: who are the main intended recipients of the non-financial information disclosed? In the UK this question is unambiguously answered by the Financial Reporting Council’s Guidance on the Strategic Report.[6] The strategic report should only contain information that is material to shareholders.[7] Its main purpose is to provide information to shareholders, to allow them to assess how the directors have performed their duty to promote the success of the company and to evaluate the past results and future prospects of the company.[8] At international level, a study carried by ACCA in 2010 across nine jurisdictions, covering both established and developing capital markets, unveiled that almost 90% of the surveyed preparers of sustainability reports considered shareholders and potential investors as the most important audience for their narrative reports.[9]

But are shareholders really interested in non-financial information? A particular class of investors certainly are: the socially responsible (or green or ethical) investors. The SRI movement has grown exponentially over the past decade in both the EU[10] and the US[11]. Do regular, profit-driven investors pay attention to non-financial information too? A 2008 study commissioned by ACCA and carried by David Campbell of Newcastle University and Richard Slack of Northumbria University[12] found that non-financial information is quite irrelevant for investment decisions of non-SRI institutional investors.

The Report canvasses the views that sell-side analysts in the banking sector hold on the utility of voluntary non-financial statements. The sell-side analysts are a vital link in the investment information supply chain. Their primary role is to interpret company reports and provide investment advice for buy-side clients and fund managers. They have significant influence on the ultimate decision of fund allocation. In fact, many investment houses impose on fund managers restrictions on investments that go against the explicit advice of the sell-side.[13]

The Report found that there is a general belief among sell-side analysis that narrative reporting was not immediately relevant in preparing forecasts and reports to the buy-side. Social and environmental reporting, in particular, was rarely read by analysts and “universally considered irrelevant and incapable of influencing a financial forecast”.[14] The reasons for the total insignificance of sustainability reporting include lack of numerical content, too general or too complex information, and an assumption that the clients are not interested in non-financial information.[15]

How do these findings relate to the idea of a failure in the market for non-financial information? One possible interpretation is that there is no actual breakdown in supply and demand that would require legislative intervention: the main addressees of this information, for the most part, do not value it. A positive externality, however, is created for other stakeholders, such as NGOs and other civil society organisations. Another explanation of the Report’s findings is the well-known problem of investor short-termism. Matters such as risk management policies or sustainability reporting are simply immaterial for short-term investors, although they are quire relevant for the company’s long-term financial performance. A recent extensive study carried by Robert G. Eccles, Ioannis Ioannou, and George Serafeim showed that, in the long term, high sustainability firms (i.e. firms having long-standing sustainability policies and active processes of stakeholder engagement) outperform low sustainability ones in terms of both stock market and accounting measures.[16]

Yet another way of interpreting the Report is that it points to the poor quality of the non-financial information being provided: narrative reporting on sustainability matters is not factored into investment decisions because the information supplied  is unreliable (not subject to independent verification) or insufficiently material, timely or comparable. [17]  This leads to the second problem identified in the Impact Assessment for the new Directive: the regulatory failure, consisting in the fragmentation of the existing legal frameworks and inadequate cohesion and comparability of reporting practices.

How effective is the new Directive?

Does the new Directive go far enough in its prescriptions in order to correct the assumed regulatory failure? The instrument’s preamble gives the concerned companies ample scope to choose the reporting framework it wishes from among the existing national and international guidelines: “undertakings subject to this Directive may rely on national frameworks, Union based frameworks such as the Eco-Management and Audit Scheme (EMAS), and international frameworks such as the United Nations (UN) Global Compact, the Guiding Principles on Business and Human Rights implementing the UN ‘Protect, Respect and Remedy’ Framework, the Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, the International Organisation for Standardisation’s ISO 26000, the International Labour Organisation’s Tripartite Declaration of principles concerning multinational enterprises and social policy, the Global Reporting Initiative, or other recognised international frameworks.”[18]

This non-prescriptive approach to reporting frameworks is justified by a concern for flexibility, but it is difficult to see how it will solve the regulatory failure problem. The Commission could have perhaps prescribed, or recommended, one of the existing reporting frameworks, such as the G4 by GRI. There are many precedents at national level in this respect. EU Member States, such as Austria, Belgium, Denmark, Finland, Germany, the Netherlands or Sweden, and countries outside the EU, such as United States and Canada, have a formal reference to GRI in their governmental corporate responsibility guidance documents or policies.[19] In Sweden, for example, state-owned companies must present a sustainability report in accordance with the GRI guidelines.[20]

Another option could have been to publish custom-made sustainability reporting guidelines at the same time as the Directive. The Commission undertook to prepare guidelines on methodology for reporting non-financial information, including non-financial key performance indicators. These guidelines, however, will be published within two years after the entry into force of the Directive and will be non-binding.[21]

What is next?

The current developments in reporting show that there is a global trend towards more extensive and more meaningful narrative reporting. The improvements in the quality and scope of reporting are driven by both regulatory demands and market demands for transparency. The future of narrative reporting seems to be the consolidation of both financial and non-financial information in a single integrated report.  The recently established International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, standard setters, accountants and NGOs, is working towards a global framework for integrated reporting that would bring together financial, environmental, social and governance information in one report.[22] It is hoped that the integrated reporting practice will lead to sustained integrated decision-making and actions that consider the creation of value over the short, medium and long term.

[1] The European Commission, “Impact Assessment Accompanying the Document Proposal for a Directive of the European Parliament and of the Council Amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure of non-financial and diversity information by certain large companies and groups” (2013) available at (“impact Assessment”) p 21.


[3] UNEP, KPMG, GRI and UCGA, “Carrots and Sticks: Promoting Transparency and Sustainability: An update on Trends in Voluntary and Mandatory Approaches to Sustainability Reporting” (2010), available at (“Carroets and Sticks”) p. 13

[4] Katelijne van Wensen, et al., “The State of Play in Sustainability Reporting in the European Union” (2011) available at

[5] Impact Assessment, p. 11


[7] The FRC Guidance, para 5.1

[8] The FRC Guidance, paras 4.1 and 4.4

[9] ACCA and Deloitte, “Hitting the Right Notes, But What’s the Tune?” (2010), available at



[12] David Campbell and Richard Slack, “Narrative Reporting: Analysts’ Perceptions of its Value and Relevance” (2008) (“Campbell and Slack”) available at

[13] Campbell and Slack, p. 6

[14] Campbell and Slack, p. 5

[15] Campbell and Slack, p. 27

[16] Robert G. Eccles, Ioannis Ioannou, George Serafeim “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance”,.in Luigi Zingales and James Poterba, Causes and Consequences of Corporate Culture (forthcoming 2014), available online at

[17] See e.g. UNCTAD, “Investment and Enterprise Responsibility Review: Analysis of investor and enterprise policies on corporate social responsibility” (2010), available at

[18] Paragraph 9 of the Preamble.

[19] “Carrots and Sticks”, p. 4

[20] “Carrots and Sticks”, p. 66.

[21] Article 2 of the new Directive.


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Greenhouse Gas Emissions Trading: A Market in Financial Instruments?

Last Monday (June 9) our Centre had the pleasure of hosting Alfonso Martínez-Echevarría y García de Dueñas, Professor of Commercial Law and Director of the Research Centre for Financial Markets Law at CEU San Pablo University, Madrid, Spain. Professor Martínez-Echevarría’s thought-provoking paper tackled the legal nature of the gas emissions allowances under Spanish law. More specifically, the paper investigated whether the greenhouse gas emission allowances introduced by the Directive 2003/87/EC and implemented in Spain by Law 1/2005 should be considered financial instruments and therefore the trading of such allowances should fall under the supervision of the National Securities Market Commission (CNMV), Spain’s national financial services industry regulator.

Professor Martínez-Echevarría emphasised the relevance of the issue of proper supervision by presenting the cautionary tale of the 2006 collapse of the Spanish philatelic investment schemes Afinsa and Forum Filatélico. CNMV regarded these schemes as falling outside its supervision, since their object of investment was not a financial product traded in a financial market. The narrow approach to the role of CNMV vis-à-vis these schemes facilitated the creation of a speculative bubble that eventually collapsed, causing losses to hundreds of thousands of investors.

The remaining part of the presentation focused on the legal nature of the emission allowances. Under Spanish law, the greenhouse gas emission allowance is regarded as a patrimonial subjective right, transferable subject to the specific provisions of Law 1/2005. According to article 2 of the Law 24/1988 on the Stock Market, the notion of financial instruments includes derivative contracts, which are sometimes used to acquire emission allowances. This in itself does not mean that greenhouse gas emission allowances are financial instruments, as the financial instrument is the derivative contract. Nevertheless, Professor Martínez-Echevarría argued, greenhouse gas emission allowances can be considered “atypical” transferable securities, and this categorization may allow us to treat them as financial instruments. This label would trigger a closer supervision by CNMV in order to prevent excessive speculation and increased systemic risk.

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