Repairing Corporate Purpose : An Inquiry into Whether Shareholder Primacy Can Be Replaced by Sustainable Outcomes and ESG Norms in Guiding Director Duties

This paper deals with the duties owed by directors under UK company law, and explores its principal philosophy, namely, shareholder primacy. It offers a critical analysis of the shareholder primacy theory, both from a legal and an economic perspective, and discusses the shortcomings of its underlying assumptions which are rooted in corporate ownership and a judicial practice of treating the company’s interests as synonymous with the shareholders’ interest. By reviewing the historical origins of the theory’s legal premise and debunking several assumptions tied to its economic reasoning, this paper identifies corporate ownership to be deeply flawed and inconsistent with other tenets of corporate law, such as separate legal personality. This paper proceeds to argue that the contestable theory of shareholder primacy is given disproportionate influence in guiding directors’ decision-making process under the law; and contends that stakeholder governance must be the rightful substitute. This paper makes the case for director duties to be instead guided by an interdependent-coordination between corporate purpose, sustainability, and profits, which will help realize the promise of stakeholder governance. This paper concludes that such an interconnected approach of stakeholder governance is hard to establish in the present wording and interpretation of Section 172 of the UK Companies Act of 2006 without the help of statutory intervention, as shareholder primacy and other assumptions are deeply embedded in corporate law today. Therefore, it proposes for three specific legal reforms to be made into the reading of Section 172; which, if effected, will aid board of directors to manage the affairs of companies of the future in a purposeful, sustainable and profitable manner